What The 3-Time Champion San Francisco Giants Can Teach Investors

Last month, the top of the San Francisco Chronicle read, simply, DYNASTY. This author won’t argue against that, but what is interesting is that the Giants have certainly not been the most intimidating team over the last three years.

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 into 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 some give them credit for?

Probably a bit of both.

Humans routinely underestimate the role 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?

Warren Buffett isn’t a fund manager, but 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 and Peter Lynch are other household names. 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.

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 percent due to bad buy and sell timing decisions.

Most individual investors tend to fare worse than luck alone would suggest. 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.

Protecting ourselves from underestimating the value of luck. Luckily, there’s an 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.

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