Investor Infallibility

At some point I want to do either an article or a series on perceived investor infallibility and investor failure.  I saw this article yesterday over at Market Watch and decided to excerpt it here for your benefit.  We'll come back to this I hope at a future time.  {Excerpt with my highlights.}

Link to Stock Gurus Aren't What They Used To Be.       By Matthew Lynn

LONDON (MarketWatch) —  ......The stock gurus aren’t what they used to be...In the last few weeks, we have discovered that John Paulson, one of the few money managers to emerge from the subprime debacle with his reputation enhanced, is just as fallible as the rest of us. Over here in London, one of the U.K.’s best-known fund managers, Fidelity’s Anthony Bolton, is struggling with a much-hyped investment trust. It doesn’t seem that anyone can make the kind of money consistently that stars like George Soros, Warren Buffett or Julian Robertson could in the past.

Maybe that’s just bad luck. Then again, maybe something more interesting is going on. We may be entering an era when there aren’t any real stock gurus anymore — in the sense of exceptional individuals who can consistently beat the market.  ....

John Paulson’s mega-bet against the subprime mortgage industry made him a star in the investment industry — as well as one of the wealthiest men to emerge in the last few years. Forbes magazine estimates his net worth at $15.5 billion.  But this month has seen heavy losses on the funds run by Paulson & Co. His fund dedicated to gold investments lost 16% in September, a lot more than the 11% fall in the gold price. His Recovery Fund lost 14% in September and is down 31% on the year. The Paulson Advantage Fund is down by slightly more so far in 2011.  Those are disappointing figures for any money manager; for a star such as Paulson, they are catastrophic.

In the U.K., Anthony Bolton has been one of the few money managers with a loyal following.......When he came out of retirement last year to launch the Fidelity China Special Situations investment trust investors stampeded into the new vehicle.....By last week, the share price had fallen by 37% so far this year, compared with a 28% drop for its benchmark....

Those are two high-profile names. But right across both the traditional fund managers and the hedge funds, returns have been disappointing — hedge funds on average lost 5.2% in September, according to research by Bank of America.

Big-name investors, such as George Soros, haven’t fared so well in the recent bear market.... In the past, there were always a few stock gurus who seemed to have the magic touch. Money managers such as Buffett or Soros or Robertson, the founder of Tiger Management, all rode the markets with a sure touch all through the 1980s and 1990s. True, their performance was not infallible. There were occasional bad years. But they endured over two decades or more, beating the market with a consistency that suggested something more than just luck was involved......No one like that seems to be around any more.  True, maybe that is just bad luck. Even the greatest of investors have the occasional rotten year. And even the dumbest gets things spectacularly right occasionally.  But it also raises a more interesting possibility. Stock gurus may no longer be able to consistently beat the market.

Is that possible? There are a couple of reasons for thinking it might be.  First, it now looks as if we are in a Japanese-style bear market, which may drag on for 20 or 30 years..... In reality, we are more than a decade into a bear market, and it doesn’t look like ending anytime soon. In a bear market it is virtually impossible to out-perform. You get lucky one year. Then you get caught out the next.

Secondly, the financial markets have become driven by politics. It is central banks printing money, or governments bailing out banks, that determines whether asset prices rise or fall. The decisions made in parliaments and senates count for a lot more than any that are made in the boardroom. That makes a difference. While a few very clever people can predict trends in free markets, it is impossible to predict what political systems might do. They are inherently unstable, and unpredictable.....

The harsh reality is that even the smartest stock-pickers can’t make money in these markets. Which, rather worryingly, suggests there isn’t much hope for the rest of us.

Matthew Lynn is a financial journalist based in London. He is the author of "Bust: Greece, the Euro and the Sovereign Debt Crisis," and he writes adventure thrillers under the name Matt Lynn.

*Long ETFs related to the S&P 500 in client and personal accounts.