#11 Arguments for Underperformance?

But why?

Can you argue for underperformance? Should you? Why would you?

Invert, always invert: Turn a situation or problem upside down. Look at it backward. What happens if all our plans go wrong? Where don’t we want to go, and how do you get there? Instead of looking for success, make a list of how to fail instead. Tell me where I’m going to die, that is, so I don’t go there.”

Charlie Munger

How to beat the street” or “Outperform the market with this one simple trick” might be popular articles. But what about “Why is underperforming good?”
Why on earth would you want to underperform the market?

Try invert the situation and look at a different perspective. Instead of why beating the market as the goal, why might someone want to underperform on purpose?

It would be easy to say after reading this “Oh you’re making excuses for why you suck” or “yeah that’s what an underperformer would say!”.
Maybe I just want to look at both sides of the argument.
I’ve heard before, “they’re underperforming” as if it totally invalidates whatever the speaker has to say. And that’s without even taking their investment strategy into perspective!

Key Assumption: Important to note the type of underperformance I’ll be talking about it here. I’m still assuming you actually achieve positive returns better than a bank account. DALBAR’s 2014 Quantitative Analysis of Investor Behavior had a 20-year return of 9.22% for the S&P 500 compared to the average investors return of 5.02%.
So assumptions will be based on that 5% return. Underperformance, when you’re actually going negative, is much harder to argue for.

Outperforming the market may seem like the be-all and end-all, but from underperformance being better than nothing, the risk versus return, and greater control, hopefully, I can argue why underperformance may not be the end of the world.

Underperformance Better than No Performance

Possibly the best reason.

As mentioned, we’re assuming here that by underperforming the market, you’re still achieving positive returns. And to be honest, it’s better to suck at something than not attempt it at all. 

And sure, you could argue that you should set and forget your money in index funds. Or some sort of vehicle or fund that aims to match or outperform the market.

But I know plenty of people who love the “punting” side of investing. And if they weren’t investing in single companies, it’s likely they wouldn’t be investing at all. Some people just want to go big or go home. I’m guilty of this myself too, I’m not acting all high and mighty here.

Because let’s face it, index investing isn’t sexy. In fact, it’s pretty boring. But boring can often be good! Just ask my girlfriend.

But I can understand investor ‘punters’ point of view. So underperformance (assuming positive) is better than no performance at all. 

Better to play the game poorly than not play at all.

Risk vs Return & Preservation of capital

What if the risk doesn’t justify the return? What if you aren’t even trying to outperform?

Imagine you’re 64 and about to retire. Who gives a rats ass about outperformance?
Hell, who even cares about matching the market at that age. 

I’d imagine your goals are to protect what you’ve toiled away at for your whole working life. Trying to match the market or even outperform is probably just too much risk and stress at that point of your life.
Add to this you’ve got pests on the internet hammering away that you’re underperforming?

Bragging about returns at the golf club is not on agenda. Being able to ensure your nest egg is reliable and going to last is.

Choosing Greater Control 

Assuming the only alternative is index fund investing. You buy the fund and that’s it. They do the rest.
For some control freaks that shit just won’t fly.
For others it’s great. Set and forget.
But for those wanting control over every little detail, it’s a nightmare.

Again, if someone wants more control and underperforms because of that, it’s still probably a better outcome than not choosing to invest at all.

If having greater control and even an emotional attachment (even if emotions in investing are rarely talked about positively) gets more people into investing, than more power to them.
Interest from a bank account isn’t really going to make you wealthy.


I’m no advocate for underperformance. But underperformance shouldn’t always be put on blast and scoffed at. Because context matters (duh).
And it’s nice to try to look at things from a perspective different than your own.

Just remember: invert, always invert.

Some Resources

You can find previous issues of mine here. I’m on the web at kscarrott.com and on Twitter @scarrottkalani.

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