Forget Average

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  • on August 27th, 2010

Do we pay to watch the average athlete compete?  No, even the “journeyman” professional is among the most exceptional of superior participants in the sport.  What about how the average fund manager fails to beat his/her benchmark?  Duh, how could they?  As a group, they are the average…minus expenses, of course.

We need to seek exceptional. So what if 99% of investors don’t consistently beat their benchmark…would an MLB scout quit looking for the next Albert Pujols because the average player isn’t exceptional?  The value lies in digging and digging to find that one gem who has the potential to be an outlier.  If you don’t enjoy the hunt, you’ll never persist long enough to find those candidates.

This Blackstar paper shows that most stocks fail to keep up with the index.  Think about that…only those businesses that demonstrate an ability to grow and profit even get the chance to become public companies(OK, forget  Once landing there, only 36% of them are able to deliver price performance better than the Russell Index.

So do we just accept the index return, knowing that most stocks and virtually all managers fail to beat it over time?  That’s one approach, and a better one than most…strip expenses away from the “average” fund and it immediately becomes “above average”.  It’s a sound way of capturing the future returns of an asset class.

Or we could seek the exceptional…the Warren Buffett running Berkshire Hathaway.  Peter Lynch running Fidelity Magellan.  Stanley Druckenmiller running Duquesne Capital.  OK, we couldn’t all get into that one, but the point is that exceptional talent exists.  There is no guarantee that we’ll find it, but is there any guarantee that equity markets owe us some magical path to retirement?

If you have the time and enjoy the hunt, look for exceptional.  Go find a Steve Jobs or Steven Wynn or Jeff Bezos who know how to grow a company.  Find a Bruce Berkowitz or John Hussman to steward a portion of your risk assets.  Learn whether a Ben Graham or William O’Neil approach is more likely to suit your personality…value and momentum work because most are afraid to act on it.

Traders, wait for your setup…find those exceptional days of narrow or wide range, or extremely high or low volume.  They reveal the backdrop of fear or complacency that provides some of the best setups, versus the chop of an “average” setup.

Outliers contain opportunity, yet most are afraid to embrace that which stands out.  This started as a post on how average range/volume days tell me “more of the same”, while exceptionally high or low range/volume days says “the times they are a changin'”.  But it is a pattern in much of what we do that we take comfort in the average, when we really should be looking at the far ends of the curve.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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