And That’s One of the Greatest Of All Time (GOAT) Investment Lessons
Until recently, when I heard the word “goat,” I thought back to when my wife and I lived in Edison, NJ, 25 years ago, before we moved to Florida. Most of our townhouse development had previously been farmland, but one family refused to sell to the developers. They kept their patch of earth as something akin to a suburban farm. And every so often, when they had big family gatherings, we’d hear the family goats making all kinds of loud noises, just about 150 feet from our place. We never asked questions, FYI.
When I hear “GOAT” today, it is most often associated with an athlete regarded as the greatest of all time in his or her sport. Tom Brady is tagged as such by many football fans, and who can blame them. Tom Brady is a superstar-of-superstars when it comes to playing Quarterback in the NFL. And, growing up in California, he played high school baseball and basketball in addition to football. My guess is that, like Michael Jordan, Bo Jackson, and Dion Sanders before him, if Tom Brady had tried to play one of those other sports at the college, or even pro, level, he might have had a least a shot at making it.
But as far as I can tell, Tom Brady never played hockey. That remind me of a common investor mistake.
Despite the urging of financial advisors and many market pundits (including your friend Rob who used to be neighbors with an excitable Garden State goat), investors seem obsessed with the S&P 500 as a target to shoot for with their own investment portfolio. Don’t believe me? Why do so many people quote the statistic about how 90% (or whatever the figure is) of active investment managers don’t beat the S&P 500? It’s misleading, and in the case of Baby Boomer investors in retirement or nearing it, it's also very dangerous. It is where a lot of the so-called FOMO (Fear Of Missing Out) comes from. The number one reason that so many active managers don’t beat the S&P 500 is not what you may think. It is not because they suck at managing money (OK, plenty do, but that’s not the key driver here). They don’t beat the S&P 500 Index…because they are not trying to. That’s not their “game” any more than Tom Brady sets out to be the GOAT of the National Hockey League (NHL).
For many professional investors (like me), the S&P 500 is something we think we can be very competitive with over a period that includes a wide variety of market conditions. But if your #1 investment rule is Avoid Big Loss (ABL) like ours is, that means you give up the allure of chasing the S&P 500 up and down and putting 30-50% declines on the table about every half-decade or more. It’s a different game, like football is different from hockey.
Any investment manager should be measured by the value they add within the playing field of the “sport” they are playing. If a manager or fund has a stated goal of preserving capital as a top priority, remind yourself that has nothing to do with a stock market that often goes up and down more in a day than you can earn from CDs in a year! And, if you believe that owning stocks in roughly equal amounts (e.g. 5% each in 20 different stocks), the regular S&P 500 is apples-to-oranges. The S&P 500 has become crowded into a small number of stocks, and while the index has 11 different economic sectors, just 2 of them (tech and communications) make up over 1/3 of the index.