Active Management

Bane of the investor.

Happy Jack Bogle Day!

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Multiple fireworks going off above a city

I talked about Jack Bogle before, and for good reason. Why do we celebrate today as Jack Bogle Day?

On August 31, 1976 ,  John Bogle led Vanguard to create something new–the first index fund for personal investors.  That fund, first named “First Index Investment Trust” grew slowly at first but now? If we look at the top 10 mutual funds, Vanguard has the positions 1, 2, 4, 7, and 8. But would any of the other index funds exist without Vanguard going first?

The “problem” with index funds is that the fund company doesn’t get to keep very much of your money. To me, this is not a problem. To most fund companies, it is.

That part sounds great but doesn’t an “expert” outperform a simplistic index fund which just buys the market index blindly? No. Over 80% of large cap active funds (yep, that’s the “experts”) fail to beat the S&P 500 index over a 10 year period. If these guys were even as good as average then 50% of them should beat the S&P 500. Part of the problem is that the experts charge us for their bad guesswork. The charges don’t sound bad…1%, for instance. But that’s 1% of your investment, not 1% of your profit. A good stock market year gets you 10%. Except the expert, who usually guesses badly, will charge you 1% of your profit, so you only get 9%.

The market is backward to our thinking. In most areas of life, expertise is good, and worth paying for. If it has to be done I want an expert taking out my appendix, not an enthusiastic, inexpensive amateur. But given that the experts don’t demonstrate expertise (except for extracting money from us) why do we need them? Instead of “you get what you pay for” the stock market reality is “you do not get what you pay for.” The best predictor of high mutual fund return is how little you pay in fees.

I’m actually being way, way too nice to actively managed mutual funds. Their numbers would look even worse but, guess what? Once an active fund has done poorly for a few years, what do they do? They kill it off, merging it into one of their few funds that’s done well. When that fund stumbles, they hide the body again, merging it into a different fund. So, even if we let them cheat they underperform 80% of the time.

Jack Bogle revolutionized investing, slowly bringing this lesson home to us and saving us an astonishing amount of money.

Thanks, Jack!

The Great Financial Eclipse: How Eclipsing What and Why

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Investing Myth 1: Getting in and out of the market

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terrified man in a suit running away“We help you get out of the market before it goes down too much and get you back in to get most of the recovery.”

I heard those words from a respectable, well meaning, deluded investment firm.  Who wouldn’t want to get in on this?  Avoiding most losses while getting most gains!  Eventually you’d own the world!  But…if there’s nobody who owns the world…maybe this doesn’t work.

In honor of Jack Bogle Day, let’s see what his company discovered:

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10 Ways to Lose Money In the Stock Market

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Burning a $100 billIf you wanted to lose money in the stock market, how would you do it?

This is a challenge, as the S&P returned 5.3% per year over the past 15 years (yes, even counting the dreaded 2008).

While it seems nearly impossible to lose money, a lot of work has been put into giving you ways to reliably lose money (although I’d plead with you not to use any of them).

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One last Scaramucci speech to analyze

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Baseball player clearly outWhat did Anthony Scaramucci do before briefly entertaining us/appalling us as press secretary?  He was the very successful founder of Skybridge Capital.  By successful, I mean that he made a lot of money from mom and pop investors and provided them with below average returns.  See Skybridge Capital’s own dismal report card.

In the very engaging Freakonomics broadcast of The Stupidest Thing You Can Do With Your Money, the host, Stephen Dubner, interviews Scaramucci about his hatred of the Fiduciary Rule and of index funds.  Scaramucci’s answers are worth thinking about.  It’s a shame he didn’t think about them.

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The Man Who Put the Fun in Mutual Fund

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Dart in the bullseyeOn August 31, the First Index Trust mutual fund began operations.  It was tiny and disrespected.  Now it’s the largest one in the world.

Here’s how that fund changed the investing world, why that’s important to you, and why you should celebrate Jack Bogle Day.

  1. First Index Trust is now the Vanguard 500, once known as “Bogle’s Folly” and described as “unamerican”, is now the largest mutual fund in the world.
  2. Vanguard 500 pioneered indexing, which gets the investor out of the loser’s game of stock guessing.  Are you really going to outmaneuver the professional firm whose inside-the-stock-exchange computer can react in microseconds?
  3. Vanguard 500 typically outperforms actively managed funds, but at lower costs.  “Active” mutual fund managers guess right 49% of the time, charge about 1.2% for that guessing “skill”, and lose about 1% of your money per year in transaction costs.
  4. Vanguard 500 pioneered and improved ultra low costs.  This has forced even forced managed funds to lower their fees.  I.E.  Vanguard started low, then went to .05%, vs. managed funds grudgingly moving from 1.08% to .82%.  Since one of the best indicators of mutual fund performance is low fees, you get exactly what you don’t pay for.
  5. The Vanguard 500 has siblings:  8 of the 10 Largest mutual funds are Vanguard’s.  Bonds, international stocks, etc. are available at low yearly fees.
  6.  Vanguard is owned by its investors and works for them, not for third parties eager to extract your money.
  7. Just about anyone can get in on this (a $3,000 minimum, 1 share via the ETF version, or less via a 401k).

All of this came about because Jack Bogle was creative and determined.  Read Jack Bogle’s biography and admire his business jiu-jitsu that enabled him to produce the revolutionary index fund.  Better yet, take advantage of what he built.

 

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Should the Fiduciary Rule Get the Axe?

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axe in chopping block

The Fiduciary Rule for financial advisors appears to be on its way out before ever coming into effect.  How should we feel about that?  Advocates say investors are often abused with unsuitable and expensive investment advice; the investment industry critics say it is a radical change that imposes substantial burdens, reduces their profits and limits investor choices.  Who’s right?

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Frank Armstrong Day

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Life Preserver floating in the water

What gift could make a difference if someone’s retirement plans were going nowhere?  What if their best efforts to win in the stock market kept losing?  Seems as if nothing short of a large pile of cash would make any difference, doesn’t it?  Let’s look at a better solution.

In January 1994 Frank Armstrong began serializing an investing book.  He had an interesting premise, that the conventional wisdom on investing was wrong.  Admittedly his only proof of that was that the conventional wisdom hadn’t worked.  In principle, the things he said should have been known.  Every brokerage and mutual fund had access to the same data he used.  The difference is that he let the data teach him, instead of trying to find some once in a blue moon event in the data to justify his preferences.  He was way ahead of his time, pursuing big data.  He crunched the numbers to find the mutual fund managers who delivered top returns year after year.  His great discovery:

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