Low-Cost Investing in Marketable Securities

This graphic is from the Sunday Business section of the March 15, 2015, issue of the NY Times, a column by Jeff Sommer entitled How Many Mutual Funds Routinely Rout the Market? Zero. The graphic shows the number of active investment managers who beat the market in 2010.  Then it follows that cohort for the next five years.  As a member of the cohort fails to beat the market in subsequent years, it drops of the graphic.  By 2014, only two are left.  By 2015, those two, however, are not looking like they will survive the cut.  So it looks like none will be left.

A client of mine brought a hard copy of the article to our office yesterday for separate conferences we had set up with advisers from Fidelity and Vanguard, respectively.  The client had been considering whether to move from an "active" manager of the very large portfolio for which the client is responsible to a low-cost index approach.  (The client had also brought in a hard copy of another NYT column by Mr. Sommer, this one entitled Measure for Measure, Index Funds Rule.)

The client decided to fire the active manager, a trust company, tentatively giving about half of it to Vanguard and half to Fidelity.

The Vanguard representative made some points that were new and striking to me.  One is that Vanguard has under management over three trillion dollars of assets.  The economy of scale that Vanguard introduces with such a staggering amount has to be matchless, at least with respect to help that can be accessed by retail investors.

Another point that that Vanguard rep made is the following, a point the Vanguard makes on its website:

At Vanguard, there is no third party. The company is owned by its funds, which in turn are owned by their shareholders—including you, if you're a Vanguard investor.  In other words, Vanguard is structured as a "mutual" mutual fund company. It's the only firm in the industry that works this way. This unique structure aligns our interests with those of our clients and provides benefits to investors worldwide. 

A third point he made is that, with respect to its actively managed funds, the management firms that Vanguard employs are third parties.  The client was not interested in "active" management, but I think it is remarkable that, although Vanguard offers actively managed funds, it does not share in the compensation of the subject investment managers.  In fact, it uses its scale to lower the cost of those managers, thus lowering the hurdle that such managers must clear in order to beat the pertinent benchmark or index.

Living to 96?

The WSJ for this weekend has a worthwhile article (behind a pay wall) entitled, "The 15 Numbers Every Investor Should Know."  Among those numbers is one's life expectancy, that is, the age to which the subject should assume he or she will live.  (Obviously, savers and investors should be interested in this number.)  The article links to a website called "Living to 100," which includes a "Living to 100 Life Expectancy Calculator." By answering a few multiple choice questions, the calculator will give you the last anniversary of your birthday.  Mine is 96.

The site will give you not only the age to which you can expect to live, but also a set of comments and suggestions in light of your answers to the multiple choice questions.  Most of the comments and suggestions make sense, but there is one that is troubling.  Because I answered that I consume very few dairy products per week, there is a recommendation that I consume more to avoid osteoporosis.  Apparently, the author of the calculator, Thomas Perls MD, MPH, FACP, did not get Dr. McDougall's memo.  A diet full of vegetables and a life with periodic exercise should result in enough calcium to keep one's bones strong.

Buying High and Selling Low

Millions of Americans inadvertently made a classic investment mistake that contributed to today’s widening economic inequality: They bought high and sold low.

Late in the stock-market booms of the 1990s and 2000s, more U.S. families clambered into stocks as indexes surged. Then, once markets tumbled, many households sold and took losses.

Those that held on during the most recent collapses reaped the benefits as stocks nearly tripled between 2009 and today.

The split path is one driver of stark inequality in the U.S. Many workers have seen their wealth and incomes drop despite more than five years of economic expansion in the U.S. Some fear the gap, widening for decades, could fracture society and slow the nation’s potential for economic growth in the long run.

-from "Bad Stock-Market Timing Fueled Wealth Disparity" in today's WSJ.

It was during 2008 and 2009 that I gave up trying to figure out when to buy and when to sell stocks and turned the portfolio over to Investor Solutions, just before the market plummeted.  When the market tanked, Investor Solutions liquidated fixed income securities in our portfolio, took the cash, and bought stocks as bargain prices.  Not that I am now among the rich, but many people were selling stocks at that time, as the article indicates.

