Even God Would Get Fired as an Investor: The Case for Staying Patient

US and Iran exchanged fire. UAE under missile threat. Oil above $105. The Dow fell 557 points.

The quick scan: Monday was the sharpest single-day pullback in several weeks. The Iran war escalated materially over the weekend: the US announced it would support vessels transiting the Strait, Iran warned it would target any US forces approaching it, and the UAE came under missile threat for the first time since the conflict began. US and Iran exchanged contradictory claims about naval attacks. Oil surged. The Dow dropped more than 550 points, materials and industrials led the losses, and VIX jumped to 18.33. Today's article on Wesley Gray's "God's portfolio" was written before this session. It applies more directly today than it did yesterday.

S&P 500: -0.41% to 7,200.81 – pulled back from Friday's record; the index remains above 7,200 but gave up most of last week's gains in a single session; energy was the only sector to close higher
Dow Jones: -1.13% to 48,941.90 – fell 557.37 points; Home Depot (–3.50%), Nike (–2.95%) and Boeing (–2.64%) led losses; JPMorgan fell 1.6%, Walmart 1.0%; Palantir was a rare bright spot, rising 1.4% after posting record Q1 revenue and profit
NASDAQ: -0.19% to 25,067.80 – the least damaged of the three; Apple fell 1.2%, Alphabet 0.9%, Broadcom 1.1%; the NASDAQ held above 25,000 – a level it crossed for the first time only last Friday.

What's driving it: The UAE entering the conflict – for the first time – is the session's defining escalation. When conflict expands beyond primary combatants, market risk premium rises sharply. Oil at $105 reinforces the stagflation concern: inflation above target, growth slowing (Q1 GDP 2%), and an energy shock the Fed can't address with rate cuts without worsening inflation. Goldman Sachs raised its Brent Q4 forecast to $90/barrel, assuming the Strait doesn't normalise until end of June. That's the base case.

Bottom line: The Iran war just got bigger. The UAE's involvement changes the diplomatic calculus – it's no longer bilateral. Today's article makes its point with unusual timeliness: this is exactly the session during which most investors make their worst decisions. The drawdown is real. The thesis for holding a diversified long-term portfolio hasn't changed.

What If You Knew Every Winning Stock in Advance? You'd Still Get Fired.

The scoop: If you had perfect foresight – if you knew right now exactly which stocks would be the biggest winners over the next five years – could you build a portfolio so good that no one would ever question it?

Wesley Gray, PhD graduate of the University of Chicago where he studied under Nobel laureate Eugene Fama, decided to find out. His paper, published in 2016 and updated in 2021, is one of the most cited pieces of research in the passive investing literature. Its title tells you where it ends up: "Even God Would Get Fired as an Active Investor."

How God built his portfolio.

Gray's methodology is elegant in its simplicity. He took every major US stock listed on the NYSE, NASDAQ and AMEX from 1927 to 2016 – nearly nine decades of data. For each five-year rolling period, he calculated which stocks turned out to be the biggest winners and which turned out to be the biggest losers. He then constructed a hypothetical portfolio that bought the top decile – the 50 stocks that would prove to be the best performers over the following five years – and held them.

No forecasting errors. No sentiment. No noise. Pure omniscience.

The long-only portfolio compounded at roughly 29% per annum. The full long-short version – also shorting the worst-performing decile – achieved 46% CAGR. Both are obviously impossible to replicate in practice. The point isn't the return. The point is what happened along the way.

The drawdowns nobody expected.

God's portfolio – the one that knew in advance which stocks would win – suffered catastrophic drawdowns. Between 1929 and 1932, it lost nearly 76% of its value before recovering. During the technology crash of the early 2000s and the Global Financial Crisis, it fell 40% from peak to trough. Routine drawdowns of 20–40% occurred multiple times across the full period.

The long-short version wasn't spared either. Even with perfect knowledge of both winners and losers – even with the ability to profit on the way down as well as up – the worst drawdown was 47%.

Here is the part that makes this more than just an academic curiosity: during many of these periods, a simple passive index fund beat God's portfolio. Not by a little. According to the paper, the passive index sometimes outperformed God's active picks by 50 percentage points over rolling windows.

Morgan Stanley's Michael Mauboussin and Dan Callahan updated the analysis in 2024–25, examining 6,500 stocks from 1985 to 2024. Their findings: the average peak drawdown across individual winning stocks was 81%. The average time for those stocks to return to their previous peak was 3.8 years.

