Thursday, April 23, 2009

This sounds vaguely familiar...

The secret to successful stock market investment is: passive investing.

Standard & Poor's released its latest Indices Versus Active Funds Scorecard today, and the headline result is the same one delivered by almost every study of mutual fund performance since the 1960s: Most actively managed mutual funds underperform the market. To be precise, 66.21% of actively managed domestic stock funds underperformed the S&P Composite 1500 Index in the five years from 2004 through 2008. During the previous five-year period, a smaller majority—50.76%—had underperformed. [More]

This is another factor in my premise that Wall Street salaries often cannot be justified by free-market economics, and are made possible by its inefficiencies and the collusion of government with the investment industry to exploit investors' inherent bad judgment.

I'm fine with it as long as they don't break the law, but I also am fine with them enduring the consequences (such as confiscatory marginal income tax rates) when their dupes wake up to reality.
Ezra Klein points out that with another year gone by, it’s still the case that the majority of actively managed funds are outperformed by passive investment in a stock index. In other words, the fund managers are creating negative value. And getting paid handsomely for it as Kevin Drum reminds us.
Consequently, a lot of people wind up getting suckered into these managed funds without quite realizing what’s happening. And it’s important to keep this kind of thing in mind when thinking about issues like the legendarily long hours worked on Wall Street. The long hours are real enough, but long hours don’t necessarily indicate that valuable work is happening. A lot of financial services is a kind of sophisticated hustle—a scam—and it requires a lot of hard work precisely because it’s a hustle.
Matt's point echoes the belief common among farmers that if we work physically hard, we are entitled to a fair income.  Both examples avoid factoring in the the value of the work.   Oddly the corn market doesn't have a sliding scale for corn produced with more effort.

We don't get paid by customers for how hard we work; we get paid for what we produce.

Hmmm....passive rings a bell...

1 comment:

ThomasMoore said...

Do I remember some sort of study that indicated simply selling 1/12 of your crop each month beat most advisor services ?