Stock picking has never been so hard.
From a recent interview with Charlie Munger of Berkshire Hathaway:
“In the old days, I frequently talk to Warren about the old days, for years and years and years what we did was shoot fish in a barrel. It was so easy we didn’t want to shoot fish while they were moving. We waiting until they slowed down and shot at them with a shot gun. It’s gotten harder and harder. Now we get little edges. It isn’t any less interesting. And we do not make the same returns we made when we’d pick this low hanging fruit off trees that offered a lot of it.”
“I used to say, ‘you have to marry the best person that will have you.’ That’s a rule of life. You have to get by on the best advantage you can get. Things have gotten so difficult in the investment world.”
From a recent article on investing by Ben Carlson of CNBC:
Michael Mauboussin calls this the paradox of skill. Mauboussin says, "It's not that managers have gotten dumber. It's precisely the opposite. The average manager is more skillful than in past years. The paradox of skill says that when the outcome of an activity combines skill and luck, as skill improves, luck becomes more important in shaping results." How many institutional investors bother to ask themselves if the investment managers they are investing with are lucky or truly exhibit skill?
Active managers are competing against many more managers these days than they did in the past. There are roughly 300,000 investment professionals worldwide (portfolio managers and analysts) working for hedge and mutual funds (Alpha Theory estimate). There are 43,000 exchange listed public companies5. That works out to about 7 analysts for every stock! Asset prices become more efficiently priced when lots of smart people pay attention. With those odds, it is no wonder that there is a dearth of good ideas.
From Daniel Chambliss’s paper on “The Mundanity of Excellence”:
“Superlative performance is really a confluence of dozens of small skills or activities, each one learned or stumbled upon, which have been carefully drilled into habit and then are fitted together in a synthesized whole.”
“Excellence is accomplished through the doing of actions ordinary in themselves, performed consistently and carefully, habitualized, compounded together, added up over time.”
It has never been more important to do the little things that lead to success. Alpha Theory’s dominant beneficial attribute is the process discipline it instills in our clients. Our clients have outperformed the HFRI Index for each of the last five years (as far back as we have data) by an average of 3%. I believe their discipline is a big part of what makes them excellent. As good as they are, they can be better. If they would have strictly followed their models, their performance would have been 6% higher. There is alpha out there for the good stock pickers but it requires discipline and a desire to be excellent.