A little random stroll

I am currently reading Burton Markiel's Investment Bible, 'A Random Walk Down Wall Street’. En 1973 déjà, Burton Markiel a pris les armes et a démystifié les capacités des analystes, des courtiers et des gestionnaires de fortune à générer de l’alpha pour leurs clients. Il fut le premier à publier des études rigoureuses, avant que les PC existent et rendent le travail rapide, comparant les performances des uns et des autres avec le marché en général. La conclusion est toujours valable aujourd’hui : si on inclut les brokerage fees (et dans certains pays les impôts sur les gains en capitaux), il est impossible de battre l’indice de façon constante (donc sur plusieurs années consécutives) avec le même niveau de risque. C’était la première mise en cause de la gestion active et surtout la démonstration statistique que pour le commun des mortels, la gestion active fait perdre plus d’argent par rapport à l’indice que la gestion passive (les indices n’incluent pas de frais, la gestion passive est donc aussi ‘perdante’ face à l’indice, mais de façon plus modérée).

It should be noted that he didn't make only friends! An industry that generates billions for its employees was not going to let itself be done in so easily. Forty years later, things have barely changed, finance professionals are still trying to convince their private and institutional clients that they have the miracle recipe to make you earn money. How is it possible that in the face of clear, mathematical and statistical demonstrations, we still find clients ready to trade (and professionals to encourage them in this direction) when rationally it makes no sense?

I think the answer is embedded in the human mind and its inability to face a certain reality can be explained as follows: human beings control some things and not others. The 'belief' in one's ability or that of one's financial advisor to generate alpha is based on the same irrationality as astrology: the need to believe that chance does not exist, that things are determined and, above all, that one can always influence them.

In our very distant past, when we were fighting for our survival, the choice was clear: if we did not find water, food, we died. If we got up to go hunting, we died. If we did not defend ourselves from our enemy, we were subject to his will. Over the millennia, we have been accustomed to being able to influence our destiny, which is a good thing. We continue to influence it today by the choices we make in our lives: studies, work, family, balance between everything. So I think that the power that human beings have gradually conquered over their destiny, the disappearance through rationalization of a number of beliefs that they had (the loss of influence of religions in our Western world is also a sign of the ascendancy of the rational over the irrational) has accustomed them to persuading themselves that they can control everything. And therefore also their investments. This coupled with his need to be active, to do rather than to undergo, creates an explosive mixture which still persuades people that we can do better than the index.

Of course, there are serious publications to counter Malkiel's statements. He himself recognizes that in some cases, there may be repetitive trends, therefore exploitable, but they are marginal, largely confined to professionals and of little help to the average investor.

So we would all be better off adopting a buy-and-hold strategy or buying index ETFs to buy the market as a whole. But of course, that is less exciting and does not make for exciting living room discussions…