WSJ - Nassim Taleb Warns: Stay Out of the Investment Industry

Bill Gross has cautioned that the “cult of equity is dying.” Now another heavy hitter in the markets, Nassim Taleb, is advising prospective investment managers to avoid the industry altogether.

Taleb, author of the 2007 book “The Black Swan” and a lecturer at New York University, has published a new paper titled “Why It is No Longer a Good Idea to Be in the Investment Industry.” Pure and simple: Professional investors have to be lucky to be successful, he says. Those who have gained some success within the industry will continue to thrive, but others looking to break in now will fail.

He says many of the best money managers earn their success based on “spurious performance” and these folks “rise to the top for no reasons other than mere luck, with subsequent rationalizations, analyses, explanations and attributions.”

Once they are at the top, though, they get the bulk of the allocations, creating a “winner-take-all effect” that causes distortions in the marketplace, he says.

“An operator starting today, no matter his skill level, ability to predict prices, will be outcompeted by the spurious tail,” Taleb says in his paper.

It’s the latest broadside fired at the industry. Pimco’s Gross recently pronounced investors should no longer expect consistent, annual returns from the stock market. Gross’s missive sparked a vigorous debate for the future of stocks, which have struggled to register consistent returns throughout the last 12 years.

Taleb takes it to another level.

For Taleb, he isn’t making a call one way or another on the future returns for the market. Instead, he’s saying young bucks looking to break into the industry should think twice and avoid it completely.

“If you are starting a career, move away from investment management and performance related lotteries as you will be competing with a swelling future spurious tail,” Taleb says. “Pick a less commoditized business or a niche where there is a small number of direct competitors.”