Billionaire investor Warren Buffet and his partner Charlie Munger get a lot of investment ideas thrown at them. And every idea ends up in one of three boxes:
- One box is marked “In.” Those are the ideas the duo feels might work.
- A second box is marked “Out.” That’s for ideas Buffett and Munger agree are clearly bad and won’t work.
- A third is marked “Too Hard.”
Guess which box is full? Yep, the “Too Hard” box. Something like 99% of the ideas they review end up there, according to Buffett.
Imagine for a moment you have Warren Buffett’s money, his influence, his cash and all of the resources he can muster — analysts, accountants, computing power, whatever you need. (Buffet is dismissive of computerized investing, but assume you’re not.)
Imagine the temptation to throw cash at every half-good idea that comes your way. As the saying goes, when all you have is a hammer every problem looks like a nail.
Here’s the thing: You could run around trading all day, jump on every IPO that crosses your desk, pull out the stops on your data pipe and compete 24/7 with the white-knuckled, hardcore money-shovelers. And, at the end the day, you would be incredibly lucky to have made some money.
Why? Because, after the dust settles, for every winner there is a loser. For every upside, a downside. The market price is set by all this activity, and you end up on the positive side of the ledger or the negative, over and over, inevitably flattening out your gains (minus trading costs, minus your time and effort) until you finish somewhere just about equal to the whole market.
That’s why pension funds don’t try to “beat the market.” They don’t have to, and as a retirement investor neither do you. Instead, you need to “be the market.”
Every money manager gives his or her new clients the same initial proviso: I will aim to get you a market return, at a minimum.
Managers set the bar there because they fully understand what will happen over a decade’s time. They won’t be able to produce a number that comes anywhere near double digits. With luck they’ll match the market itself, before subtracting their fees.
Promising to beat the market is foolhardy, to say the least. If it happens one quarter or the next, fantastic. But nobody in the business expects to do so consistently, and they don’t promise they will.
Really, the active management retirement industry should hang a sign up over its door that reads “Too Hard” and clock out for a while. Increasingly, that’s happening. That’s what’s driving the adoption of passive investing strategies. People are exhausted and want instead to “be the market” for once.
For retirement investors, active management is Warren Buffett’s classic “Too Hard” proposition. If the same outcome can be purchased more cheaply and efficiently with a passive portfolio, who needs the stress?