In 1969, Harvard accepted 20% of about 6700 applicants. It wasn’t easy to get in then, but it sure beat what it’s like now. In 2015, there were 37,307 applicants to Harvard, and the acceptance rate was 5%. Harvard’s director of admissions said there were far more qualified candidates than the university could take. Over 16,000 applicants had scored 700 or above on the SAT math test, 3200 were ranked first in their high school classes, and beyond the numbers, the admissions office had to evaluate an impressive range of academic research and creative portfolios.
Part of the story here is that competition is fiercer than ever because spots at Harvard remain scarce while the applicant pool is larger in our globalized age. Another part of the story is that student skills and accomplishments are at a higher level than before. College applicants are a lot better than they used to be. They have to be.
In almost every human endeavor, performance levels have been rising – and so has the level of competition. In the 1972 summer Olympics, Mark Spitz set a remarkable seven world records in swimming. But today his times would not amount to much. His 100-meter butterfly record time of 54:27 today would be about the benchmark for a male high school student aiming to swim at a Division I college.
Sometimes we are reminded of competitive intensity in amusing or absurd ways. How many 10 year-olds can there be that can sear Chilean sea bass perfectly and serve it with baby eggplant and exquisite curry yogurt sauce? If you watch the television cooking show MasterChef Junior, apparently more than you think. Why do so many young South Koreans get plastic surgery? There are many reasons given, but one that college graduates often offer is that being better looking will give them an edge in a fiercely competitive job market.
Note that in each situation, three things are happening. First, the competitive field is getting bigger as more competitors enter the field to vie for some kind of reward, profit, or position that cannot be shared. Second, absolute ability levels keep rising as knowledge levels increase and training techniques improve. Third, the difference between the best and the average is shrinking. Getting an edge over others is harder.
Investment has all these characteristics of increased competition. There are more professional investors today, and more individuals who are serious about their own investing than ever before. This is possible because, as NYU finance professor Aswath Damodaran has said, the investment world has gotten “flatter.” Individual participants can access information, trading platforms, and computing power that is competitive with what professionals have.
Absolute skills and knowledge also have increased. Investor Michael Mauboussin, who has done extensive research on this, wrote in a recent paper that “Today’s professional investors are better trained, have greater access to information, can rely on better theory, and have more computing power than their predecessors. If an investor with today’s capabilities were to travel back to the 1960s, he or she could run circles around the competition.”
But we are not in the 1960s any more. The final issue is that there is no longer such a big gap in information access or skill levels. Active investing is a contest where for every winner there is a loser, and today the game has gotten harder.
Passive investors have decided they cannot or will not compete and have stepped out of the game. That has only made the competition fiercer for the active investors that remain. As a result, active investors now must be more cognizant than ever of the competitive nature of investing.
They must ask, if I am buying, who is on the other side selling and what do they know that I don’t? They must question what they can bring to the table in a world of thousands of smart, driven market participants all seeking to get an edge over each other. And they must remember Warren Buffett’s words that, “If you’ve been playing poker for half an hour and still don’t know who the patsy is, you’re the patsy.”