The best investment advice you’ll never get

Subject: The best investment advice you’ll never get Sun Feb 23, 2014 2:37 am

For 35 years, Bay Area finance revolutionaries have been pushing a personal investing strategy that brokers despise and hope you ignore. The story of a rebellion that’s slowly but surely putting money into the pockets of millions of Americans, winning powerful converts, and making money managers from California Street to Wall Street squirm.

As Google’s historic August 2004 IPO approached, the company’s senior vice president, Jonathan Rosenberg, realized he was about to spawn hundreds of impetuous young multimillionaires. They would, he feared, become the prey of Wall Street brokers, financial advisers, and wealth managers, all offering their own get-even-richer investment schemes. Scores of them from firms like J.P. Morgan Chase, UBS, Morgan Stanley, and Presidio Financial Partners were already circling company headquarters in Mountain View with hopes of presenting their wares to some soon-to-be-very-wealthy new clients.

Rosenberg didn’t turn the suitors away; he simply placed them in a holding pattern. Then, to protect Google’s staff, he proposed a series of in-house investment teach-ins, to be held before the investment counselors were given a green light to land. Company founders Sergey Brin and Larry Page and CEO Eric Schmidt were excited by the idea and gave it the go-ahead.

One by one, some of the most revered names in investment theory were brought in to school a class of brilliant engineers, programmers, and cybergeeks on the fine art of personal investing, something few of them had thought much about. First to arrive was Stanford University’s William (Bill) Sharpe, 1990 Nobel Laureate economist and professor emeritus of finance at the Graduate School of Business. Sharpe drew a large and enthusiastic audience, which he could have wowed with a PowerPoint presentation on his “gradient method for asset allocation optimization” or his “returns-based style analysis for evaluating the performance of investment funds.” But he spared the young geniuses all that complexity and offered a simple formula instead. “Don’t try to beat the market,” he said. Put your savings into some indexed mutual funds, which will make you just as much money (if not more) at much less cost by following the market’s natural ebb and flow, and get on with building Google.

The following week it was Burton Malkiel, formerly dean of the Yale School of Management and now a professor of economics at Princeton and author of the classic A Random Walk Down Wall Street. The book, which you’d be unlikely to find on any broker’s bookshelf, suggests that a “blindfolded monkey” will, in the long run, have as much luck picking a winning investment portfolio as a professional money manager. Malkiel’s advice to the Google folks was in lockstep with Sharpe’s. Don’t try to beat the market, he said, and don’t believe anyone who tells you they can—not a stock broker, a friend with a hot stock tip, or a financial magazine article touting the latest mutual fund. Seasoned investment professionals have been hearing this anti-industry advice, and the praises of indexing, for years. But to a class of 20-something quants who’d grown up listening to stories of tech stocks going through the roof and were eager to test their own ability to outpace the averages, the discouraging message came as a surprise. Still, they listened and pondered as they waited for the following week’s lesson from John Bogle.

“Saint Jack” is the living scourge of Wall Street. Though a self-described archcapitalist and lifelong Republican, on the subject of brokers and financial advisers he sounds more like a seasoned Marxist. “The modern American financial system,” Bogle says in his book The Battle for the Soul of Capitalism, “is undermining our highest social ideals, damaging investors’ trust in the markets, and robbing them of trillions.” But most of his animus in Mountain View was reserved for mutual funds, his own field of business, which he described as an industry organized around “salesmanship rather than stewardship,” which “places the interests of managers ahead of the interests of shareholders,” and is “the consummate example of capitalism gone awry.”

Bogle’s closing advice was as simple and direct as that of his predecessors: those brokers and financial advisers hovering at the door are there for one reason and one reason only—to take your money through exorbitant fees and transaction costs, many of which will be hidden from your view. They are, as New York attorney general Eliot Spitzer described them, nothing more than “a giant fleecing machine.” Ignore them all and invest in an index fund. And it doesn’t have to be the Vanguard 500 Index, the indexed mutual fund that Bogle himself built into the largest in the world. Any passively managed index fund will do, because they’re all basically the same.

