In the meantime...
Who are the smartest investors in the world? Arguably, they're the guys running hedge funds, right?
Well, guess what? Maybe they're not so smart after all. As we predicted, hedge funds have turned out to be a bad investment choice. This from the Economist:
The mediocrity of the hedgies' recent performance is in part the result of the industry's massive growth. Whereas in the past it was plausible that hotshots like George Soros could spot market anomalies, several thousand managers in an industry with $2 trillion of assets under management are very unlikely all to be able to earn spectacular returns. There will always be a few managers who do well, of course, but there is no reliable way of identifying them in advance, and past performance is a poor guide to future returns. John Paulson, the manager who made a fortune out of the subprime-mortgage crisis, has performed dismally since the start of 2011.
But these vehicles pose a more fundamental problem for investors. Managers of hedge funds charge a lot more than those who run conventional mutual funds, and many times more than those who offer funds that track stockmarket indices. Hedge-fund fees are usually 2% every year, plus 20% of all returns over a set level. It is, as a result, easy to think of people who have become billionaires by managing hedge funds; it is far harder to think of any of their clients who have got as rich. Fund management has become like films or professional sport: a much more lucrative business for the insiders than for those who stump up the cash to pay them.
The best way for investors to play the odds is to choose low-cost ETFs or trackers and diversify geographically and across asset classes. It is not an exciting strategy. It will not bring anything to brag about at dinner parties. But it will mean that more of their money stays in their own pockets, and less goes to buy other people's mansions in Mayfair and the Hamptons.
But wait a minute. If the masters of the universe can't beat the market, why should you bother to try?
Bingo. You shouldn't. There are some things you do better by not thinking about it too much. Like swallowing. Or breathing. Or falling in love.
Investment success is one of those things. At least, that's our new theory.
Say you try to make a lot of money by investing. What do you do? Read books. Read the Wall Street Journal. Learn what other people say about it.
Oil is going down, they say. Stocks are going up, they believe. Don't put your money into tech stocks; try some options; bet heavily on Apple; stay away from Google.
Or how about this? Here's the Wall Street Journal's front page story on the latest 'fiscal cliff' update;
The more you try to follow the latest news...and compete with the real pros ...the more you get caught up in the latest investment fads.
Trouble is, you're at the end of the fashion chain. You're like the guy living in a trailer in the Ozarks who gets a wide belt two years after the swells in LA and NYC have to skinny ones.
When the real pros like oil stocks, for example, word eventually trickles down to the amateurs. They buy...but only after the oil stocks have already been driven up. They end up being a day late and a dollar short. When the market sells off, they are the ones who take the brunt of the losses, rather than those who bought earlier at lower prices.
The more you follow the news...the more you watch TV...the more you read the papers and try to keep up with the latest investment thinking...
....the more likely you are to lose money.
Better to do it without thinking. Do it naturally. But what does that mean?
Damned if we know. But we have a whole new year to think about it.
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.