A little random stroll

I am currently reading Burton Markiel's Investment Bible, 'A Random Walk Down Wall Street'. As early as 1973, Burton Markiel took up arms and demystified the abilities of analysts, brokers and wealth managers to generate alpha for their clients. He was the first to publish rigorous studies, before PCs existed and made the work quick, comparing the performances of each with the market in general. The conclusion is still valid today: if we include brokerage fees (and in some countries capital gains taxes), it is impossible to beat the index consistently (i.e. over several consecutive years) with the same level of risk. This was the first challenge to active management and above all the statistical demonstration that for ordinary mortals, active management makes you lose more money compared to the index than passive management (indices do not include fees, so passive management is also a 'loser' compared to the index, but to a more moderate extent).

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…