Good Investors Make Investing Harder

Programming note: Money Stuff will be off tomorrow and Friday, back next week.

A basic stylized fact of financial markets is that active investment managers, as a group, do not outperform a monkey throwing darts at the stock tables. This is an embarrassing stylized fact, but you cannot, if you are an active manager, feel too bad about it. The monkey is cheating. He is free-riding on your work. The reason his investments are good is that he is buying stocks of companies that have already been vetted by active investors, and at prices that represent the active investors’ consensus about their value. The monkey is not doing any deep fundamental analysis of the cash flows and business prospects of the companies whose stocks he buys, because you have already done it for him, and you have told him what those stocks are worth. He just has to throw darts. If his dart lands on a good company, he will invest in a good company at a fair price. If his dart lands on a bad company, the price of the stock will reflect the risks and badness of the company, and will still, in expectation, give him a fair return. If you and your active-management competitors have done a good job, the monkey can’t lose.