Tuesday, April 05, 2016

Simple? Or Complicated?



When I was a lad (I'm talking late twenties to mid thirties, so maybe a few years beyond ladhood), I had a stock broker who had a complicated investment plan, built especially for moi (and probably a number of other clients, but who's counting?)

He had me in individual stocks, and he sold them and bought other stocks quite a bit. All the buying and selling was quite dazzling, and I got regular printouts with graphs to show how well everything was doing, and he only charged me 2% off the top for all of the busy service.

Which I thought, in my stupidity, was bargain.

Years went by like this, and slowly, steadily, my investments crept up. But one day I read about these investment called "index funds", and further read that they were very inexpensive. Like way less than the 2% my broker was charging.

So I asked for a meeting with my broker. He had offices up in a high rise in Newport Beach, and there was a breathtaking view of the Pacific and California coast lines through his floor-to-ceiling windows. He sat me down in a padded chair and ran through all the stocks I was holding, showing me with colored bars that went up and up.

Impressive. (This was the go-go nineties, when many investments looked impressive).

But then I asked a pointed question. ...

"So. Are these investments doing better or worse than the S & P 500 Index?"

He answered promptly: "Better. We've made 14.7% annually. The index has done 14%."

"Before or after the 2% fee?"

Less promptness this time. In fact, there was a long, pregnant pause. Finally one of his staff (who happened to be one of his adults sons; he had three of them working in his big office) piped up with:

"Before. You're ... ahm ... doing 1.3% less than the index after our charges."

We all stared at each other. And finally I said: "So ... what am I paying you for?"

I thought of the above when, earlier today, I read this from a financial blog called The Reformed Broker:

... It should not come as any surprise that a sophisticated investment thesis will appeal to funds whose reputations are steeped in the aura of being able to solve market puzzles before the crowd. Sometimes it works beautifully but sometimes the consequences are disastrous. I’ve come to learn that, for most investors, the entire enterprise is completely unnecessary. Year after year, decade after decade, portfolios with simple building blocks and transparent mechanics get the job done. A bet that this will not be the case in the future because of (name your reason) is a low probability one.

Many intermediaries sell funds that traffic in complexity because they position it as their value-add. “There are you things you cannot understand going on in these funds, but I am managing and monitoring it for you.” It’s a barrier to entry and a justification for above-average fees. It also gives the advisor or family office person interesting things to discuss at quarterly reviews or in newsletters. It’s a signifier that the fees are being earned. Ben Carlson points to this “agency” problem as one of the main reasons so many institutions order from a menu of convoluted solutions – it’s the menu they’ve been brought by their waiter. And if something gets too simple, the intermediary can begin to feel his or her own place in the process becoming more vulnerable – what do we need you for? ...

This is what I've learned from forty years of investing: Simpler is good.

Also, too, simpler is often better than anything else an investor can do. It's when a person believes that complicated/complex investment maneuvers will deliver more money into her/his pocket that trouble ensues.

UPCOMING 401(K) ENROLLMENT MEETINGS

Sony Pictures Animation
Thurs, April 7th
2 to 3 pm
North Room 2000

* This Meeting Was Rescheduled
This is the new date

Nickelodeon
Fri, April 8th
12 noon to 1 pm

Main Conference Room
450 Brand Boulevard
Glendale, CA




0 comments:

Site Meter