Haghani Says Retail Investors Face Tough Odds Picking Stocks

Elm Wealth founder Victor Haghani said retail investors trying to beat the market through stock picking face persistent behavioral biases and a tough trading environment, making broad index exposure a better fit for many.

Haghani, Elm Wealth’s founder and chief investment officer and a founding partner of Long-Term Capital Management, said investors can treat recent returns as evidence that a trend will continue. He calls that tendency extrapolation bias. “I’m not sure that investors are that much more sophisticated than they were 30 years ago,” Haghani said. He said nonprofessional investors face a difficult environment when trying to earn returns above the broader market. At Elm Wealth, he has emphasized cost-effective strategies and said individuals are well served by holding some broad index exposure.

Haghani said firms such as Citadel, Jane Street and Hudson River Trading are “minting money every single day,” describing an environment rich in opportunities for traders able to spend $1 billion a year on technology. He contrasted those firms’ resources with an individual searching for trades from home. Haghani warned that Ken Griffin, Citadel’s chief executive, or someone like him could be on the other side of a retail trade.

His argument also covered complex exchange-traded funds: adopting an elaborate strategy does not necessarily make it easier for an individual to outperform. But Valerie Grimba, director of global ETF strategy at RBC Capital Markets, said specialized funds can have a role in investors’ portfolios.

Grimba said funds holding 10 to 15 stocks can give investors exposure to a specific theme without requiring them to identify which company will become its biggest winner. She said derivative-based products can also generate income in different ways. Grimba views the wider range of funds as useful, while stressing that investors need to understand a fund’s holdings and trade-offs. “You should be able to explain to your friend what it is in the ETF and what you’re buying,” she said.