Why Self-Directed Investors Can Massively Outperform Professional Money Managers (part 1)
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Over the past couple of weeks, I’ve revealed to you how I learned to invest (see part one and part two). Now I wish to address a topic that often comes up in discussions about investing. The person I’m talking with often asks, “Why do you think you can do better than a full-time, professional money manager with his or her team of analysts?” In this article, I’ll answer that question.
Nobody is watching me
Warren Buffet, once the (self-made) richest person in the world, has compared investing to batting in baseball. As the crowd watches intently, the batter has to decide which pitches to hit and which to let through. I barely understand baseball, but I know that the umpire calls a strike if the batter swings and misses, hits a foul ball, or doesn’t swing at a ball that is in the strike zone. Once the umpire hands the batter three strikes, she or he is out, losing the opportunity to score points for the team.
In baseball many great batters have proven that it pays to wait for the “fat pitches,” the pitches that enable superior hits and therefore produce more points. This is a favorable approach even in spite of the risk of being called out in three strikes.
But investing is not actually baseball. There is no three-strikes rule. I can stand at bat for hours, days, weeks, or even years, never swinging once. No one is ever going to call strikes or make me leave the plate. The various asset markets will continue to pitch at me all day long, every day. I get to stand there and wait not just for a “fat pitch” but for a god-almighty perfect pitch, a steady ball that arrives in slow-motion at a place where I can apply the bat to it with the maximum likelihood of it leaving the park.
Can you imagine sitting in the stands watching me bat? Hours and hours would go by without me swinging, maybe days, maybe weeks, maybe even years. Also imagine that you were not just a fan of my team but that you had a massive bet on my team winning. How frustrating would it be to watch me doing nothing, especially if you thought that I was really playing baseball and that at any moment the umpire would send me back to the dugout with no points? Imagine if your friends were texting you the…
