I heard this statement recently, although it has been stated many times in many different ways.

Here’s what I think: Most professionals aren’t trying to beat the market. They are trying to further their career and make money.

That’s not a judgment against them. Everyone responds to incentives. One way to achieve success is to beat the market. If only it weren’t so hard.

Here are some other ways to succeed as an investment professional:

• Get Promoted – Being or looking smarter than peers. Complicated math, complex derivatives, macroeconomic opinions. These are good ways to sound smart but not necessarily to get returns. Play the game well enough, and you could get promoted to portfolio manager.
• Gather Assets – Become a well-known name. Forecasts of “this time is different” or “the crash the century is coming” are good for getting on TV. Be a good storyteller with the right mix of producing fear and FOMO at the same time.
• Keep Assets – A nice, diversified portfolio, spread all around the world and in every asset class is a good way to not get in trouble. The portfolio won’t go down too much; it will underperform, but not too much. And if it does, you can blame it on some emerging market thing (oh well). In any case, investors are unlikely to get annoyed enough to sell your fund or transfer their assets.

That is to say, there are many incentives causing professionals to act and invest in ways that are not focused on getting high returns.

This is why small funds often outperform the bigs. And why the investors who are on CNBC often don’t have the returns to backup their forecasts.

Beating the market isn’t easy, but it helps to try.

– Spencer