Saturday, 17 February 2018

Sack all Fund Managers !

Here is uncontestable proof that all Fund Managers are a waste of time. They are (mostly) lavishly paid for nothing. If that sounds a radical statement, read on.

Its a well known saying in financial circles that you cannot beat the market in the long run. The sage of Omaha, Warren Buffett has been saying this for a long time. In 2007, he publicly laid a bet that the S&P 500 index would outperform hedge funds over a 10 year period. He wagered $500,000 on it to anybody who would take up the challenge, observing cheekily , " "After all, these managers urged others to bet billions on their abilities. Why should they fear putting a little of their own money on the line?"

Surprisingly only one person took up the bet (shame on you hedge fund industry). Protege Partners handpicked a  portfolio of hedge funds. And the wager was on - the S&P 500 against this handpicked pool of hedge funds.

Ten years ended on 31 Dec 2017. And guess who won ? The hedge fund pool gained 22% over 10 years. The S&P 500 rose 85%. No contest ! Buffet won a handsome amount and promptly donated it to the charity,  Girls Inc of Omaha.

There's a big lesson to everybody who is saving and investing. In the long run you cannot beat the market index. Repeat after me, In the long run you cannot beat the index. Repeat again, In the long run you cannot beat the index. Write it out 1000 times.

And yet, we listen to advice from friends. To tips. We hire investment managers. Fund Managers design all sort of esoteric funds and write research reports on how their funds are outperforming the market. A million online portals exist that cater to advice on investment. All of them charge a fee. All of them get handsomely paid.  

Instead follow the advice of Warren Buffet (for free; no fees charged). Simply invest in an index fund - the S&P 500 if you are in the US, the Footsie if you are in the UK, the Nifty if you are in India. A fund that will charge minimum fees to simply hold the basket of securities exactly mimicking the index. And then forget about it. Come back after 10 or 20 or 30 years. You would have made more money than anybody else. It's as simple as that.

There's only one slight problem. Warren Buffet has beaten the S&P Index handsomely in the 50 odd years he has been at the helm of Berkshire Hathaway !


Sriram Khé said...

In the long run, we are dead, said Keynes. That much is certain ;)

People like me do not have investments to manage. Because, we opted to work in a system that offered to do that for us and then provide us with pensions.

I know, your next comment will be, "but the pension system is broke." It is for a reason--the political ideology has been one of decimating collective security, and individualizing these. It is like the GOP jumping up and down that Obamacare is failing after making sure that they did--and do--everything they possibly can to make sure it fails.

That aside, the long-run requires practically every human to ace the "marshmallow test." We fail, and fail spectacularly. We humans are not wired for long-runs. We are animals first and reasoning beings later. On top of that, it has yet to really sink in that our life expectancies have gone way up. You combine these two, and we have a disastrous situation where it is practically impossible for most humans to think about the long run and the importance of savings and investments. Hedge fund is the least of my worries!

Anne in Salem said...

Footsie and Nifty? How does one take them seriously?

Sriram is correct in noting most people's inability to think long term, to sacrifice anything now for a proven benefit later. Disastrously high debt illustrates perfectly, as does the proliferation of expensive coffee shops and $150 gym shoes. Parents don't model it so children don't learn it.

Most people fortunate enough to have money to invest probably are intimidated by the deluge of conflicting information and advice - diversify but don't be too shallow, be wary of risk but don't be too conservative, etc. They seek assistance from professionals for the same reason they seek a doctor for a medical problem - presumed expertise. And they find an investment advisor the same way they find a doctor - they ask friends. Are they going to listen to a quiet-living, unassuming man, whether you or Buffet, or are they going to listen to the guy who looks wealthy and gets airtime or print? Anyone who knows anything about marketing knows the regular person will follow the loud, flashy one.

And who, besides the Oracle himself, can afford to invest in BH?

Ramesh said...

@Sriram - Don't you even begin to raise pensions. If there is anything that prods me to violence, it is the concept of state pensions, especially when they are unfunded. Daylight robbery of children and grandchildren. Start saving for yourself and forego your pension !

@Anne - Even dry finance folk can coin creative names ! Yes, long term is a difficult concept to grasp, but a small step can ensure all our futures. I've written before - say $5 per day every day from the age of 21 to 60 and you can retire a millionaire. If $5 a day is too much, even a $1 a day can result in a quarter of a million dollars on retirement. Surely even a beggar can save $1 a day. Everybody should be investing ; however small their surplus is (even $1 a day), but few do.

You are absolutely right about the loud marketing types. Of course I should have expected that from a P&G alumnus !!!!

gils said...

Mutual funds koodava sir?

Ramesh said...

@Gils - Yup !

Anonymous said...

I have no idea what these fund managers really do, it sounds like a made up phony job to have. Any sort of investing is a gamble and it's often better to stay away from gambling. Now saving $5 a day, this is the best advice!

Ramesh said...

@Anon = Well, you'll be a millionaire soon :)

Sriram Khé said...

This will delight you a lot, Ramesh ;)

Harvard's money managers were paid $242 million from 2010 through 2014 to manage the gazillion dollar endowment. Yet ... "Harvard over the past decade ended June 30 posted a 4.4 percent average annual return, among the worst of its peers. It even lagged the simplest approach: Investing in a market-tracking index fund holding 60 percent stocks and 40 percent bonds, which earned an annual 6.4 percent."


Ramesh said...

@Sriram - Why am I not surprised !!

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