American radio host Garrison Keillor referred to a fictional town Lake Wobegon on his radio show, ‘where all the women are strong, all the men are good looking, and all the children are above average’. It is a human tendency to overestimate your own abilities relative to other people. This could be anything you do in your daily life – cooking, driving, teaching, professional work etc. This tendency has come to be known as the Lake Wobegon Effect.
The same phenomenon works in the realm of investing as well. Many of us who are active investors believe we are better than others at investing – ie. we are able to understand the market & predict its future direction better than others. But this is not usually true as most retail investors can’t even match the performance of a major index like the NIFTY 50 over the long-term.
There is only one sure way to beat the market in the long term: Superior information. It refers to information that other people don’t have or generating insights from public data through sophisticated analysis. Institutional investors that have both of these are still not always able to generate above average results. According to Dalbar research, a typical small investor has underperformed the S&P index by 4.3% a year over the last 20 years.
In 2015, IIM Bangalore commissioned an academic study which found that the more the investing experience you have, the more you will overestimate your abilities in the market. You may remember only the right decisions you have made in investing, and as a result repeat your mistakes over and over. Are you guilty of this? What is more important to you personally – to beat others in investing or to secure your future?
What is the way out? Tracking your portfolio performance can help you understand exactly how well you are doing relative to a broad market gauge like the NIFTY 50 index. Or you can use an app that provide financial guidance which will give you research-backed portfolios and help you monitor your performance easily.