The Answer to Poor Hedge Fund Results and High Fees and Costs: "Index Funds" says Warren Buffett

Yesterday in the WSJ, a big article appears (behind the pay-wall) on the unhappiness of public pension funds, including Calpers, the big CA public pensions fund, with their hedge fund investments.  Here is the closing paragraph of that article:

Mr. Meiberger [on the board of the San Francisco Employees' Retirement System] said at the [the board's June] meeting that he had sought out Warren Buffett's advice on the matter. The billionaire investor's handwritten response: "I would not go with hedge funds—would prefer index funds."

Stupid, Stupid, Stupid

T. Rowe Price blocked approximately 1,300 American Airlines employees from trading into their retirement plan mutual funds over the past three years due to excessive activity, according to Money Magazine. Some of the airline’s employees received lifetime bans. Southwest Airlines employees have also been warned by Vanguard to end their trading, according to Money.

Those of you who subscribe to Money may have seen the article. It’s not the first one on the subject and likely won’t be last. Though most mutual funds reserve the right to ban an investor from buying and selling its funds, it is rarely used. Investors who do get banned have frequently traded in and out of mutual funds, commonly on the guidance of a newsletter or an adviser.

It is my understanding that in order to get banned, or even to get a warning letter, a large amount of short-term trading has to occur. What prompts the warnings and the bans can often be a group of investors acting in unison, often on the recommendation of a central party (e.g., an advisory service). If enough shareholders move to buy or sell at the same time, the mutual fund could end up with more cash inflows or outflows then it is prepared to handle.  

-from an AAII Investor Update email I received last evening.

This investor behavior is nuts.  Do these employees think they can game the market?  What an argument for having the government invest our pension savings - except that the government plays much larger and much more lethal games with the market.  

Kudos to T. Rowe Price and Vanguard for stopping this sort of thing.  They do so, not because they are investor-nannies, but because, among other things, it drives up costs for those financial institutions, costs which they, in turn, must pass on to the rest of us. 

I get solicitations all the time for financial newsletters and advisers such as the ones mentioned in the quote.   If the publishers and advisers are so good, why do they have to do their mass mailing solicitations in the first place and offer to sell their "best ideas?"  If they are so smart, then  .  .  .   Of course we know why: there is a sucker born every minute, and they count on it.

What? No Blood in the Streets? None of My Blood? Maybe We Should be Selling.

The Wall Street Journal Today headlines an article “Retirement Investors Flock Back to Stocks: Equities Account for Highest Percentage of new Contributions into 401(k) Plans Since Crisis.”   The article reports in part: 

Individual investors, notorious for mistiming the market, didn't fare well in the financial downturn. At the stock market's peak in October 2007, investors put 69% of new 401(k) contributions into stocks, according to Aon Hewitt. The S&P 500 went on to lose 57% of its value by March 2009.

Some financial advisers now worry that retirement investors could be late to the game, pouring into stocks after much of the easy gains have already been had. This year, the S&P 500 is 1.9% higher, but it is 0.4% off its record high hit at the beginning of April. By comparison, in the first four months of last year, the S&P 500 was 11% higher. 

A friend of mine and I had our portfolios in a 55% equity and 45% fixed-income mix as the crash approached.  When it occurred, he sold his equities in large part because of fear that the market would never recover.  Under the discipline that Investor Solutions applies (our representative is Rob Gordon), we bought equities to restore our 55/45 allocation.   We rode back up when the market improved.  My friend’s portfolio did not.  Our overall return since the crash is about 4.2%, after all fees.

Russia’s stock market is down.  Everyone is getting out of Russia.  We have a very small allocation to Russia through one of the index mutual funds in which Investor Solutions has us invest.  As to the very small allocation, we are buying Russia.

This quote from the Investopedia website gives you the flavor of that investment approach:

Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, is credited with saying that "The time to buy is when there's blood in the streets."

He should know. Rothschild made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon. But that's not the whole story. The original quote is believed to be "Buy when there's blood in the streets, even if the blood is your own."

This is contrarian investing at its heart - the strongly-held belief that the worse things seem in the market, the better the opportunities are for profit.

Most people only want winners in their portfolios, but as Warren Buffett warned, "You pay a very high price in the stock market for a cheery consensus." In other words, if everyone agrees with your investment decision, then it's probably not a good one.