Eighty-one percent. Almost four years. Even for the stocks that turned out to be long-run winners.

Why God would get fired.

The paper's conclusion isn't really about God. It's about the structure of how investment performance is evaluated – and how that structure is incompatible with the patience long-term outperformance requires.

Gray's point is that even if a manager had perfect foresight – even if every single stock pick was objectively correct – the short-term volatility of that portfolio would look indistinguishable from incompetence during the inevitable down periods. Clients would withdraw. Boards would panic. The manager would be replaced.

"Markets can remain irrational longer than you can remain solvent" – Keynes. The updated version: markets can remain irrational longer than your clients will remain calm.

The investment strategies most likely to outperform over decades are precisely the ones most likely to be abandoned during the inevitable down periods.

The implication for active management.

Gray's paper has a pointed secondary argument: if a God-like active investor – with access to perfect information – would still get fired, what does that say about actual human active managers who are working with imperfect information, limited research budgets, and their own behavioural biases?

The paper notes that with perfect foresight, an investor achieves roughly 29% per annum. Any active manager claiming 35–40% should prompt serious questions – that would require performance better than omniscience.

What the past three months just demonstrated.

The Iran war provided something unusual: a real-time demonstration of Gray's thesis on a compressed timeline.

From late February to late March, the S&P 500 fell sharply. The market looked broken. Every day brought new escalation – the blockade announcement, the failed Islamabad talks, oil above $100, the NASDAQ's winning streak interrupted. The correct investment decision, in hindsight, was to hold a diversified portfolio and do nothing.

But the investor who was being evaluated on their March performance, or who was checking their account daily, would have experienced exactly what Gray describes: a period of gut-wrenching drawdown during which their strategy looked wrong and doing something felt imperative.

The S&P 500 closed April at an all-time high. The investor who held through the noise is now at a record. The investor who moved to cash during the fear is now trying to figure out when to get back in – which is, in its own way, another form of market timing with another opportunity to be wrong.

God would have held. So should you.

Actionable takeaways for L-Plate Retirees:

• Drawdowns are not evidence that a strategy is wrong. Even a perfect strategy – one with complete future knowledge – experiences catastrophic drawdowns. Drawdowns alone tell you nothing about whether the underlying thesis is sound.

• Your evaluation window is probably too short. If you are assessing your portfolio's performance quarter by quarter or even year by year, you are almost certainly evaluating it on a timeframe too short to distinguish a correct long-term strategy from a temporarily unlucky one. The research suggests a minimum five-year window is needed for meaningful signal.

• The strategies most likely to outperform are the hardest to hold. This is not a paradox – it is the structural reality of markets. If a strategy were easy to hold through its inevitable down periods, everyone would hold it, and the excess return would be arbitraged away. Discomfort during underperformance is part of the structure of outperformance.

• Be deeply sceptical of any active manager claiming 35%+ annual returns. Gray's paper calculates that perfect foresight yields approximately 29% per annum. Any claimed return in excess of that should prompt immediate and serious questions about the methodology, the risk, and the survivorship bias in the track record being presented.

• The Iran war was a live exam on patience. Investors who held through February–April are now at all-time highs. Investors who moved to safety are now trying to time a re-entry.

• The passive case is not an argument about skill – it is an argument about structure. Gray is not saying active managers are stupid. He is saying that the structure of how performance is evaluated makes sustained active outperformance nearly impossible to maintain, even for someone with genuinely superior insight. For most investors, a diversified passive portfolio removes the structural problem entirely.

Your Turn:
The paper shows that even God's perfect portfolio would have lost 76% in the early 1930s before recovering. Knowing that, does the Iran war's 15–20% drawdown feel more or less significant than it did at the time?
Gray argues that the strategies most likely to outperform long-term are the hardest to hold – because they are the most uncomfortable during the inevitable down periods. Have you ever abandoned a strategy during a drawdown that later recovered, and what did you learn from it?
The paper's implicit argument is that most retail investors would be better served by a diversified passive index portfolio held over decades than by any active strategy they could implement or hire. Is that the conclusion you've reached about your own investing – or are you still searching for the edge?

👉 Hit reply and share your thoughts – your answers could inspire fellow readers in future issues.

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