I write to your from Menlo Park, in Silicon Valley, in the midst of looking for Venture Capital backing for my amazing Fintech, although I’ll do fine without it.
12 years ago in the glare of the Financial Times, I topped their competition to predict the FTSE 100 over a 12 months period. I came within 0.5% of the final value. Others who participated in the competition, such a market commentator John Lee, went on to become Lord John Lee. Another still Mr Woodford, launched Woodford Funds, managing hundreds of millions of dollars – even though I trounced his performance.
It taught me some important lessons:
How you look matters more than performance – old and white helps. Hey, I am in California and the Oscars prove that pointA pissed off entrepreneur (me) usually beats the conventional same old, same old
You know the movie ‘MoneyBall’ in which the Brad Pitt character turns around a baseball team by picking players based on a variety of mathematical factors and by mining for data on all professional baseball players across the US. He looks for exactly the right mix of batters, fielders, runners to make a team which in composite will beat the baseball teams with far more money. Brad knows if they are to beat the best baseball teams, they cannot do so by simply trying to outspend them or mimic what they are doing.
His sidekick, a Yale economist, develops a computer programme to score all players. They scout and then hire a team. The uproar by the fans and the other colleagues is outrageous. They complain you cannot pick players based on the characteristics Pitt chooses. You have to use conventional wisdom they say. Yet, the team goes on to equal the record for number of consecutive winning games. This is a true story.
Before I knew anything about this story, I had asked the UK’s largest seller of private investor software, if they would create a piece of software for me based on my investing criteria. They could market it licensing my name and call it the ‘Alpesh Patel Special Edition’ of their main software. I knew if I was to beat the biggest fund managers, with their dozens of analysts, I could not do so by simply trying to outspend them. I could not do so by replicating their strategy. I had to look for their perceived strengths and outsmart them, turning those strengths into weaknesses.
You see the biggest fund managers are not now, nor have they ever been, very good. They are marketing machines. They look right. Statics show they rarely outperform putting your money in a passive index fund. The reason is they have so much money under management, because that’s how they earn money, not based on their performance. With so much money they can only invest in the UK’s largest companies.
Moreover, with so much money, they have to spread those funds across so many of these big companies that they end up replicating an index like the FTSE 100. And then they turn that into a virtue, by measuring their performance relative to such an index.