Pursuing an evidence-based approach to investing (as we do) includes hearing from those whose thoughts align with ours as well as those who challenge our assumptions. In that spirit, one of my recent reads was “A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market,” by Edward Thorp.

That’s a big book title, from a larger-than-life author. Even if he spiced up his story with a few potential exaggerations, Thorp obviously is one of the most brilliant people you may never have heard of.

A childhood genius and young math professor turned Vegas gambler turned hedge fund manager, Thorp knew his way around the data analysis block, warning a client about Bernie Madoff’s fake trades before the news went public.

He also suggests he scooped Nobel laureate Myron Scholes and collaborator Fischer Black on their insights into how to price options and other financial risks. The implication is that Nobel prize would have been his, had he played his cards right. He doesn’t say how much he earned over his career, but in the the book, he states that Citadel Investment Group was built using his market-neutral strategy, and the managing partner was worth $5.6 billion at last count.

Then there were his casino-beating tactics – employing statistical analysis to tilt the odds in his favor, plus a few tricks up his sleeves to stay in the game (such as wearing disguises once the casinos were onto him). I found this portion of the book the most entertaining.

But what about his investment advice? If anyone could crack the code on how to consistently beat the market, you’d think it would be Edward Thorp. Instead, when he tried his hand at active stock-picking, he soon discovered the same thing we did: Stock-picking advice is worthless, after-the-fact news.

The conclusions Thorp drew from there differ from our own. One of his chapter titles says it all: “Wall Street: The Greatest Casino on Earth.” While Thorp tries to apply some of his casino-beating tactics to pursue statistically significant edges over the market, we feel there’s more compelling evidence suggesting long-term investors are better served with a less dicey approach.

“A Man for All Markets” is a fun summer read for peeking inside the mind of a mathematical whiz with a flair for living and investing on the edge. When it comes to managing your money for all markets, we continue to recommend evidence-based investing.

As meticulous as we are with our financial advice, we tend to be even more deliberate when adding new members to our Hill Investment Group team. Fortunately, welcoming Nell Swanson as our Chief Operating Officer (COO) was one of our easiest hiring decisions ever.

You might not immediately conclude a natural fit, given her intriguing credentials as a petroleum engineer and, most recently, an operations specialist for an oil & gas private equity firm. But here’s where it gets interesting.

Nell found us after determining that something was missing from her otherwise stellar career. She was content enough and successful enough, but she wasn’t personally connected to it or inspired by it.

So, as any good evidence-based advocate would do, she took a good, hard look around. A voracious reader with a passion for behavioral finance, it was only a matter of time before she ran across Matt Hall’s Odds On. She devoured it at once, and knew she’d found the inspiration she’d been looking for. Reaching out to Matt for career advice, the conversation quickly turned into a job interview. The rest is happy history.

“Nell blew each of us away as we met her,” says Matt. “She has so much energy and initiative, and such a rare combination of technical ability and interpersonal understanding. We soon knew we’d found the right person to be our first COO.”

You’ll find Nell based in our Houston office, where she already is making her mark by exploring new business, operational, human capital, compliance, financial and overall organizational opportunities for us. Most of all, Nell will be instrumental in helping us sustain close personal relationships with our clients even as we grow. This is mission-critical and at least as important as any numbers involved.

In her spare time, Nell is planning a fall wedding to her fiancé and pre-school classmate Walter. She enjoys working out with Walter, putting together puzzles, reading, traveling with friends and family, volunteering in her community, and drinking copious cups of coffee … cold-pressed, lightly creamed.

When she told her family about her career change, she admitted she was nervous. “They’ve always been so supportive of my past plans, I was afraid I might disappoint them by shifting gears so dramatically.” Quite the opposite, her parents felt as she did (and we do) that she should pursue wherever her passions take her. We’re so glad they’ve led her to our HIG family. Welcome, Nell!

There’s never a lack of news in the financial press:  new studies, new reporting, new crises, new opportunities … it never ends.

Some of it is worth heeding; most of it is just noise. One of our roles at Hill Investment Group is to help you find the hidden gems in all that “new news.” Here are two worthy reminders that trying to pick individual stocks or forecast the market’s many moods remains as ill-advised as ever.

On the Dangers of Stock-Picking …

In his recently published piece, “Hot Stocks Can Make You Rich. But They Probably Won’t,” Jeff Sommer of The New York Times reflects on how investors may be tempted to chase surging stocks in hot markets. “But,” he cautions (emphasis ours), “before you jump headlong into stock picking, you may want to consider the odds … [O]ver the long run, while the total stock market has prospered, most individual stocks have not.”

This may seem counterintuitive, but for supporting evidence, Sommer cites a new study by Hendrik Bessembinder of Arizona State University’s business school (my own alma mater). Sommer points out two remarkable findings from the study, often overlooked in all the excitement:

• “58 percent of individual stocks since 1926 have failed to outperform one-month Treasury bills over their lifetimes.”
• “[A] mere 4 percent of the stocks in the entire market … accounted for all of the net market returns from 1926 through 2015.”

Professor Bessembinder’s study concludes that individual stock picks are like lottery tickets. A stock picker may beat the odds and win big, but if you’d rather focus on winning sustainably while managing the risks, you’re better off accepting wider market returns.

On the Dangers of Market-Timing …

On the same day Sommer’s article appeared, The Wall Street Journal’s Jason Zweig published a nicely paired piece, “Sorry, Stock Pickers: History Shows You Underperform in Bad Markets, Too.”

You may need a subscription to read the entire article, but the title says a lot. Based on data points going back to the 1960s, Zweig notes: “The odds of finding a stock picker who can do better in down markets have long been less than 50/50.” Not only are the odds against those who try to beat the market, the costs tend to be high in every market, up or down. So, while stock pickers often tout their ability to shine the brightest when the markets are at their darkest, the evidence again suggests otherwise.

So, What’s New?

Bottom line, a traditional active investor faces hurdles that are simply too tall to be enticing, especially when there is a more logical, evidence-based strategy to lead the way. This may not be breaking news to anyone who’s been following our work for a while, but I’d say it’s still as fresh and relevant as ever.