In his short story “The Condemned“, Woody Allen writes: “Cloquet hated reality but realized it was still the only place to get a good steak.”
When it comes to investing, like Cloquet, most of us seem to hate reality too.
Take the recent study of mutual fund performance. A research team at S&P Dow Jones looked at 2,862 mutual funds, all of which were actively managed and focused on the broad domestic market. Of the 25 percent best-performing funds in 2010, only 0.07 percent remained in the top-tier five years later. (Or, to put it another way, 2,860 funds failed to maintain their performance record.
Reality Bite #1: The majority of active managers do not outperform the market.
Reality Bite #2: Past performance does not predict future performance.
So why do we bother paying management fees? Why don’t we all just pile in to a couple of different ETFs or low-cost mutual funds and then skip off to the beach?
Investing itself might be relatively simple but the subject of money is anything but. Each of us vests the idea of money with layers of notions and emotions that blur reality.
Take the wealth management industry. As brokerage fees continue to tank due to competition from online trading, advisors are re-branding themselves as ‘wealth managers’. Rather than slave away as brokers and live off dwindling commissions, many advisors now charge a management fee based on ‘Assets Under Management’.
This arrangement is the goose-that-lays-the-golden-egg because every month your manager gets a nice pay packet that increases along with the rise in the value of your holdings. Compound those management fees over several decades and, if your manager is not consistently beating the markets, you’re paying a premium for something you’re not getting.
But it’s so alluring to tell people you have a “wealth manager” or a “private banker”, isn’t it? You feel richer just saying the words. And, mama, the offices! The express elevator, paneled in rich wood and trimmed with spit-polished brass whooshes you to the executive floor. The elevator doors open to an intense light. Are you in rich-person’s heaven? A large floor-to-ceiling window overlooks the throbbing metropolis below. As you contemplate your good fortune, a pretty young woman takes your coat, offers coffee, tea, mineral water, cookies. You sink into the caramel-coloured leather seats with your coffee. The glossy magazines have titles like, “Yachting Life”, “Sotheby’s”, “Cigar”,”Luxury Rental Properties”…
Who wouldn’t pay a couple of extra points for this fantasy?
Many years ago I went shopping for an advisor. I met several men. One, possibly after a bump or two in the bathroom before our meeting, chattered away about some casino stock. The next one, I don’t remember his pitch but we were in a massive boardroom, the thermostat set to “meat-locker”. The leather chairs were the right fit for a Texas oilman or DQ regular.
My last stop was a Waspy boutique brokerage. Threadbare carpets, a lop-sided painting of a big boat against the beige wallpaper, a soigné 70-plus receptionist, and no tea or coffee. The broker was a short, not-young man with mad scientist eyebrows and a nose for money. A bit of a crank, he proceeded to lecture me about what a scam mutual funds were. I was instantly smitten.
Very slowly we built a portfolio. I have kept many of those original investments, adding to them over the decades.
Yeah, reality bites, but fantasy is a right little nipper too.
What’s that line? If you can’t spot the mark at the table, then it’s you.