[Bob_Huntley]

Has anyone noticed that most reports of the reports of disasters on Wall Street start with , " X made big bets on this, that and the other"  nothing about investment in "something or other." The jargon was all about pure speculation...the big bet.

I am afraid the Wall Street casino has caused Main Street to back away and for a very long time. The blue collar worker trying to build up his 401k in Mutual Funds is disillusioned and will be reluctant to come back. I look at the load Mutual Fund Industry going the way of the makers of buggy whips.

Bob

[Rob Rigg]

Bob,

The fact of the matter is that, on average, 80% of Equity money managers lose to their index every year, no matter whether the market is up or down.

The number of quality equity fund managers is probably under 100 and most of them do not take money from "average joes".

Most of the big fund managers just market whatever outperformed in the previous couple of quarters with no vision to true long term success. Even Morningstar weightings are backwards looking and not terribly helpful.

As Andrew Swensen wrote in his books, the little guy is at a huge disadvantage and the best thing you can do is diversify across asset classes and use index funds.

Having worked on Wall Street and traded Equities and Bonds in the past, I am not terribly surprised about the melt down of the credit markets and complex/BS financial instruments, and the leverage that many hedge funds have applied will only continue to make matters worse.

I would agree that many people will stop putting cash into their 401ks, that is if they have not withdrawn already to help pay for their mortgages which are totally underwater.

[CJ Carder]

I am afraid the Wall Street casino has caused Main Street to back away and for a very long time. The blue collar worker trying to build up his 401k in Mutual Funds is disillusioned and will be reluctant to come back. I look at the load Mutual Fund Industry going the way of the makers of buggy whips.

The only problem with that line of thinking is that it assumes 1 of 2 alternative paths.  First, it assumes that there are places to park your money in lieu of the stock market that will still provide a reasonable return on investment enough to grow your money so that you can provide for yourself during retirement.  On average, that needs to be somewhere in the 7-8% per year neighborhood to get most people to where they would feel "comfortable."  And don't get me started on what people my age would have to do given that I'm not expecting social security to still be around for me.

The second path, if the first path is either not feasible or not acceptable from a risk standpoint, is to increase your savings rate.  For as long as I can remember, the US has had a savings rate of less than 5%, usually approaching zero, and for the last few years residing in the negative number.  We're a consumer-driven economy, fine, but the negative savings rate and crazy leveraging is part of what got us into this mess.  Still, use the stimulus package that was shipped out earlier this year - how many people do you know actually took that and put it into the bank and are saving it for retirement or a rainy day?  I didn't know anyone.  Everyone I saw was happy to have an extra $600 or $1200 to stay an extra day on vacation or whatever.  I don't see us changing the consumer-driven, gotta have it nature of our economy anytime soon.

So basically, neither of my two options are really all that feasible.  Thus, I have a really hard time seeing people "staying out of the market" for any significant length of time, regardless of what Wall Street does. 

Right now, news is negative, but despite the whole "buy low, sell high" thing, it's amazing how difficult it is for people to follow and how few people really do it.  It's also amazing to me how much more willing people are to throw their money into the market when prices are going up!  The ole "I'm going to wait until the market goes back up before I put my money back in" excuse.... excuse me?!?!?  Sure, it makes no sense, but it's what people do.  So my final reason that people won't stay out of the market for too long is, wait until the market starts to go back up (because it will) and see how many people come running back in because "they feel better." 

It'll be the people who bought or averaged in when the news was awful that make the money (does anyone realize the market is up 20%+ from it's recent bottom?), and the average investor will be left wondering "how come my portfolio isn't up 20%?"

The fact of the matter is that, on average, 80% of Equity money managers lose to their index every year, no matter whether the market is up or down.

Yeah, but is it the same 80% every year?  If you're looking on a year-by-year basis, sure.  But I'd be willing to bet you that your 80% number is closer to 50% if you expand your time horizon by 3 or 5 years.  So yeah, if you use index funds religiously, you'll do better every so often, but I'll still take my chances with active management over the long haul every time.

[Phil McDade]

Today, that type of business is a blip on Wall Street's radar screen today.

Why is that? How'd we get from there to here?

(Warning to GCA participants -- those of us in the Upper Midwest may see a spike in posting today, as we're currently being buried by up to a foot of snow...)

[Jim_Kennedy]

Bob,
I think this essay may be relevant:

http://www.vanguard.com/bogle_site/sp20070518.htm

[Dan Kelly]

I look at the load Mutual Fund Industry going the way of the makers of buggy whips.

Buggy whips might be just about due for a comeback.

[John Keenan]

Shivas

Sand Hill Road in Palo Alto has taken the place of the suppliers of capital to new and emerging industries.  When Silicon Valley was starting WS had no interest in it. That gave rise to some excellent I Banks and VC that started in SF to cater to this industry.

WS seems to more more focused on financial engineering. Those bring young MBA have a full and complete understanding of business and risk. The can model risk and eliminate it or structure instruments that greatly lessen it.

