Most of my life has been a trajectory in discovering sound investment ideas.
Often these will begin from a rather simple, and sometimes silly, place. It’ll be in thought-experiments that sound outrageous or in the love of a distressed company producing an amazing product.
Financial advisors — and financial advising — are seemingly everywhere today.
But it’s sourced from a more foreign place. Not in analysis or in sound reasoning. Sometimes with vast neglect for doing exactly what the job title suggests.
Every sales angle has its fair share of snake oil. Every commission-based salary has its caveat for what it is truly offering.
Financial advisors are not going to admit that most of the information for their job is actually non-exclusive. For the vast majority of the American working class, an S&P tracker at Vanguard, Charles Schwab, or Fidelity will charge you peanuts to manage your cash passively. As of April 28, 2020, Vanguard’s expense ratio is .04%. It’s going to be near impossible to beat it.
Advisors aren’t completely lost in value. Some will know what to do in unique financial decisions you find yourself in. It’s not always about strictly managing personal funds, after all.
The one caveat is that most information in the world of finance is only under the semblance of exclusivity when it is, in fact, readily available on your phone or computer.
Fund managers come in good and bad.
If you are trying to make money on a decent chunk of change, it’s likely you’ll need someone to strictly manage it for you. For folks with an excess of seven digits or more, personally accounting for it doesn’t work. Even in trackers, you’ll find yourself frequently discussing the opportunity cost of that performance.
It helps to pay fund managers on areas of performance and it incentivizes the right talent to come out. For the last decade, almost every single fund manager has underperformed the S&P 500. This is partly because the S&P 500 and NASDAQ have been on a bender and partly because a lot of fund managers are awful at managing money.
Most advisors and managers work off of a commission. Their salaries are guaranteed outside of the performance metric of their work. It leads to results like this in the last 15 years:
The world of finance is a large industry. There are, quite literally, hundreds of billions of dollars exchanging and transacting on a market on any given day. Because of this, the people within the industry get paid regardless of the outcome or the results of their portfolios. Whether they slightly underperform or do not perform at all, their paychecks are safe. These paychecks are massive regardless.
This isn’t exactly a bad thing. If you take an example from the best money manager of all time, you’ll understand that they’re motivated by fees on realized gains. Jim Simons’ Medallion Fund at Renaissance has consistently annualized 70% gains on the market for the last thirty years. That’s about $100 billion in total gains for the last three decades. Simons’ net worth is north of $20 billion and climbing.
It’s not unusual to take over 20% of gains or more as salary. While Medallion has made about 70% in annualized returns, after fees that number comes down to 40%.
You want the best to manage your money. Managing is one thing, but performing is another.
You want to look at track record and performance and consistency. They exist. If they do exist, they’re generally not easy to find.
“Most funds, in my opinion, are not quantitative.” — Dr. Jim Simons
The best money manager on the planet has said this. We live in an era of snake-oil salesman posing as something more than insurance.
“Diversification is a protection against ignorance” — Warren Buffet
This is an era where the exact opposite is touted relentlessly. One of the strongest tenets of the financial world today is the concept of diversification.
The old Warren Buffet wouldn’t agree. Jim Simons today wouldn’t agree. Markets are a system designed to acknowledge companies that consistently outperform by raising their valuation.
By that logic, the true problem is in figuring out where those gems may be hiding and why.
All the math and financial jargon won’t save anyone’s life savings if you can’t make sense of the simple testament to a market’s existence. On the surface, it’s just nice suits and a clever wordsmith.
The vast majority of funds will not beat the S&P tracker on any given year. This is a truth nobody will admit to. If you’re looking for consistent gains that are double-digit in percentage or more, it will be tough to find the actual quantitative geniuses willing to put their own skin to the test.
Instead, you’ll often find advertisements posing as financial analysis.
Here is one you’ve probably seen:
These advertisements, and many that follow the format, are everywhere. And they’re not only bad advertisements, they’re entirely lazy and fraudulent.
Purchasing Amazon isn’t something you would have wanted to do in 1997. By 2000, the dot-com bubble was bursting and the stock price came right back to where it had begun. Worse, the company was on the brink of bankruptcy — much like every other dot-com at that time. Amazon exists today because Warren Jenson was lucky enough to sell $672 million in convertible bonds to European investors. That money kept them afloat until Amazon Web Services was born.
It’s a simple game to expand a graph from 1997 to 2020 and look at companies that exploded 50,000% and then deem yourself a genius.
But it’s pure laziness to pick a date like 1997 when 2002 was the year that you should have been looking at as a marketer.
In either case, it begs the most obvious questions:
- Why would anybody be selling stock picks when they could make the money themselves?
- Why wouldn’t these same people run a fund and take client money to perform as well as they say they do?
- Why are they selling advertisements all over the internet as if it is a charity or a donation project?
I’ve never seen an advertisement for Jim Simons’ fund. In fact, I’ve never seen any marketing of any kind for a product or service that people know is amazing. That’s because the truth is something that doesn’t need to be marketed. Simons is probably the richest person you never knew about it. There is a reason for that.
Most people are in the industry to sell you dreams. You will give them a pie, they will cut a piece of that pie off, and then they’ll give you back a little less than you gave them initially.
The Federal Trade Commission is finally beginning to take notice of some of them.