Why Investing is the World’s Most Difficult Profession

Being a professional investor is the hardest profession on the planet.

Not because the financial markets are global and 24/7.  Not because the markets are full of extremely driven and intelligent competitors.  Not because the emotional highs and lows can be soul crushing.  It is because of the constant and measurable competition against passive benchmarks.

Each day, month, quarter and year a professional investor’s performance is measured against both the benchmark and their peers.  Outside of professional sports, I’m not sure there is any other industry that generates such objective and continuous measurements. And even in sports, there is no equivalent of a “passive benchmark”.  If a player is struggling, teams do not have the option to replace that player with a benchmark that guarantees them the averaged production of every player at that position.

Benchmarks are the most ferocious of competitors.  They show up for work everyday. They never get sick.  They don’t take vacation.  They are always 100% invested so their results are continuously compounding.  Most importantly, they’re not aware of their own performance.  The S&P 500 will never enter the 4th quarter feeling it needs to really press to have good numbers for the year.  Nor will it take December off to “lock in” a good year.

Not only is the pressure unrelenting, but your failures are public on a scale that again only professional athletes can relate to.  If you do become a successful professional investor and overcome all of the above, there is always the question of skill versus luck.

No fan in their right mind believes they have a chance of beating a Kobe Bryant or LeBron James at basketball.  Yet any investor can now buy a portfolio of index funds and have a good chance to outperform not just a few, but the majority of mutual and hedge fund managers.

This inconvenient truth is like a little voice in the head of every successful investor – “Am I really good at this or have I just been lucky?”.  A voice that never goes away as it only takes a couple bad years to destroy an lifelong track record.

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  • http://twitter.com/StockKevinH Stock Kevin

    Is this suppose to discourage us from investing?

    • http://www.johnstanderfer.com John Standerfer

      My intent was not to discourage, but point out some of the difficulties that are often overlooked by those not immersed in the industry.

      • http://borasky-research.net/about-data-journalism-developer-studio-pricing-survey/ M. Edward (Ed) Borasky

        John, I’m with the “quitcherbellyachin” crowd on this one. *Nobody* feels sorry for an “investment professional”, used-car salesman or politician except another one. ;-)

  • http://www.johnstanderfer.com John Standerfer

    Absolutely, investing can be even more financially rewarding than professional athletes and you are likely to have a much longer average career.

  • http://www.ivanhoff.com ivanhoff

    It depends how you structure your market approach. You could be competing against benchmarks or you could be competing against yourself – subtle psychological alteration that could make a huge difference in behavior and performance. It is easier when you manage your own money. With OPM, you need to win their trust first, which means make them some money at the very beginning of your relationship.

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  • reformedbroker

    Amazing post, John, anyone in the business can relate, no matter how good they are (or used to be). I think one thing professionals can do to somewhat insulate themselves from this becoming a major psychological stumbling block is to think about what their goals actually should be – not every pool of money needs to beat the S&P in order to be productively invested over the long-term

    • http://tr.linkedin.com/in/kahmet Ahmet Kara

      Great comment (on a great post), Josh. In my opinion, the trick to success is to be able to set your own performance criteria which will most probably be worse, but should definitely be FAR LESS volatile than the passive indexes.

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  • Sarge

    I get it. I see it, and unlike other professions, and very much like the benchmarks, most market people haven’t called in sick in years (decades?), and take very little time off.

  • Patrick Haughey

    This is stupid. Nobody is shooting at you while you try to earn a living. Nobody is threatening your children or your food supply. You are not trying to earn a living surrounded by chemicals that will kill you or your family while making a meager sum. Even being a mediocre index-matching investor pays better than most jobs in the US. Quit whining. You could have it much much worse. there are people who go to work everyday who wonder if they will be dead due to location ,job hazard, or inherent dangers of their profession. You “performance anxiety” is ludicrous by comparison.

    • Matt

      Completely agree and I’m in the industry. It is simple arrogance to think that a profession in which 80-90% of the participants FAIL to match their benchmarks over time, yet many still manage to earn six figures or more per year, is somehow a difficult way to go about your day.

      Sure, it is difficult to beat a benchmark, but since you don’t actually have to succeed to make a ton of money for yourself, investing is possibly the world’s most embarrassing profession.

    • http://www.johnstanderfer.com John Standerfer

      Patrick,

      There are obviously many professions that involve far more personal risk and sacrifice than anything related to Wall Street. But extreme danger, risk and sacrifice are not the same as difficulty. High danger organizations like the US Military / Special Forces and Boots & Coots (as referenced by Johnny Options) have historically been extremely successful at achieving their goals. The same can not be said for the investment industry.

