June 19, 2019

Don’t be a Hero (in the Stock Market)

By Omar Z. Maniya, MD, MBA, EMRA President
 
You graduated, passed your Boards, paid off some loans, and now it’s time to invest, right? Bitcoin, or some small under-the-radar auto parts maker that every partner in your group is raving about? Don’t.
 
Stocks, specifically U.S. equities, are heavily regulated to ensure all potential investors (the public) have access to the same information. And there’s an entire industry, Wall Street, that’s devoted to taking this raw information and making sense of it. Most physicians don’t have the time, financial analysis expertise, or the passion to spend 80 hours a week pouring over company accounting records. And that’s okay, because we’re passionate about saving lives.
 
But let’s say you have a financial background and a sweet locums job that affords you the time to pursue this new passion. Even if you’re just as good as a professional portfolio manager, the data shows you’re probably still going to lose. Over the last 15 years, 92 percent of professionally managed large-cap funds underperformed the S&P 500. In other words, if you have just invested in 500 of the largest companies and logged into your account once a year to rebalance your portfolio, you would’ve beaten 92 percent of the professionals who work in this space.
 
This debate between active and passive investing is decades old. Active investors do their own research and pick winners and losers. Passive investors, in contrast, invest a balanced portion of money into every company within the sector and quietly grow their money at the pace of the overall market.
 
While the active investors are often hailed as heroes and glorified in movies (“The Wolf of Wall Street”), TV (“Mad Money”), and in the rumor mill at work, the data shows it doesn’t work. In a market where everyone has access to the same information, and millions of people are scrutinizing it, active human investors with emotions often misjudge stocks and trip over their own shoelaces. In fact, some hedge funds bank their entire strategy upon buying information on the which trades personal investors (like us) made, and then turning around to do the exact opposite.
 
Now there are obviously exceptions to this rule. Some funds create their own “information edge” by buying the data to your iPhone’s location or hiring satellites to count the number of cars in each Walmart’s parking lot to estimate if sales have grown or not before those numbers are publicly released. Others locate their computer servers next to high-speed fiber-optic cables to obtain market moving information a fraction of a second before other investors do. Another strategy is to invest in markets where there aren’t a million other people crunching the numbers because it’s just too risky (such as certain markets in the developing world) or because only those with tens of millions of dollars can participate (private equity).
 
But for the vast majority of us emergency physicians, none of those exceptions will be true, and that’s okay – for two reasons:
 
First, the market has been doing pretty gwell, earning on average 13.79 percent a year for the last 10 years, and between 5 and 7 percent for any 10-year timeframe since before the Great Depression. In other words, a $100,000 saved today will be approximately $800,000 in 36 years.
 
Second, it’s never been easier to passively invest in the market with robo-advisors that replace traditional investment advisors at a fraction of the cost and are better at math. Just google or download Wealthfrontor Betterment, type in your information, and buy the funds they suggest.
 
Next time someone comes up to you in the break room and pitches the next and greatest cryptocurrency or stock, ask them why they think they have an edge as an active investor, and smile, knowing that your passively invested pot is slowly but surely getting bigger.
 
Omar is a resident physician at The Mount Sinai Hospital in New York and holds an MBA from Harvard Business School. He has no conflicts of interest to report.