The Lake Wobegon effect is the natural human tendency to overestimate one’s capabilities. The most popular real world example is that almost everyone believes they are an above-average driver.

A similar level of overconfidence can be seen in the investing world where the vast majority of fund managers and individual investors believe they are above-average performers. This is of course impossible (everyone can’t be above average) and studies have shown that such overconfidence is actually one of the primary factors leading to underperformance.

Why is overconfidence a problem? Isn’t confidence a good thing, and the more you have, the better? Well, not necessarily when it comes to markets. Overconfidence tends to lead to overtrading and an increase in risk-seeking behavior. If you lack a disciplined strategy with an edge, this can be a destructive combination.

Few investors take the time to stop and think about the concept of an edge. For the casual investor, this may be because they lack the time, expertise, or inclination. For the professional investor, even if they have an edge, executing on it would necessitate deviating from their benchmark, which in turn introduces the undesirable career risk. Whatever the reason may be, the most likely outcome from overtrading without an edge is decidedly negative.

What is an investor without an edge to do? In a word: nothing. Sit on your hands and become an asset allocator instead of an active trader. Your edge as an asset allocator is simply having the patience to stick with a diversified portfolio long enough to take advantage of rising markets and compounding of interest and dividends over time.

Not as exciting as picking stocks on a whim or on a recommendation from a guru? I agree, but successful investing is not supposed to be exciting or entertaining.

What do we believe our edge to be at Pension Partners, where we manage the ATAC Inflation Rotation Fund (ATACX) and separate accounts?

  1. Developing tactical strategies that use a systematic, unemotional process to capitalize on market inefficiencies,
  2. Having the patience and discipline to stick with that process during inevitable periods of underperformance,
  3. Placing an emphasis on ex-ante risk management and downside protection, and
  4. Having a willingness and ability to deviate significantly from established benchmarks.

All of these factors are important but I cannot emphasize enough how important the second factor is. You can have the best strategy in the world but if you don’t have the patience and ability to stick with it through trying times, what good is it?

We derive such patience through our award-winning research that challenges the efficient market hypothesis. This research has uncovered market anomalies in the utilities sector and Treasury market that have persisted through multiple market and economic cycles. Specifically, we have found that when Utilities are leading the broad market and long duration Treasury bonds are leading intermediate term bonds, higher volatility tends to follow. We utilize these signals (and others) to determine whether to take an offensive or defensive stance in our strategies.

It is important to note that this stance is going to be wrong at times, for there are no Holy Grail strategies in markets. An edge is just a slight advantage, enabling you to increase your probability of a positive outcome, but never ensuring it.

The next time you feel the urge to make a trade, ask yourself the following question: what’s my edge? Write it down on paper. If you cannot do so or cannot commit to sticking with a strategy that exploits that edge through good times and bad, what outcome should you reasonably expect?


Thanks for reading. To learn more about our research-driven investment process, contact an ATACX fund specialist at



Charlie Bilello is the Director of Research at Pension Partners, LLC, manager of the ATAC Inflation Rotation Fund (ATACX). He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. Charlie holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and also holds the Certified Public Accountant (CPA) certificate.

In 2017, Charlie was named the StockTwits Person of the Year. He is a frequent contributor to Yahoo Finance and has been interviewed on CNBC, Bloomberg, and Fox Business.

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