“No, I’m Better”

Adam M. Grossman

CONVERSATIONS ON Twitter aren’t known for their civility. Still, it came as a surprise last week when, out of the blue, author Nassim Nicholas Taleb launched a broadside against investor Clifford Asness, calling his work “crap,” along with other insults.

Asness wasted no time firing back, calling Taleb “very wrong and clearly both nuts and a world class terrible person.”

From there, the insults escalated: nasty, overrated, unoriginal, illogical, pretentious, emetic. That last one I had to look up in the dictionary. And those are just the words fit to print.

If you aren’t familiar with them, Taleb is a retired Wall Street trader turned author. He’s best known for his book The Black Swan. Asness is the founder of AQR Capital Management, which runs several public and private investment funds. Both are well respected in the investment field. According to Asness, they used to be friendly.

So why the sudden vitriol? It started when Taleb questioned the track record of some AQR funds, then touted the superior performance of funds managed by Universa, a firm with which he’s affiliated. Over the course of several days, Taleb and Asness debated a number of points but, fundamentally, it was an argument about investment performance.

Of all the topics to debate, investment performance seems like one that ought to be cut and dried. Suppose Fund A gains 5% and Fund B gains 10%. Didn’t Fund B deliver better performance? What’s there to argue about?

It turns out that investment performance is, unfortunately, somewhat in the eye of the beholder. Below are just five of the ways in which performance measurements can be fuzzy:

Choice of benchmark. One of the oldest tricks in the book: A fund manager will choose a benchmark that’s easy to beat. Fund companies have been known, for example, to choose a conservative benchmark and then fill their funds with the stocks of small, fast-growing companies. Result: By comparison, the funds look like stars.

Choice of time period. Measuring performance obviously requires picking a time period. Yet the reality is that almost every investment has periods when it’s in favor and when it’s out of favor. Choose one time period and you could argue that international stocks are superior to U.S. stocks. Choose another time period and you’ll get the opposite result.

Limited data. Try to evaluate an index of emerging markets stocks and you’ll quickly get stuck. Why? For the U.S. market, there’s reliable data going all the way back to 1926. But the most common emerging markets index only started in 1998. How can we best compare emerging markets to other investments, if at all? It’s a judgment call and certainly subject to debate.

A changing world. The world is not a static place. Since 1926, the U.S. stock market has returned some 10% a year, on average. But today, our population is growing at just half the rate it was in decades past, so is that historical average meaningful or misleading? You could make similar observations about other countries, as well as particular industries and companies. In every investment category, it’s very hard to make comparisons across time.

Taxes. For individual investors, one of the more maddening aspects of performance reporting is that taxes are often ignored. If one money manager is pursuing a tax-efficient strategy while the other is not, it’s very hard to compare them. A key problem: Tax rates differ across individuals. For instance, those in the lowest tax brackets pay zero capital gains taxes. That’s why many money managers don’t even try to report after-tax performance, even though that’s what really matters to investors.

Asness summed it up best. In one of his tweets, he accused Taleb of comparing “apples to hippopotamuses.” That’s the heart of the problem. In this case, both Asness and Taleb have a vested interest in defending their own funds’ performance. But even for the individual investor trying to make objective judgments, it isn’t easy. With that in mind, here are three recommendations as you build and monitor your portfolio:

  • Stick with simple investments. There are two reasons. First, they’ll usually have long track records. Second, it will be easier to choose an appropriate benchmark. A big issue with the Asness-Taleb debate is that they’re arguing over complex investments with track records that go back to only 2017 or 2018. Even if they could agree on a benchmark, a few years is hardly enough time to form a judgment. When you choose investments with longer track records, you can examine how they did during different kinds of market environments—bull markets, bear markets, inflationary periods and so on. That’s much more meaningful.
  • Avoid package deals.  Even some seemingly simple investments can be complicated. Consider target-date mutual funds, which are popular in many 401(k) plans. Because these funds are comprised of stocks and bonds—and sometimes other asset classes—they’re difficult to judge. My advice: Stick with the simplest funds, those that hold just one asset class—a total stock market index fund, for example—rather than a stew that’s hard to characterize. A bonus: Simple investments usually carry the lowest costs and are most tax efficient.
  • Focus on what matters. When last I looked, Taleb and Asness were still going at it. Because investment performance is such a fuzzy topic, they could probably go on indefinitely. Fortunately, there’s a simple solution: Ultimately, the best measure of performance for you is whether you’re on track to meet your own financial goals—and that means you should worry less about how your portfolio matches up against some arbitrary benchmark.

Adam M. Grossman’s previous articles include A World of ProblemsThinking It Through and Regrettable Behavior. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.

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