Lately, the day job has been inspiring many of our Philosophy Phriday posts. (This coming Sunday’s WaPo column was also inspired by what we see int he office).

Today’s post is another such example. Perhaps its because we run a somewhat different business model than is typical in the finance industry in the US. Our clients come to us through word of mouth and referrals, as opposed to the traditional cold calling/sales nonsense (which I despise). We run a more European model, which is low key and quite civilized.

Anyway, the other day, we received this inquiry in the office:

“I am interested in some alpha investing without excessive risk, perhaps looking for 4-5% greater than the averages.” (emphasis added).

Understand, that not every inquiry is a good fit for us. And what we do is not a good fit for every potential client. If we don’t think what we do will make the client happy — even if its the smart thing, the right thing for them to do over the long haul — we simply don’t take them on. This inquiry likely fell into that category.

But rather than just blow someone off, I always feel obligated to at least make some attempt to explain why he is unlikely to achieve happiness & wealth in his chase of Alpha. Call it tough love or the straight dope, but I have to at least try to help the guy get off his expensive, illusory alpha chasing hamster wheel.

Thus, I responded as follows:


I wanted to follow up to the automated reply you received from me yesterday. You noted that you were looking for “perhaps looking for 4-5% greater than the averages.”

The best doctors I know never mince words, and I agree with that philosophy, so here goes: YOU ARE HURTING YOURSELF WITH THIS PURSUIT.

The data on this is overwhelming and incontrovertible. Nearly all investment managers underperform; of the ones that out-perform, few do it consistently year to year, and of those who do, once you take into account fees, they become average.

Earlier this Summer, I gave a presentation to a room full of public pension trustees at Harvard (about 1.7 trillion dollars worth, not counting Calpers). Its called “Romancing Alpha, Forsaking Beta” — you can see it here.

The takeaway is that the mad dash for out-performance almost always leads to UNDER-performance. The huge public pension funds and many of the large Foundations are slowly coming to realize the truth of this.

If you are looking for someone who is going to find you the magic hedge fund that turns dross into gold, we cannot help. What we can offer you is a way to figure out what your needs and goals are, along with the healthiest, lowest risk way to achieve those goals.

There are some people who have yet to pay their tuition to Wall Street University. They shall do that over the course of their investing lifetimes through high fees, unnecessary taxes, costs and expenses. And the vast majority of these folks will underperform the suitable benchmarks. Net net they better enjoy this pursuit, for it will be more expensive than any mid-life crisis expenditures they might incur.

Patients are advised to stop smoking, lose the weight, exercise, reduce stress, cut out sugar, etc. when their doctors observe conditions they KNOW will manifest as future health problems. To this doctor, I tried to identify the risks to his future financial health. Otherwise, he will eventually pay some hefty tuition bills if does not change his investing ways.

Investors, heal thyself.

Category: Apprenticed Investor, Hedge Funds, Investing, Philosophy, Psychology, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

21 Responses to ““I Am Looking to Outperform the Markets by 4-5% a Year””

  1. Chief Tomahawk says:

    He’d do better to spend spare time scouring Groupon for the places actually offering deals.

  2. jnkowens says:

    Wow. Great response Barry. It’s truly refreshing to see a statement of reality like this to potential clients. I know there are many people of the highest integrity managing money, but they seem to be overwhelmed by those “professionals” who have no integrity at all. At least that has been my personal experience. And don’t even get me started on the real estate industry.

  3. Hallsto says:

    Dr. Ritholtz I need a prescription for straight dope.

    • A hot summer night, fell like a net
      I’ve gotta find my baby yet
      I need you to soothe my head
      Turn my blue heart to red

      Doctor, doctor give me the news
      I’ve got a bad case of lovin’ you
      No pill’s gonna cure my ill
      I’ve got a bad case of lovin’ you

      A pretty face don’t make no pretty heart
      I learned that buddy, from the start
      You think I’m cute, a little bit shy
      Momma, I ain’t that kind of guy

      Doctor, doctor give me the news
      I’ve got a bad case of lovin’ you
      No pill’s gonna cure my ill
      I’ve got a bad case of lovin’ you


  4. Petey Wheatstraw says:

    I can’t help but think that maybe you should have given this advice, with a few very minor tweaks, directly to Lawrence Summers when he was President of Harvard.

