Why Most Fund Managers Are Worth Their Weight in Feathers
- Jun 24, 2005
- admin
- Investing
IT SHOULDN’T HAVE SURPISED US REALLY.
Quite the contrary.
We should have known it would be very difficult for them.
And why not?
Most of these people were the same kids we knew in grade school.
You know who I’m talking about.
That kid who always had a runny nose whether it was 20 degrees or
90 degress outside.
Or the one who wore his pants all the way to his chest and always
had the right answer regrdless of the question.
Yea, those kids.
Shouldn’t have been suprising to us at all.
The fact that the very same students – who now “run the world”
managing many billions of dollars in hedge fund money – are
running for the hills faster then criminals are turining in
performances worse than Mark Geragos.
Yes, both Standard and Poor’s and Morningstar just released
their semi-annual report card on fund performance.
And this time the news was even worse than usual.
In 8 out of 9 investment categories (i.e. “value” and “growth”)
these investment “professionals” were trounced by the indexes.
In other words, you could have bought any major index fund – without
paying commissions or fees – and you would have outperformed
most of those runny-nose pro’s who manage your money.
Which begs the following question:
Why do these fund managers have such a difficult time
beating the “averages”each and every year?
Well, the answer to the question reveals as much about Wall Street
as it does the nature of people managing money these days.
Follow me on this one folks.
Wall Street wants you – the individual investor – to
do “average.”
Not too good. Not too bad. Just “average.”
That’s because Wall Street,in large part, is in the
business of gathering and managing assets.
Just like a bank.
But not quite.
It’s the “new” brokerage model.
Raise money. Gather assets. Offer checking accounts.
It wasn’t always this way.
At one point, brokerage firms tried to pick stocks and
make their clients money.
But that changed in the early 70’s.
When the “powers-that-be” decided that they had had enough.
Enough of the bull market/bear market cycles that blew up
their clients every four years.
Enough of the unsteady returns of cash flow that that kind of
business brought with it.
So, in the early 70’s the “powers-that-be” had an idea.
It was brilliant idea actually.
And it went something like this:
Instead of having their runny-nose pro’s try aimlessly to pick
stocks while blowing up their client base every four years
they latched onto a theory.
A theory so absurd – yet so powerful – that it literally
changed the way Wall Street worked.
It was the Efficient Market Threory (E.M.T.)
In short, E.M.T. states that it’s a waste of time to try
and pick individual stocks.
Why?
Because markets are already efficient.
Therefore, nobody could make money picking stocks
because markets – by definition – have already priced in
all information.
That means any type of analysis – including the efforts
of your’s truly – are indeed a waste of time.
In one fell swoop this silly little theory explained
why their people couldn’t pick stocks.
It also gave them a goal.
A goal to make as many “products” as possible to sell
to individual investors.
Products that just mimic the averages.
Products that just help them raise money.
So, for the past twenty years or so, the big brokerages
have transformed themselves into money management goliath’s
that want you to do “average.”
This is not to say that they don’t want you to make money.
Or profit from the next internet craze.
But for the most part they want you to do no better
and no worse than “average.”
Why?
Because if you do average than you won’t complain.
Sure the market may go down.
But if you’re doing “average” you won’t lose more
than your golfing buddy.
And if the market goes up – you won’t make more than
your golfing buddy.
This way, through good markets and bad, you
won’t leave the firm.
And why would you leave if everybody, including your
golfing buddy is doing average?
But there seems to have been a problem.
Something unexpected.
And it happens almost every year.
But hardly anybody complains anymore.
The problem?
The runny-nose pro’s who are trusted with doing
“average” can’t even beat the averages.
Not even close.
You read the S & P report – down in 8 out of 9 investment categories.
That’s why it pays to listen to what we have to say.
Remember, you are what you read!
–By Dylan Jovine