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Human nature magnifies the perceived omniscience of celebrity. The oft-quoted celebrity is viewed as the incontestable sage.
Self-deprecation is the corollary to this tendency to magnify celebrity. We underestimate and belittle our own abilities. At the same time, we disregard our natural advantages.
Take investing. Celebrity money managers are placed on pedestals. Their words are taken as gospel. They’re perceived to maintain an insurmountable knowledge advantage that individual investors can’t possibly overcome.
Nothing is further from the truth. This point has been driven home in recent weeks.
Billionaire money manager Bill Ackman of Pershing Square Capital Management has seen the value of his largest investment, Valeant Pharmaceuticals International (NYSE: VRX), more than halved in the past month. Valeant is the second largest holding of another billionaire investor, John Paulson. Paulson has also lost big on another pharmaceutical company, Mallinckrodt PLC (NYSE: MNK).
Interestingly, both Valeant and Mallinckrodt are reeling on research produced by a firm that was anonymous only a month ago. Citron Research, relying on public information available to all, arrived at damning conclusions that have erased billions of dollars of market value.
To be sure, celebrity investors are privy to velvet rope sources and information, but don’t let that dissuade you. As economist John Maynard Keynes observed nearly a century ago, “The dealers on Wall Street could make huge fortunes if only they had no inside information.”
Ackman and Paulson are good investors, and their celebrity status imparts certain advantages. But you as an individual investor have your own advantages.
Solitude is one. When discussing information, Keynes is really referring to too much information. A constant bombardment of news, innuendo and rumor compromises intelligent thinking. Because you are acting as an individual, you can easily distance yourself from the fray. Sometimes a little quiet contemplation is all that is needed to improve outcomes.
Size is another advantage. You can buy and sell with little market impact. The celebrity investor, in contrast, must invest millions of dollars in one stock. He must carefully parse the trade to avoid the share price moving against him. Just as important, his size limits his investing universe. Your size expands your universe.
Self-directed investing brings expenses under direct control. Most online brokers charge less than $10 per trade. Once you own a stock you incur no additional expense. An actively managed mutual fund will skim 1% to 2% of your wealth annually. A hedge fund will appropriate 2% of money under management. Once a performance goal is exceeded – say a 6% return – up to 25% is turned over to management.
Tax efficiency is another advantage. You pick when, where, and how long you invest. A portfolio of high-quality dividend growth stocks can be held for years, if not decades. No capital gains taxes are realized. The more money that’s invested, the more wealth that accumulates over time.
As for time, it really is on your side. No institutional imperative is imposed to beat a benchmark every 90 days. You have the luxury of holding whatever you want for as long as you want. You can hold stocks that temporarily lag the market (as all eventually do) which have the potential for outsized gains down the road. Your independence inures you to institutional short-termism.
Have I painted too rosy a scenario? I don’t think so. Earlier this year I wrote an article about Ronald Read, a janitor, gas-station attendant and individual investor who amassed an $8 million fortune by investing in stocks like these.
I think it’s fair to say that Mr. Read avoided genuflecting to celebrity. I think it’s also fair to say that Mr. Read exploited his natural advantages to the best of his abilities.