Introduction
Javier Estrada, who is Professor of Financial Management at Barcelona-based IESE Business School, was a tennis coach in his native Argentina before moving to live and work in Spain in 1993. He set the cat among the pigeons in global investment circles with his ground-breaking research, “Black swans and market timing: How not to generate alpha,” which conclusively revealed that investors who seek to time the market are unlikely to reap rewards. His research focuses on risk, portfolio management, investment strategies, emerging markets, and insider trading. The founding editor of Emerging Markets Review, he holds visiting professorships in Scandinavia and Latin America. As wealth management adviser at Sports Global Consulting, Estrada advises professional sports-players on their investments. His favorite football team is Club Atletico River Plate. A fan of hard-rock bands, including Queen, Kansas, and Led Zeppelin, he plays electric guitar in his spare time. His first degree, a BA in economics, was from the National University of La Plata in Buenos Aires, and he also holds MSc and PhD degrees from the University of Illinois at Urbana-Champaign.
Healthy Eating and Investing
We all know that eating properly is essential for our health. Most of us are aware that certain types of food are good for us while others are best avoided. We are also aware of the trade-off between the desirable long-term goal of being fit and healthy and the pain associated with denying ourselves foods that we really like. We also know that patience and discipline are required.
What does healthy eating have to do with investing, you may well ask? Arguably, there are plenty of similarities. Anyone who has gone into a bookstore in search of a book on healthy eating will have been confronted by rows and rows of books, each outlining a different miracle diet.
Anyone looking for a book on investing has a similar experience. Shelf after shelf bulges with with books outlining “high-return, low-risk” strategies. Each gives the impression that all we need do is to follow the indicated path to instant riches. If only life were as easy! If it was, I would not be writing these lines and you would not be reading them—we would probably both be enjoying the Caribbean sun.
A Balanced Diet
Most of us recognize that eating healthily is going to require a long-term commitment and the making of certain sacrifices (we must kiss goodbye to all those tasty 600-calorie blueberry muffins), and that there is no such thing as a painless shortcut. The same applies to investing.
In reality, the only way to generate high long-term investment returns is to endure some risks in the short term, with the associated pain that comes from sleepless nights as our portfolio value bounces about. There is no such thing as a “high-return, low-risk” strategy. Sadly, the same “no pain, no gain” rule applies both to eating and to investing.
And yet, when it comes to investing, many investors are seduced by “get rich quick” schemes. They often get blinded by the lights of easy money and delude themselves into thinking that gain can be achieved without pain.
For the purpose of this article, I would like to group the investment strategies people are offered into two types: in one group are the “exciting” active investment strategies, which usually promise high returns but claim to achieve them with little or no risk; in the second group are the more boring and conservative passive strategies, which usually promise no gain without pain.
The two approaches can be evaluated from several standpoints, not all of which lead us to the same conclusions. I will evaluate them here through the prism of my own recent research into the so-called “black swans” in financial markets.
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