[Adam Clayman]

Bob. This demise of the mutual fund should be a good thing for a humble country broker. ETF's will be the new vehicle and could keep those commissions in house. No? 

[Richard Choi]

The fact of the matter is that, on average, 80% of Equity money managers lose to their index every year, no matter whether the market is up or down.

Yeah, but is it the same 80% every year?  If you're looking on a year-by-year basis, sure.  But I'd be willing to bet you that your 80% number is closer to 50% if you expand your time horizon by 3 or 5 years.  So yeah, if you use index funds religiously, you'll do better every so often, but I'll still take my chances with active management over the long haul every time.

It is over the long run (10 years). For any given year, you may have more or less than 80%, however, over the long run, active fund managers just cannot match the steady returns of the index funds.

The real reason why most active fund managers cannot beat the index funds is simple - fees. Active managers charge 10 times more in fees than index funds. That means that you start out down 1% return per year. Which means that, just to match the returns on index funds, you have to do significantly better than the average market. And it is mathematically unlikely that a majority of people will do better than average. Active managers also tend to trade more which also has some tax implications as well.

Trying to beat index funds is like trying to swim up stream. Lucky few maybe able to do it, but most won't, not over the long run.

[Phil McDade]

I look at the load Mutual Fund Industry going the way of the makers of buggy whips.

Bob

http://www.youtube.com/watch?v=MfL7STmWZ1c

[Cliff Hamm]

Bob,
I think this essay may be relevant:

http://www.vanguard.com/bogle_site/sp20070518.htm

John Bogle is an American Hero.  Believe he did his thesis at Princeton on Index Funds.  He lives incredibly modestly - eschews fancy cars, if I'm not mistaken refused a reserved parking spot at Vanguard, flies coach, etc.  Vanguard continues to offer excellent funds with low costs.  If anyone is interested in an excellent discussion board on investing, check out the Bogleheads at bogleheads.org.

[Phil Benedict]

The investment banks used to be private partnerships in which the partners had personal liability.  This was true into the '70's.  They evolved first into LLC's and then later public companies, gaining access to other peoples' money.  As a result of this transition, traditional investment banks evolved from advisors and brokers to quasi-hedge fund operations with massive risk profiles.  It was a recipe for disaster. 

Imagine how differently Dick Fuld or Stan O'Neill would have acted if they were personally liable for their firms' debts?

[mike_malone]

 If you want to own stocks in the U.S.  for conservative growth then the S+P 500 index funds are hard to beat. Unfortunately, the problem is that U.S. stocks will likely be a bad investment for a very long time. They are doing lousy which is the simplest reason why the average person will abandon them. In the long term (a generation) stocks swing from hatred to euphoria. We aren't at "hatred" by any means yet. The leveraged investment community is in a shambles; they provided the marginal dollar that kept stocks on a high plateau for years.

    And now finally there is competition for the money. For the last few years as I warned of the RISKS for stocks I was told " What else is there?"

  Well, it is lower rated corporate credit that will significantly outperform stocks for a long time.  If you are a person who believes that stocks do well when the economy is improving , interest rates are declining, and corporate profits are rising then you should be in love with corporate credit here. The stocks can't rise until the credit markets improve and the valuations on corporate bonds would probably compute to a Dow of  2500 right now.These securities have reached 100 year opportunity levels BECAUSE of the destruction of Wall Street and the leveraged professionals. Benjamin Graham advised buying into illiquid markets on the downside and selling into illiquid ones on the upside.

   The wonderful thing about the best opprtunity in 100 years is that most people think you are crazy to do it. I can't think of a better reason to buy!

   Only a crazy person would buy something paying more that 15-20% that has a terminal value

[John Keenan]

Mike I took a look at bond funds and overall not bad for 08. The exception are muni 's which were down but far less than equities.

The issue with bonds is inflation. TIPS are interesting but the inflation risk exists for fixed income investing.

I do not think that retail investors will be back any time soon. It took a few years after the 87 mess and longer after the Dot Com mess. It could be 10 years or more before they march back in 

[archie_struthers]

 


Isn't the real problem with Wall Street as simple as a false front....


while Rome was burning they were looting the peasants of all their possessions , at least those they could get access to...with no thought of the morality involved in same ..funny  how the  "Masters of the Universe" are missing in action now ...except to cut up whats left       

[mike_malone]

 I share your concern about inflation possibly leading to much higher interest rates . So, bank loans fit the bill because they have variable rates. High yield corporates at 20%+ will be okay particularly if you have a hedge of short treasuries .  This has became easier to do with the introduction of mutual funds and ETF's that go short treasuries.

    I have been listening to many bond strategists in the last few weeks. All are raving about the opportunity in bonds now, but most are reducing their risk. That is typical for these managers. They don't take risks when the risk/reward ratio is heavily in their favor.

  As my favorite guru, Jeremy Grantham says " They don't want to be wrong alone!".

[CJ Carder]

The fact of the matter is that, on average, 80% of Equity money managers lose to their index every year, no matter whether the market is up or down.

