Читать книгу A Wealth of Common Sense - Carlson Ben - Страница 8

When “dumb” money acknowledges its limitations, it ceases to be dumb.

– Warren Buffett

I was fresh out of college and in the early days of my career in the money management industry, but I could tell this talk was a big deal. It was one of my first big industry conferences and it was standing room only. The room was packed with professional investors, portfolio managers, and consultants, all eagerly awaiting the message to be delivered by a well-known billionaire hedge fund manager. There was a buzz in the air. At every investment conference there is always one speech that every attendee circles on their agenda. This was that speech.

After taking the podium and making the customary break-the-ice joke, the headline speaker got right into his speech. It covered a wide variety of topics on the markets and the investment industry in general. It was very data driven, but interesting and even funny at times. You could tell that he had plenty of practice over the years speaking to large crowds such as this one. There were no note cards or PowerPoint slides. It was like you were having a one-on-one conversation with a business associate. Everyone around me was frantically scribbling away in their notebooks so they could look back on his words of wisdom in the future. Once the bulk of the current market outlook was through he decided to spend some time going over the big changes he foresaw in the investment management industry in the coming years.

He made the claim that many of the best, academically tested, evidence-based investment strategies from the past – once only reserved for the wealthy elite at a very high cost – would soon become available to all investors through low-cost exchange-traded funds (ETFs) and mutual funds that could be instituted on a systematic, quantitative basis. At the time ETFs were still a relatively new product, so this was somewhat of a bold call that not many were making at the time. He was predicting a sea change in the industry.

In way of background on ETFs, the industry has experienced explosive growth in assets under management in the past decade and a half. ETFs in all financial asset classes carried only $70 billion in assets in the year 2000. By the end of 2014, that number was closer to $2 trillion, an unbelievable growth trajectory.10 For the uninitiated, an ETF is very much like a mutual fund in that it allows you to hold a number of different securities under a single fund structure. This allows investors to buy a diversified pool of securities so you don't have to buy them each individually. The biggest difference is that ETFs trade on the stock exchanges throughout the day, just like individual stocks, whereas mutual funds transactions only happen at the market close. ETFs are also structured in a way that that makes them very tax and cost efficient, so they're cheaper, on average, than mutual funds. ETFs have better transparency of their holdings than mutual funds, as you can view ETF holdings on a daily basis. They aren't nearly as affected by forced buying and selling as mutual funds can be.11 ETFs are allowing enterprising fund companies to slice and dice risk factors, sectors, regions, and asset classes in a number of interesting ways. This should only continue in the future, as these strategies will become more and more specialized. ETFs are worth paying attention to as they will only carve out an ever-larger market share of investor dollars over time.

Back to the investment conference: I found myself nodding in agreement with this fund manager as he surgically laid out the reasoning behind the potential shift to make better investment strategies available at a lower cost to more and more investors – increased competition, availability of information, a dearth of academic studies on back-tested strategies, and the fact that most professional portfolio managers came from similar schools of thought. This was making it harder and harder for portfolio managers to justify their claims of superior investment processes at a much higher cost to the individual investor. The line of thinking was that these newer products wouldn't offer the possibility for enormous outsized gains, but at a reduced cost to the investor, would give similar returns on a net basis after costs, the only thing that really matters in the end.

When the speech was over, there was a Q&A session that gave the professional investors in the room a chance to follow up with this hedge fund manager about his speech. Participants quickly hurried to the microphones to ask this famous investor a question. The first audience member, looking a little flustered, didn't waste any time as he asked, “How are we ever supposed to sell these lower cost funds to our clients? Won't this be an admission that we're buying sub-par funds?” As I looked around the room I noticed nearly every other investor nodding their head in agreement. One by one they all took their turn asking similar questions.

“How can we justify the use of inferior funds?”

“Don't you understand that you get what you pay for?”

“How do we prove our value-add when selecting these types of funds?”

“How could we ever sell the fact that we're not buying the best of breed funds at the highest cost? We might as well admit we don't know what we're doing!”

At first, this reaction by my fellow, more experienced investors, made absolutely no sense to me. Why wouldn't they be thrilled about the fact that certain strategies would now be much more accessible at a lower cost in a more shareholder-friendly investment vehicle? Wasn't the investment industry becoming flatter and more cost-effective a good thing for advisors, consultants, and investors alike?

Then I started to realize my naiveté. I was still a rookie in the field of finance. Not everything works in black and white when it comes to products and investment choices in the financial services industry. All of the pros in the room were thinking about the same thing – signaling. If they were using inferior products at a lower cost, they would be signaling to their clients that they weren't doing their job to uncover the best investment products available in the marketplace. These investors and allocators of capital were worried about becoming marginalized. If they couldn't offer access to only the best funds, then how would that look to current and potential clients? If you have your name on the list at the best nightclub in the city, you're in exclusive company. But if that velvet rope is open to everyone that wants to get in, suddenly the shine comes off just a bit and you don't feel so special anymore. Also, you get what you pay for is an expensive theory, but one that all too many still believe in. It's more or less a sales tactic, but one with a narrative that's difficult to shake for many both inside and outside the industry.

It was far too counterintuitive for these investors to accept the fact that they could earn above average returns at a lower cost while giving up the opportunity for extraordinary performance at a much higher cost. The extraordinary performance was much harder to get and there was no way that all of them were going to be able to succeed in finding it, but how could they admit this fact and not even try? These are very competitive people. They all went to top colleges and universities. Most attended the top business schools, obtained the prestigious CFA designation, or both. Everyone in the room was intelligent and extremely qualified. Investing can be a cutthroat business. Everyone wants to be the best investor by making the most money possible in the shortest amount of time. Unfortunately, it's just not possible for every single professional investor to be in the top echelon of the performance rankings. This can be a difficult realization to come to.

The look on the speaker's face was priceless after he finished answering the final round of angry questions from the audience. He had a smirk on his face. It was almost like he knew what was coming for many of these investors based on their reactions. He knew it was only a matter of time before market participants came around to his line of thinking. But breaking established viewpoints on the markets can be difficult for intelligent people. It's not easy to admit that there might be another way of doing things, a simpler approach.

Luckily, individual investors don't have to worry about entrenched positions from the investment industry. You don't have to try to impress anyone. You don't have to invest in the Rolls Royce of portfolios to reach your goals. A more economical, fuel-efficient model will do the trick as long as you're not worried about impressing anyone else (which you should not be). It's about getting from point A to point B, not how you get there. There are no style points when investing. There's no bonus for degree of difficulty. You don't have to signal that you invest only in the best, most exclusive strategies. No one is there to judge you or your portfolio and you don't have to compete against your peers. The most important thing is that you increase your probability for success. That's all.

Coming to this realization can be a huge weight lifted off your shoulders because, as you'll see in the next section, being in the upper echelon of investors is nearly impossible for even the professionals that do this for a living.