  • http://www.facebook.com/people/Don-Ake/100000579041721 Don Ake

    Investing is difficult but keep an eye on the one you choose! – http://modeltstocktrends.blogspot.com/2012/03/dont-let-curtis-mismanage-your-money.html

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  • Randolph Bertin

    If you acknowledge that it is almost impossible to consistently beat a benchmark, shouldn’t you and your clients be investing in the benchmark (i.e. equivalent passive fund(s))? Why would you combat the benchmark? I recognize that financial planning and advice is more than just buying a handful of index funds and waiting for retirement, but if you can’t beat them, you should buy them.

    • http://infosample.com/ Info Sample

      Randolph, there is a subtle but important difference between consistently beating a benchmark and beating a benchmark over a longer period of time. I’m arguing that it is virtually impossible to beat a benchmark every quarter or year but great investors can beat index funds in time. I’ll admit it is rare.

      • Randolph Bertin

        I took “consistently beating” to mean, beating regularly, over a long time (not necessarily beating it every single quarter or year). It also seems that the longer the time frame, the more difficult it is. Only a handful (now very wealthy) have managed such an accomplishment. For the rest of us, the argument to index is compelling. (Disclosure: I’m not exactly following my own prescription/observation as I probably have only a quarter of my portfolio indexed).

        • http://borasky-research.net/about-data-journalism-developer-studio-pricing-survey/ M. Edward (Ed) Borasky

          The argument to have a *diversified* portfolio is “compelling”, but it takes more than a single “index” to achieve diversification.

          • Randolph Bertin

            I agree. There are numerous index funds that allow you to diversify into various classes of equities (domestic, international, small/large, growth/value, various bond durations, etc). The question I have to ask myself is, if I cannot construct a portfolio (including buying/selling now and then) of individual holdings (i.e. specific stocks and bonds) that will regularly beat an indexed portfolio (comprised of various index funds to establish a desired asset allocation), then I *should* be buying passive index funds (and possibly rebalancing). So far, I am holding my own, with a little outperformance primarily due to two fortunate (lucky?) purchases I bought cheap and have held (AAPL and GGP). The questions professionals should be asking themselves is what *value* they are providing clients. If they are not able to beat passive index(es) over the life of their management of those funds (and charging management fees on top of that), they owe it to their clients to provide a better return (through index funds). Of course it does not make sense to compare an entire portfolio to the S&P 500, but it does make sense to compare it to a set of index funds that match the risk tolerance of the client.

          • http://borasky-research.net/about-data-journalism-developer-studio-pricing-survey/ M. Edward (Ed) Borasky

            “The questions professionals should be asking themselves is what *value* they are providing clients. If they are not able to beat passive index(es) over the life of their management of those funds (and charging management fees on top of that), they owe it to their clients to provide a better return (through index funds).”

            Bingo! But it very much depends on who the “client” is. I spent a huge chunk of my recent life in the corporate world, where one invests via a 401(K). The options one has in that situation are constrained by back-office deals between “fund managers” and corporate HR, with generous commissions and much congenial back-slapping all around. It’s great in a bull market and the company match somehow makes it work, but when something like 2007-2008 rolls around, it all goes to Hell.

            The HR people simply do *not* make the fund managers compete. And the ones with the 401(K) are the *lucky* ones – everyone else beneath “accredited investor” status is on their own.

  • http://twitter.com/JohnnyOptions Johnny Options

    I just retired after 35 years in the profession made famous by Red Adair – oil well blowouts. During my time, I owned a couple of large companies and had to bury 22 of my employees. Although we had trust funds set up for the families and the surviving children’s education, what you do is not as difficult as facing the surviving spouse of someone who worked for you.

    Funny thing about flames, heat and pressure – they show up to work every day and can be fiercer than (choke, gag, roflmao) “benchmarks.” Wow.

    As for me, I only lost an arm during this but, as I am an adrenyline junkie (as I suppose most of you deskjockeys are), I wouldn’t have traded it for anything. Somebody had to do it; somebody would’ve done it – it might as well have been me. I invest for a living now and do rather well for myself, earning a 12-15% return, on average, in futures and options. Yes, I’m not pushing money like you guys are, but the few mil I do for myself is all I have outside of the trusts and annuities I have set up for my family.

    I don’t have a problem with your article, but I do have some reservations about it’s tone. The hyperbole and over-the-top self-congratulatory vibe makes me ill. I get what you’re “trying” to do here – you just didn’t do it very well.

    • http://www.johnstanderfer.com John Standerfer

      Johnny,

      Please see my response to Patrick below.

  • Jonas

    It’s difficult only if you try to be substantively good at it. It’s not difficult if you’re only trying to survive on your luck until you make your bonus(es). Then you only have to be lucky and/or good at self promotion.

  • http://tr.linkedin.com/in/kahmet Ahmet Kara

    Great post, John. In addition to your thoughts, let’s not forget the fact that broad indexes always consist of the best companies. Once a company is in trouble and loses market value, it’s kicked-off from the index, and another one (a more promising one) enters. If you’re competing with an index, that means you’re ALWAYS competing with the best companies of the scope of the index.

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