In the investment world, you occasionally come across a simple yet striking observation. Here’s an example from a recent client letter of Howard Marks, chairman of Oaktree Capital Management, L.P., and one of Vanguard’s external investment advisors:
It would be great if we could predict what economies and markets will do, move in and out with perfect timing, foresee which industries and companies will fare best, and hold only the securities with the highest returns. But to paraphrase John Kenneth Galbraith on forecasters, I feel there are two kinds of investment managers: those who can’t do these things and those who don’t know they can’t do these things.
This last sentence says it all, for both money managers and investors. You recognize you don’t have the skill to time markets—or you don’t know that you lack the skill, and spend your time at a generally fruitless effort.
This idea is really at the cornerstone of investor literacy. It’s in many ways about humility and keeping one’s own overconfidence in check—recognizing the limits to skill in competitive capital markets. A savvy investor knows that neither the experts, nor novices, can time markets consistently. And when the occasional timing decision does result in a gain, that investor recognizes it could just have easily been due to random chance as skill.
This perspective is also about more than market timing. Whether it’s choosing a strategic asset allocation strategy, picking money managers and funds, adjusting the portfolio based on market conditions, or managing tax results and rebalancing—a healthy dose of skepticism about superior skill is called for.
What’s the lesson here? For those of you who work with investment advisors, it’s best to find one who clearly understands the limits of his or her own skill set. For those who make investment decisions on your own, a similar self-awareness is a prerequisite to making good portfolio moves. Too much investor capital has probably been wasted on learning this lesson time and time again.