  5. denim says:

    Thanks. Somehow, your answer to the doctor brought up a past link of yours regarding Jesse Livermore.

    “1. Nothing new ever occurs in the business of speculating or investing in securities and commodities.
    2. Money cannot consistently be made trading every day or every week during the year.
    3. Don’t trust your own opinion and back your judgment until the action of the market itself confirms your opinion.
    4. Markets are never wrong – opinions often are.
    5. The real money made in speculating has been in commitments showing in profit right from the start.
    6. At long as a stock is acting right, and the market is right, do not be in a hurry to take profits.
    7. One should never permit speculative ventures to run into investments.
    8. The money lost by speculation alone is small compared with the gigantic sums lost by so-called investors who have let their investments ride.
    9. Never buy a stock because it has had a big decline from its previous high.
    10. Never sell a stock because it seems high-priced.
    11. I become a buyer as soon as a stock makes a new high on its movement after having had a normal reaction.
    12. Never average losses.
    13. The human side of every person is the greatest enemy of the average investor or speculator.
    14. Wishful thinking must be banished.
    15. Big movements take time to develop.
    16. It is not good to be too curious about all the reasons behind price movements.
    17. It is much easier to watch a few than many.
    18. If you cannot make money out of the leading active issues, you are not going to make money out of the stock market as a whole.
    19. The leaders of today may not be the leaders of two years from now.
    20. Do not become completely bearish or bullish on the whole market because one stock in some particular group has plainly reversed its course from the general trend.
    21. Few people ever make money on tips. Beware of inside information. If there was easy money lying around, no one would be forcing it into your pocket.”

    I was going to highlight a few of those that resonated with me, but the more I read, the more they all made sense.

    “Jesse Livermore’s legacy is a bit of a double-edged sword…”

  6. steveh18 says:


    If you truly believe what you say, why are you having a conference ? You must serve a hell of a lunch.

    • If the conferences were like the usual nonsense, you would be right. But what I do with our conference is bring people who can educate investors about what they are doing right and wrong.

      For example, this year we have:

      1. Columbia Prof Michael J. Mauboussin explaining how to “Untangle Skill and Luck in Business, Sports, and Investing
      2. Vanguard Chairman Jack Brennen discussing the state of the investing industry
      3. Art Cashin discussing the history of Wall St

      That is a very different confernece than the usual hedge fund stars making stock picks to own for the next 15 minutes

  7. wally says:

    Well, OK then… how about 3-4%?

  8. VennData says:


    I’m going with Peter Schiff.



  9. Cato says:

    Yet another reason why if I win the euromillions I’ll be coming to you Barry.

    @VennData that made me laugh my ass off, lot of weird looks in the office, but I’m used that.

  10. says:

    Anyone know of an investment advisor who missed the 18% gain in gold and the 30% gain in silver over the last two months?

  11. [...] How investors hurt themselves in the pursuit of alpha.  (Big Picture) [...]

  12. Malachi says:

    Love the response Barry. Now if only I could get my loved ones to listen.

  13. Tony61 says:

    You could be gracious and assume the email writer intended gains of 4-5% OVER baseline, and NOT 4-5 percentage points aver baseline.

    If baseline long term market gain is 6% per year, then 4% outperformance would be a total return of 6.24%.

    Not a ridiculous goal. Your mileage may vary.

  14. [...] Barry Ritholtz, “There are some people who have yet to pay their tuition to Wall Street University. They shall do that over the course of their investing lifetimes through high fees, unnecessary taxes, costs and expenses.”  (Big Picture) [...]