Congratulations to the World Champion San Francisco Giants. Led by one of the all-time best pitching performances by Madison Bumgarner, and a host of critical contributions by nearly everyone on the team, the Giants racked up their third World Series in five years.
The top of today’s San Francisco Chronical reads, simply, DYNASTY. I won’t argue against that, but what strikes me as interesting is that the Giants have certainly not been the most intimidating team over the last three years. In 2010, after they won, I remember saying to a friend, “well, if you played this season a thousand times, the Giants would have won it once – this just happened to be the one”.
In 2012 they did the nearly impossible by winning seven straight elimination games in the LDS and NLCS before sweeping a heavily favored Tigers team in the World Series. This year they snuck in to the playoffs with the Wild Card spot. On paper, the Dodgers and Nationals had more talent.
Luck, Modesty, Goodness
When asked why he pitches so well in the World Series after his Game 5 shutout, Bumgarner said, “just lucky, I guess”. So have the Giants just been lucky, or are they actually much better than I’ve been giving them credit for? Probably a bit of both. Humans routinely underestimate the roll of luck in many aspects of life. In the investment world, there are over 10,000 mutual fund managers. But in any given year only about 35% of them (on average) manage to outperform their benchmark. Typically, the bell curve of performance looks exactly as you would expect it to given random results and after subtracting fees and trading costs.
But there are a few fund managers who have risen to the top and posted impressive long-term performance. Are they that good? Buffet isn’t a fund manager, but I’d say he’s found a formula that works in concert with his intelligence, discipline, and competitive advantage of having a huge capital base and very patient investors (a luxury most fund managers don’t have). It’s been real, though there is no guarantee it will continue.
Bill Miller famously beat the S&P 500 for 15 years, but then crashed and burned in 2008 to a degree which pretty much wiped out the benefits of the whole streak for most investors in his fund. Peter Lynch became famous for posting amazing returns with the Fidelity Magellen fund, but in reality he had a few great years and then basically kept things pretty close to the benchmark. So that could have been just luck, but even if so, you have to give him credit for playing it smartly.
Fund managers are easy to pick on because their results are public. But the same thing plays out in millions of American’s accounts at Schwab or Merrill or wherever. Some are lucky, but most are not. The oft-quoted DALBAR study shows investors tend to lag the performance of the very funds they invest in by about 4% due to bad buy and sell timing decisions.
Most individual investors tend to fare worse than luck alone would suggest. As an example, just a couple of years ago our average Dashboard user had about 15% cash in her investment account. Now, with the market up about 50% from then, it is down to around 9%. People struggle to avoid buying high and selling low.
If you pick a handful of stocks and mutual funds, or if that is what your advisor does for you, you’re just hoping to get lucky. Usually you won’t. The alternative? Determine an appropriate risk-level for your portfolio, create a diversified, multi-asset class approach to get there, build a portfolio with efficient vehicles, rebalance occasionally, and stick with it. If you can do this, your odds of success are pretty good. You remove the chance of having huge outperformance, but you can also eliminate the higher likelihood of costing yourself dearly with bad luck.
In baseball, winning the World Series is everything. In investing, it’s ok to have decent year after decent year as long as you avoid terrible years.
Decided By One Run
As for the Giants, they deserve a ton of credit not only for executing but for giving themselves the best chances to get lucky. Manager Bruce Bochy pulled all the right strings. In 2002, when the Giants lost to the Angels, then manager Dusty Baker was just eight outs away from victory but decided to leave his best pitcher, Rob Nen, in the bullpen. Luck rarely rewards those who don’t play the odds. Bochy understands it is a long season and you need to pace your players. But when you can see the finish line you should fire all of your guns.
Congrats again to the Giants organization. They delivered an amazing performance and it was fun to watch. In sports and investing, at the end of the day, all that matters is results.
Photo Credit: Overlooking the Bay Bridge the morning after. Financial Samurai.