When the industry sharks were finally allowed to enter the inner sanctum of Google, they were barraged with questions about their commissions, fees, and hidden costs, and about indexing, the almost cost-free investment strategy the Google employees had been told delivers higher net returns than all other mutual fund strategies. The assembled Wall Streeters were surprised by their reception—and a bit discouraged. Brokers and financial planners don’t like indexed mutual funds for two basic reasons. For one thing, the funds are an affront to their ego because they discount their ability to assemble a winning portfolio, the very talent they’re trained and paid to offer. Also, index funds don’t make brokers and planners much money. If you have your money in an account that’s following the natural movements of the market—also called passive investing—you don’t need fancy managers to watch it for you and charge big bucks to do so.

Brin and Page were proud of the decision to prepare their staff for the Wall Street predation. And they were glad to have launched their company where and when they did. What took place in Mountain View that spring might have never happened had Google been born in Boston, Chicago, or New York, where much of the financial community remains at war with insurgency forces that first started gathering in San Francisco 35 years ago.

It all started in the early 1970s with a group of maverick investment professionals working at Wells Fargo bank. Using the vast new powers of quantitative analysis afforded by computer science, they gradually came to the conclusion that the traditional practices guiding institutional investing in America were, for the most part, not delivering on the promise of better-than-average returns. As a result, the fees that average Americans were paying brokers to engage in these practices were akin to highway robbery. Sure, some highly paid hotshot portfolio managers could occasionally put together a high-return fund. But generally speaking, trying to beat the market—also called active investing—was a fruitless venture.

The insurrection these mavericks would create eventually caught on and has spread beyond the Bay Area. But San Francisco remains ground zero of the democratizing challenge to America’s vast and lucrative investment industry. Under threat are the billions of dollars that mutual funds and brokers skim every year from often-unwary investors. And every person who has money to invest is affected, whether she’s patching together her own portfolio with a broker, saving for retirement or college, or just making small contributions each year to her 401K. If the movement succeeds, not only will more and more people have a lot more money in their pockets, but the personal investment industry will never look the same.

I was once a portfolio manager myself, and like the industry folks Google was protecting its employees from, I was certain I could outperform market averages and confident that I was worth the salary paid to do so. However, I left the investment business before this revolt began to brew. In the intervening years, I never stewarded my own investments as judiciously as I’d managed those of my former employers—Bank of America, Industrial Indemnity, and the Bechtel family. I was unhappy with the Wall Street firms I had been using, which had churned my account to make lots of money on the sales, and, despite instructions to the contrary, placed my money in their own funds and underwritings to make even more at my expense. So a couple of years ago, when it finally came time to get my own house in order, I knew I wanted help from an independent adviser, someone who was doing things differently from the big brokerage firms.

....

Which index fund?
In some ways indexing is a no-brainer: invest your money and let it do its thing. Still, there are varieties. Aperio Group’s Patrick Geddes pushes two rules in choosing a fund: “The broader the better, and the cheaper the better.” When you invest in a broad domestic fund, you’re investing in the entire U.S. economy, or “owning capitalism,” as it were, Geddes says. The Vanguard Total Stock Market Index Fund, which represents about 99.5 percent of U.S. common stocks, is a great one to start with. If you choose a narrower fund, like a tech or energy index, you’re basically just speculating (though you’ll most likely still fare better than if you tried to pick the next Google). Narrow index funds also typically command higher fees. With indexing gaining in popularity, everyone’s trying to get into the game and sneak in unnecessarily high fees. Geddes says there’s no good reason to pay more than .19 percent. —Byron Perry

More here: http://www.ritholtz.com/blog/2014/02/the-best-investment-advice-youll-never-get-2/

Well that was certainly the lamest advice that they could get..

But that's nerds for ya!

Thumbs down

Indexing seems to perform better than mutual funds.

Tweedle-dee or Tweedle-da

Or do you want what's behind the curtain?

But not everyone can have that, else there's no one left to make money off.

"Everyone!"

And that's never the case...

The best investment advice you’ll never get

The best investment advice you’ll never get

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