Charlatans, Crooks and Fools
“The burnt customer certainly prefers to believe that he has been robbed rather than that he has been a fool on the advice of fools.”
– From Where are the customers’ yachts? by Fred Schwed
Did you know every 1% extra that you pay in fees could wipe up to 10 years off the life of your final retirement nest egg?
OK, let’s be blunt here. If anyone tells you they know where the stock market is heading, they are either self-deluded or simply lying. Even the “best” investors, including; Warren Buffet (net worth of US$84.7 billion), Ray Dalio (net worth of US$17.4 billion and manages $160 billion) and Jack Bogle (manages US$4 trillion, yes, that’s a “T”); don’t claim to know where the market is going.
The beautiful thing about this world is that it’s unpredictable. Not that anyone would call Donald Trump beautiful, he is completely unpredictable. Every time he opens his mouth, the stock market reacts up or down – sometimes in a big way. And it’s not just him of course… wars in the Middle East, shonky banks ripping off their customers, countries in Europe defaulting on their debts, the rise of technology and innovation… the world is constantly changing and nobody really knows what will happen next.
Investing doesn’t need to be difficult or scary. So why does it always seem that way? Simple. Money. Some people have learnt to make their money (and a lot of it) by scaring the living bejesus out of us all.
Look at the rise of the business channels on TV, e.g. Bloomberg (which I do like), CNBC and Foxtel’s Business Channel 602. Have you ever sat down and really listened to them? So much of it is just utter nonsense. Each day telling us that the end of the world is nigh, to invest in that stock, that this other stock is doomed, that a whole sector is ruined… It’s how they make their money. Watch them for entertainment but don’t let them cloud your vision.
Some stockbrokers provide me with no end of amusement. I will qualify this by saying there are a few who we deal with, respect and with whom we can have a meaningful conversation. But by and large they are salespeople who make their money, and that of their firm, from commissions on buying and selling shares or other products designed to make them money whether you do or not. It’s in their interest that there is optimism and fear in the market, so you feel obliged to buy or sell depending on where the market currently is.
Research Houses have “experts” reviewing stocks, plugging numbers into spreadsheets and coming to conclusions on whether you should buy, hold or sell a stock. Everyone has their stories of following such advice. Oh, why did we sell BHP on a reduce recommendation in April 2016 (when we were told the fair value was only $15) despite the price currently sitting close to $36? And why did we accumulate Telstra at the same time (when the price was around $5) only to see it sitting around $2.70 now? It’s simple: they make their money from selling subscriptions to individual investors and larger institutions, i.e. the brokers above.
However, the most questionable characters in my view are the equity fund managers. After spending years charging clients exorbitant fees, they can now afford to sit atop their ivory towers enjoying the best views. It amazes me how they can get away with it. I can only put it down to a lovely quote from Warren Buffet, who said “…the wealthy think their money should buy them something superior compared to what the masses receive…” and that makes it hard to “meekly sign up for a financial product or service that is available as well to people investing only a few thousand dollars.” Yes, you should pay for advice which covers investments, tax and estate planning, but why is it based on a percentage of the funds you have invested with them? I’ve seen people paying $50,000 to over $100,000 in fees for a simple portfolio of Australian stocks! How on earth is that justified?
There was a great (but at the same time sad) quote I read recently from ex-stockbroker Fred Schwed in his book: Where are the customers’ yachts?
“The burnt customer certainly prefers to believe that he has been robbed rather than that he has been a fool on the advice of fools.”
It may seem I am bitter on this subject but in truth I am not. Regulators and governments have allowed this behaviour to go on unpunished. While the fines you see on TV or read about in the papers seem substantial to you and me they are mere petty cash to these billion-dollar institutions.
Over the 10-year period ending December 29, 2017, more than 85% of international equity and Australian bond funds and more than 70% of Australian general equity and A-REIT funds underperformed their respective benchmarks on an absolute basis.
My advice is to find an adviser who is a fee for service provider. Yes, advice costs, but this way there is a limit.
However, as always, if you don’t want to take my word for it, I’ll leave you with the words of the world’s most famous investor.
From Warren Buffet’s letter to Berkshire Hathaway shareholders in 2014
Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So, ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.
My advice to the trustee (of his Will) could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I, Warren that is, suggest Vanguard’s). I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.
Important Notice
The advice in this post is intended to be general in nature and does not take into account your personal circumstances. Before implementing any of the strategies discussed, we recommend you speak to your licenced financial advisor or solicitor. Allworths Wealth Management Pty Limited (AFSL 457 155) is the Wealth Management arm of Allworths Chartered Accountants. For further information, please contact us on (02) 9264 6733 or email growth@allworths.com.au.
