How to Achieve Superior Outcomes

I figured we would just get right to it this week. Isn’t that what everyone wants, superior outcomes? Yes indeed, there are steps that you can take to influence outcomes, but don’t let anyone tell you outcomes can be engineered or precisely controlled. They can’t.

Human behavior is by far the most important ingredient in achieving good long-term outcomes. We crave certainty and want to believe gurus “know” what is going to happen in the markets. Here is a list of these gurus who have consistently called market tops and bottoms.


No, I didn’t forget the list. It just doesn’t exist! The list is blank.

Seeing Patterns When None Exist

If we could just detect the signals or patterns in the markets, then we could achieve superior returns. Right? Sorry, no, this is wrong. We are wired to look for patterns that don’t exist. The even bigger problem is that we don’t have a way to detect real trends from noise. That’s where the gurus come in, I guess.

Most of you have seen some version of a Randomness of Returns or “Periodic Table” chart, pictured here:

In review meetings, we often show this type chart with a client’s own portfolio as one of the asset categories. The point this demonstrates is that most of the time, a globally diversified portfolio will neither be on the top or on the bottom, in performance terms, during any given year.

There are always multiple lessons from looking at these “Periodic Table” type charts. First, these scream out about how difficult, ok, silly, it is to think that anyone can predict which category will be at the top in any particular year. The best-performing asset class in 2017 (Emerging Markets) was in the middle of the pack in 2016 and next to the bottom the year before that.

Must Commit for the Long Term

Another lesson is that the long-term returns will likely not be too surprising, but the short term might be very surprising. What constitutes long-term in this context? 10 years or more would be my answer. Anything less than five years is just noise. You have to become “comfortable being uncomfortable” to withstand the surprises along the way. That’s where the human behavior I mentioned comes into play.

Even with randomness, there can be periods that appear to have patterns. I often use the example of tossing a coin. If we filled up Williams Brice Stadium at U.S.C. and had everyone toss a coin ten times and record the answer, would we notice some patterns? Yes. We would expect about 78 people in the stadium (of about 80,250 people) would toss ten heads or ten tails in a row. While this is actually random, we see a pattern. We believe that these people may be coin tossing gurus!

Okay. If you can accept the random nature of short-term market results, you have a fighting chance to actually influence outcomes in a way that is superior to the grand majority of other humans inhabiting the planet. Ready for a real conversation?


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