Mendoza School of Business

Who gets the best return on stock-market investments? Not finance professionals

Published: November 18, 2014 / Author: Siri Srinivas

Here’s a shocker: finance professionals are not terribly good at … finance.

Openfolio, which calls itself the “Yelp of investing”, mined data from 2,500 of its users over a year. The new data suggests that technology professionals are doing better than the finance pros at making money on the stock markets.

They saw that those who worked in technology and advertising had investments that were up 12.7% and 11.1%, respectively.

Finance professionals? Only up 8% over the last year.

That’s not impressive. The S&P 500 is up 17% over the last year, says Hart Lambur – so finance professionals managed “basically half the performance of the S&P 500”. Lambur, a former Goldman Sachs bond trader, is the co-founder of Openfolio and curator of the research.

Hold your jokes. The laggard returns of finance experts may not be an issue of competence. It may be a classic case showing that familiarity with the markets breeds contempt – or at least, wariness.

Lambur says the very people who work closely with the markets seem to be nervous about them. “They’re apparently more risk-averse. They don’t want to be as invested in the market.”

Neither are those in finance – as richly paid as they tend to be – particularly aggressive about increasing their already substantial wealth. “They also get paid cash in big chunks that they’re not investing fast enough,” says Lambur.

That’s evident from how many in finance hold their portfolios in cash, which is considered the safest and most risk-averse place to park it. Finance professionals, it turns out, hold an average of 14.4% of their portfolios in cash, compared with 11% for tech professionals and a meager 9% for those in advertising and media.

This is not about skill, this is about access to superior information.
Andriy Bodnaruk, who teaches behavioral finance at the University of Notre Dame, says that Openfolio’s findings are consistent with his own research in the past, but advises caution. The tech investors’ concentrated wealth may have to do with the high-flying stocks of tech in the past few years.

“Over this time, the high-risk stocks [like tech stocks] are doing well,” but he notes that the data may not adjust for risk in comparing performance.

Another interesting finding is that no matter what their profession, investors’ wealth was heavily concentrated in their own industries. Technology professionals tend to own more technology stocks because their companies tend to pay employee bonuses in stock.

Finance professionals, similarly, have their money concentrated in their own companies’ stocks. While this shows a certain amount of devotion, such arrangements also devastated the employees of Lehman Brothers and Enron, who were paid primarily in company stock. One-third of Lehman’s stock, for instance, was owned by its own employees.

In fact, there’s broader research to prove that financial experts don’t make better investing decisions than those without dedicated finance expertise.

Notre Dame’s Bodnaruk and his research partner Andrei Simonov, associate professor of finance at Michigan State University, researched how fund managers performed compared with educated people in other professions.

Bodnaruk and Simonov observed private portfolios of mutual fund managers in Sweden, and compared them with the personal investments of people with similar economic standing and educational levels.

They found that the fund managers’ personal investments didn’t do any better than those of smart people in other fields.

While not absolutely debunking financial education or expertise, Bodnaruk says that it proves that anybody with a reasonable amount of intelligence – such as tech professionals who write code and build apps – who follows fundamental concepts such diversification and common sense can make great returns from the markets.

The researchers conclude that fund managers fared better only when their workplace exposed them to additional information. “This is not about skill, this is about access to superior information,” says Bodnaruk.

This mass rejection of financial expertise may be a deeper generational trend. Lambur observes that millennial investors would rather look to the wisdom of friends and their extended network than go to a financial adviser – especially so after the financial crisis they have lived through. “The younger generation has a deeper distrust of expertise,” he says. Go figure. 

View this story on The Guardian website.