*As seen on Forbes.
Unlike Tinker Bell, who flew around doing nice things, the Performance Fairy robs investors of their rightful gains. Actually, Performance Fairies are gremlins in disguise. By convincing unsuspecting people that it is easy to beat Mother Market, they induce investors to do all kinds of crazy things. Unfortunately, the damage that they do is far from trivial.
Because Performance Fairies are the official religion of Wall Street, most investors believe in one form or another of these gremlins. There are several well known variations of Performance Fairy, and investors may shift allegiance from one to another at various times. These belief shifts most often occur when a well known Performance Fairy appears to have lost his magic, or when another one demonstrates a miraculous burst of jojo power.
If you believe in the Performance Fairy, you are convinced that somewhere out there is a Fairy that can “beat the market”. Or, you might even believe that you yourself are a Performance Fairy. You persist in this delusion against all the available evidence. It is extraordinarily difficult to beat Mother Market. Few actually do it over the long haul, but a many fools are always ready to confuse pure dumb luck with skill.
I admit, Mother Market is often capricious, and nobody really understands her. That’s the nature of complex systems. While she is a little quirky, Mother Market provides for her children through the miracle of capitalism. That’s all you really have to believe in. If you embrace Mother Market you will find her benign, benevolent, and bountiful.
The central fallacy, and the core belief of all Performance Fairies is that Mother Market is not doing her job properly (market inefficiencies). Furthermore, Performance Fairies claim to tell the future. Some believe that they can divine the intent of Mother Market. Others believe that they can predict which of Mother Market’s children will thrive, and which will fail. Although this has never worked before, they stubbornly cling to their pagan beliefs.
Like any other superstition, the Performance Fairies lack any shred of credible evidence. But, the various voodoo priests, shamans, witch doctors, false profits, and charlatans, are so loud, persistent and prominent that most investors simply accept them. The dark side is strong. Misguided people tend to stay misguided. And all they ever get for their delusions is higher costs, higher risks, and lower performance than Mother Market would have given them.
Here’s the bad news: The Performance Fairy isn’t coming. So, get over it. But, the Performance Fairy never delivered and you are far better off without him.
Enlightened investors realize that making decisions in an atmosphere of uncertainty is difficult. They don’t demand miracles. They don’t rely on magic. They don’t need to. There is a huge body of academic theory and real world experience that will assist you to make better investment decisions without resorting to voodoo finance. We are in the midst of an enormous revolution in finance that has brought us better theory, better products, and lower costs. Once you give up on the impossible, you can focus effectively on the possible. Markets work pretty well, at least in the long run. And you can make far more progress by riding that wave rather than fighting it.
Let’s continue this dialogue on Twitter.