Buccaneers of The Financial Market
The ocean makes up around 71% of the Earth's surface yet it may be surprising to find out that only 5% of the ocean has been explored. There are many hidden secrets waiting to be discovered and since ancient times, the allure of finding hidden treasure in unchartered territories has captivated the human imagination. Many courageous explorers have ventured into the depths of the ocean to try and unearth these precious treasures, but many have failed.
Closer to home, a truly remarkable discovery was made off the coast of Great Yarmouth which some historians are calling ‘Norfolk’s Mary Rose’. After exploring more than 4,000 nautical miles over the course of four years, brothers Lincoln and Julian Barnwell finally hit the jackpot and located a royal shipwreck, the HMS Gloucester - a naval colossus that had gone down in 1682 along with 250 people, almost killing King James the II. The sheer mathematical odds of finding a discovery of this scale were simply awe-inspiring which was prolonged as the brothers were sworn to secrecy for a long 15 years.
In many ways, financial markets share many conceptual similarities with the ocean - mainly that markets are also deep and liquid. But thankfully, we seem to know a lot more about markets than we do about the ocean. Consequently, there are two main strategies used by investors to seek hidden riches in the ocean we call financial markets. Firstly, there’s the active approach whereby investors make frequent buying and selling decisions to outperform the market. Active investors aim to take advantage of perceived inefficiencies or opportunities in financial markets to generate excess returns. They will typically engage in speculative research analysis and rely on market timing to identify individual stocks, bonds, or other assets they believe will make them richer than other treasure hunters in the market.
Conversely, passive investors adopt a patient and systematic approach, surfing the natural forces of market waves and tides to unveil their treasures. Passive investing acknowledges that the markets are mostly efficient and align with something known as the Efficient Markets Hypothesis (EMH). As mentioned earlier, financial markets are vast and at any point in time, there will be millions of participants actively engaging in the pricing of assets. This makes markets highly efficient at processing information and calculating a fair and true price for the asset. Simply put the EMH recognizes that consistent and long-term outperformance of the market is nigh-on impossible as there are imperceptibly miniscule opportunities to take advantage of mispricing. So, for passive investors rather than trying to beat the ocean, it’s much better to work with it. Passive treasure hunters, take cues from historical records, maps, and the experiences of fellow explorers to generate their wealth.
There has been a great deal of academic research – even Nobel Prize-winning – which found in favour of passive investing and highlighted the chronic long-term underperformance of active investing. It’s vital to remember that unearthing hidden treasure requires patience, discipline, and a long-term perspective. Remember, it took the Barnwell brothers four years to find the shipwreck and then another fifteen long years before they could reap the rewards and bask in well-deserved glory. For us investors, the short-term turbulence of market cycles and fluctuations is part of the journey towards wealth accumulation. We must remain focused on the bigger picture are making decisions based on short-term information could potentially harm our long-term outcomes.
While you may hear success stories from active strategies, as long-term evidence-based investors, must ignore the enchanting melodies of the ‘active’ sea sirens who try to lure us towards the Bermuda Triangle of speculation and ultimately wealth destruction. The odds of having better investment outcomes by choosing the active route is infinitely harder, so as Jack Bogle once said, “instead of trying to find the needle in the haystack, just buy the haystack!”.
Lee Nguyen
Investment Analyst & Innovation Champion
This blog post is intended for information only and does not represent personal financial advice. If you require advice in respect of your financial planning, you should contact us. Past performance is not a guide to future performance. The value of an investment can fall as well as rise and is not guaranteed - you may get back less than you paid in.