He Lost 35% Ignoring 2024’s Biggest Trades: ‘I Am Not Good at What I Am Doing’ Richard Toh’s raw mea culpa details how he ignored Nvidia and bitcoin and misread tariffs.
Hedge Fund Managers are fairly good at getting attention. Sometimes good, sometimes bad. Great stories for CNBC, the Wall Street Journal and Fox Business to trumpet upon you for attention. After reading a WSJ article about Richard Toh's 2024 investment returns, I wanted to circle back to what this means for new investors and those reviewing their investment strategy.
The Illusion of Beating the Market
At Sterling Edge Financial, we understand the allure of outsmarting the market. Many investors dream of achieving extraordinary returns through the right strategy and extensive research. However, the reality is that consistently beating the market is incredibly difficult, even for professional investors. Our approach focuses on implementing academically grounded processes and strategies that prioritize diversification and risk management to help clients achieve their financial goals.
The Stock Market’s Unpredictability
The stock market is influenced by a myriad of factors, including economic indicators, geopolitical events, and investor sentiment. Predicting stock movements is more akin to gambling than a precise science. The Arizona State University study "Do Stocks Really Outperform Treasuries?" revealed that only a small percentage of stocks are responsible for the majority of the market's long-term gains. This underscores the challenges of stock selection and timing. At Sterling Edge Financial, we leverage this understanding to guide clients toward strategies that align with long-term market trends rather than speculative bets.
Challenges in Investment Research
Investment research is a complex and time-consuming process. It involves analyzing financial statements, understanding market trends, and keeping up with economic news. Even with sophisticated tools, predicting the future performance of a stock remains fraught with uncertainty.
We help clients navigate the overwhelming volume of market information by employing evidence-based models that filter valuable insights from noise. This disciplined approach allows us to focus on robust investment principles that prioritize steady, long-term growth over short-term speculation.
The Reality of Underperformance
The sobering truth is that a significant number of active investors fail to outperform their benchmarks. According to a 2020 report from S&P Dow Jones Indices, over 80% of active fund managers underperformed their benchmarks over a 15-year period. This highlights the inherent difficulties in active investing, even for seasoned professionals.
A striking example of underperformance is the case of Richard Toh's Kenrich Partners hedge fund, as highlighted by a recent Wall Street Journal article. Despite employing extensive research and sophisticated strategies, the hedge fund suffered significant losses. By comparison, diversified portfolios—such as those built with Vanguard and Dimensional Fund Advisors (DFA) ETFs—have consistently provided more stable returns. At Sterling Edge Financial, we prioritize these diversified, low-cost strategies to offer clients risk-adjusted returns that outperform many active management approaches.
Academic Insights on Active Investing
Academic research has consistently shown that active investing is a losing game for most people. Studies by Nobel laureates Eugene Fama and Kenneth French demonstrate that markets are generally efficient, meaning that stock prices already reflect all available information. This reinforces the importance of diversification and disciplined investment strategies.
The Arizona State University study also found that the majority of individual stocks underperform the market, further emphasizing the value of broad diversification. Additionally, the costs associated with active investing, such as trading fees and management expenses, further erode any potential gains. Sterling Edge Financial incorporates these academic insights into our client portfolios, ensuring that our strategies are cost-effective and aligned with market realities.
The Case for Diversified Portfolios
At Sterling Edge Financial, we advocate for diversified portfolios as a cornerstone of our investment philosophy. Diversification involves spreading investments across various asset classes and sectors to minimize risk. By holding a mix of stocks, bonds, and other assets, we help our clients better protect themselves against market volatility.
Through the implementation of academically aware models, we design portfolios using low-cost index funds and exchange-traded funds (ETFs). A balanced portfolio of Vanguard and DFA ETFs, for example, has demonstrated superior performance compared to many hedge funds. Our process eliminates the need for constant market monitoring and complex analysis, providing clients with a stress-free and reliable investment experience.
Conclusion
The illusion of beating the market is a compelling narrative, but the reality shows the importance of disciplined, evidence-based investing. There are real risks and consequences to taking concentrated positions. At Sterling Edge Financial, we leverage academic research and real-world evidence to design portfolios that emphasize diversification, manage risk, in pursue of investment returns. By acknowledging the limits of active management and focusing on broad-based, cost-effective investments. If you are feeling the need to speculate or take a concentrated position, let's talk about how to do so without putting your financial plan at risk to speculation.
References:
-
Bessembinder, H. (2018). "Do Stocks Outperform Treasury Bills?" Arizona State University.
-
S&P Dow Jones Indices. (2020). "SPIVA U.S. Scorecard."
-
Fama, E. F., & French, K. R. (1993). "Common Risk Factors in the Returns on Stocks and Bonds." Journal of Financial Economics.
-
Wall Street Journal. "Kenrich Partners Hedge Fund Case Study."
-
Vanguard Group. "Historical Performance of Index Funds."