Are You "Paying Your Manager To Fail?" -- Jane Bryant Quinn
On Jan 2, 2016 I posted on this blog a criticism of financial writers and pundits. Specifically people who earn income from their writing, but do not earn income by directly providing financial advice and / or services for a fee to individual clients / customers … as those of us in the Financial Services industry do.
But … to further my own professional education … to understand different points of view … and to understand what widely read financial writers are saying … I do considerable reading and listening in my field. In that regard, I recently attended a live lecture by Jane Bryant Quinn … who has recently written a new book.
It may come as no surprise to fans and / or long-time readers of Jane Bryant Quinn that she is not a big fan of the financial services industry. I was prepared for that. But I was not prepared for how much I agreed with her point of view! Yikes! (Not 100%, though.) Early in her talk, she said something that I immediately copied verbatim … in her discussion about “active management” vs. “indexing,” she said …
“You are paying your (active) manager to fail.”
To research further, I went to Jane’s website ... ... where I saw the following comment from one of her readers ... not from Jane herself:
“Index ... (investments) ... have been shown over and over again to beat almost all actively managed ... (investments) ... over any meaningful period of time, and the longer the time period the more index ... (investments) ... win out. At this point, it is tantamount to financial malpractice to recommend trying to beat the market by ... (trying) ... to pick winners and time markets. If this message could cut through all of the financial noise blasted at people on tv and the internet we could save millions of people a lot of grief.”
I knew that I needed to write my own comment, so I continued to research. I happened onto the following from the Stanford Graduate School of Business website. Below I will more fully characterize what I read on the Stanford GSB site referenced above … but for heavy-duty readers among us, please feel free to look here at the entire 51 page paper.
Back to what the Stanford GSB said …
“Research says top managers are good at what they do, yet most investors can’t benefit from it.”
Here are the details:
“ …new research from Stanford Graduate School of Business explains why no one — especially financial policymakers — should jump to the conclusion that active-fund managers have no superior investment skills. … In fact, research by Jonathan Berk of Stanford Graduate School of Business and Jules H. van Binsbergen, formerly of Stanford and now at Wharton, suggests that the typical mutual fund manager is persistently skilled, and that top performers are especially good.
Stanford goes on to point out that the managers and their companies, rather than investors, are the ones who do benefit from superior and persistent skill.
So the conclusion of a commenter on Jane Bryant Quinn’s site turns out to be accurate … and I agree. It does seem to be pretty bad advice to recommend trying to pick winners or trying to time the market. But that advice is true not because those things can’t be accomplished … Berk and van Binsbergen’s research show they can be done … but because we lowly investors at the bottom of the food chain can’t benefit from this superior investment skill the researchers found.
Finally, at the risk of repeating myself slightly … also from Jane's site ...
… “Of all the so-called predictors of future performance, low costs is the only one that consistently works.”
So, in an attempt to answer my own question, i.e. "Would a President Sanders Make Active Management a Crime?" ... I don't think so. On the other hand, the future members of a Sanders' administration's regulatory organizations might have their own opinions ... please stay tuned.