The Seduction of Above Average
Just want to make it clear up front that I am not starting this thread to for the purposes of debating stock picking vs. indexing. I understand there are a lot of intelligent people in this forum who spend quite a bit of time studying personal finance and investing topics. Just want to ask: how confident do you feel that your efforts justify the potential rewards? Do you think, in any way, that you are being "seduced", as the author of the article implies?Take me for example. Throughout my life I have been told that I am smart and hard-working, and I have received evidence affirming these notions. I got voted “Most Likely to Succeed” in high school, attended a top university, and have worked in intellectually-demanding jobs throughout my career. I can list reason after reason as to why I am well-equipped to be a great active manager.
And deep inside I believe it to some extent. I tell myself that if I just had the interest and if I worked hard enough, I could learn to beat the market. But, this is where the seduction occurs. I start deluding myself into thinking that I am special. I start to assume that because I am intelligent I will be good at all intellectually-based activities such as stock picking.
But, being smart doesn’t imply that you will be a good stock picker, but it does imply that you could be susceptible to believing so. While there is some evidence that more intelligent people are better investors, this is not because they are superior at picking stocks. Despite this, people still convince themselves that they can beat the market. They convince themselves because it is easy to do so.
Is there any way to combat this kind of thinking? Yes. You have to recognize that the competition will be orders of magnitude harder as you go further up the ladder. You are now playing against the cream of the cream of the crop. It’s like a college football player that enters the NFL. The game might be the same, but the players have changed.