Myth: Advisors can beat the Market

The guide in your money journey shouldn't be picking stocks.

I had an interesting conversation over the weekend.? I was at an event and saw an advisor from a major bank – he’s quite successful.? I hadn’t seen him since before Covid, so we had a quick chat to catch up.

I told him that I left TD in the spring and became independent at IPC.?

‘Congratulations on the move, that’s really exciting… can I ask, what research do you use?’ he asked.

In the context – he was asking what 3rd party investment research or analyst reports I use – as in do I come up with ‘ideas’ for clients.?

I said that anyone can subscribe to analyst research – the kind that say ABC Company has a 12 month target price of $XX – but those analyst prices are flawed in so many ways (very, very rarely does a bank put a ‘sell’ rating on a company – they want them to be customers for their lucrative Investment Banking revenue if they need to raise capital at some point, CEOs and boards have long memories ??), so there’s no way I would put client money into something based on 12 month projections.

I thought about the exchange as I was driving home. I use the research that says 'that's not research'.

Research is a funny word.?

We saw a lot of research going around during Covid being bent out of shape and misinterpreting research to fit a narrative.? The idea that someone in their basement has found out something that the world’s leading viral and vaccine scientists didn’t was everywhere.

Research in wealth management is too often narrowed to investment research.? ‘What should we buy?’, ‘How much?’ and ‘When should we sell?’

There is a reason for this – it scratches an itch.?

I’m going to post more on the topic of research this week, for now I’ll talk about so-called ‘Investment Research’.

I have sat through hundreds (thousands?) of meetings, calls, conferences etc… where there is someone saying a form of ‘our proprietary research gives us the ability to pick stocks better than our peers and we’re positioned to beat the index.’

My favorite line is ‘it’s a stock pickers market out there’.

It has been used countless times – and with good reason.? From a marketing standpoint – it’s a great way to position your services: investing is tough, and I know more/have a better way.

Our brains work in stories – and they want you to think it’s Yoda speaking – your guide on this journey.

This leads us to the initial question – what research do I use?

If we’re talking about research I use for investing – a good starting point is SPIVA (short for S&P Indices Versus Active) which has been comparing the results of active managers (many mutual funds, actively managed ETFs, institutional managers for pension funds etc…) to that of simply purchasing a broad-based investment vehicle, like a market cap index (think of the S&P500 for example).

Visually, the image at the top shows a result of their findings – over the past 15 years, 92.19% of actively managed mutual funds have underperformed the S&P500, for Canada the date ranges only go back 10 years, in which 94.57% of managers underperformed the S&P/TSX.? This data can be found in the link below by scrolling down part way, and you will see that the results are consistent across various geographies.

The idea of having stock picking research that nobody else has that can be implemented just doesn’t exist.? There is no world where suggesting a strategy that might work 7.81% of the time (without adjusting for sheer luck) is a strategy worth following.? Outperformance, or hot research simply doesn’t exist at the mutual fund or institutional level where teams of at least 20 are looking at a small niche within the overall market – and will not work at the advisor level.

What research do I use?

In this case, the ones that can succinctly say that analyst reports and ‘action list buy ratings’ are not worth the paper they’re written on.

That’s useful research.?

Advisors can’t beat the market – especially if they’re ‘running a model’, ‘picking only stocks they really like’, or picking others.?

There is no such thing as a stock pickers market, further – when is a stock picker ever going to tell you when it isn’t?

Advisors should be coaching clients on making smart decisions with their money by operating within their context and values - and creating a plan within that context.

Outperforming 'research' doesn't exist - let's stop pretending like this hasn't been solved already.