Yeah, but is it the same 80% every year?  If you're looking on a year-by-year basis, sure.  But I'd be willing to bet you that your 80% number is closer to 50% if you expand your time horizon by 3 or 5 years.  So yeah, if you use index funds religiously, you'll do better every so often, but I'll still take my chances with active management over the long haul every time.

It is over the long run (10 years). For any given year, you may have more or less than 80%, however, over the long run, active fund managers just cannot match the steady returns of the index funds.

The real reason why most active fund managers cannot beat the index funds is simple - fees. Active managers charge 10 times more in fees than index funds. That means that you start out down 1% return per year. Which means that, just to match the returns on index funds, you have to do significantly better than the average market. And it is mathematically unlikely that a majority of people will do better than average. Active managers also tend to trade more which also has some tax implications as well.

Trying to beat index funds is like trying to swim up stream. Lucky few maybe able to do it, but most won't, not over the long run.

So why is it that over the last 11 years, every single large-cap mutual fund in my portfolio has outperformed the S&P500 by, at worst, 121 bps average per year after all these ugly fees and up-front sales charges?  If I had an S&P500 index fund, I'd have far less money.

[Steve_ Shaffer]

As it turned out, Gordon Gekko was wrong. Greed isn't good.


http://www.americanrhetoric.com/MovieSpeeches/moviespeechwallstreet.html

[Cliff Hamm]

[/quote]

So why is it that over the last 11 years, every single large-cap mutual fund in my portfolio has outperformed the S&P500 by, at worst, 121 bps average per year after all these ugly fees and up-front sales charges?  If I had an S&P500 index fund, I'd have far less money.
[/quote]

The answer is really quite simple.  An index fund is asset pure.  The S&P 500 does not own international, does not own mid-caps, does not own small caps.  Active funds will call themselves large caps but check their asset allocation.  I can guarantee you they are not only large caps.  The S&P 500 Index will not beat a large cap fund when large caps are not doing as well as other asset classes for the reason given.  If you invested in the same mix as your fund using only index funds you would do better giving the low costs and tax ramifications of index funds.

This is another advantage of index funds.  Mutual funds tend to exhibit asset drift.  If they do well and grow they may begin small move to mid caps and eventually be mostly large caps.  If one desires to control their own asset allocation Index funds are better.  Again, I encourage all to check out www.bogleheads.org.  It will provide as good of an education on investing as this site does on GCA.

[tlavin]

Hindsight is 20/20, but the current issue of Vanity Fair has a terrific piece that analyzes some of the critical failures of the financial system in the U.S., including the asinine levels of leveraging that investment banks were allowed to operate with.

http://www.vanityfair.com/magazine/2009/01/stiglitz200901

 

[Steve Lapper]

Let's not forget a few critical and balancing thoughts:

1) The greed on Wall Street was hardly unique to the financial world. Who can forget Bernie Ebbers, Enron, Rigas, etc.. or so many other otherwise almighty CEOs (think Jerry Yang among others) whose greed and egos easily matched those found on the Street. We are, as a society, mostly greedy, selfish and ignorant of the long-term value of much of anything. That will have to change substantially if we are to ever "grow-up" and get beyond these cycles of excess.;

2) Don't be so fast to declare ETF's a benign and intelligent instrument for investment. Many of these are ultra-short, ultra-long , ultra fecal matter leveraged piles of crap that retain a quite severe cause and effect  on their underlying securities. These things contribute to volatility, not reduce it and such a very small percentage of people really understand exactly what they entail. Caveat emptor.

Read the quote below (I've long used as part of my profile) and make the effort to think before acting.

[Rob Rigg]

CJ,

Interesting - you must have selected some pretty good large cap fund managers.

As you can imagine, if 80% lose to the index every year, over a 5 or 10 year time frame only a handful of managers outperform the index.

Many large cap managers try to manage beta to beat the market which is a pretty BS strategy. If you add in fees, the beta strategy is even worse because you never lose to or beat the market by much, but you consistently lose minus fees. If you look at the top managers out there, like Ken Heebner, they do their research and really focus their positions. You want to put your money with managers who are going to add alpha to the portfolio, otherwise you are wasting your money.

Most of the better open architecture firms in the country tend to use Index Funds for large cap exposure unless they have access to a top manager that is "open".

I would agree with Cliff that an understanding of the Vanguard model and the benefits of index fund investing would be beneficial to anyone, whether they end up going down that road with their retirement investments or not.

[Bob_Huntley]

2) Don't be so fast to declare ETF's a benign and intelligent instrument for investment. Many of these are ultra-short, ultra-long , ultra fecal matter leveraged piles of crap that retain a quite severe cause and effect  on their underlying securities. These things contribute to volatility, not reduce it and such a very small percentage of people really understand exactly what they entail. Caveat emptor.

Steve,

I had a wholesaler in my office today extolling the use of Pro Shares. Another leveraged instrument that is not in the best interest of the general public. I guess the hare is much more exciting than the tortoise..

Bob

[Jim_Kennedy]

Benedict Arnold only tried to sell West Point to the British. What's happening today seems like economic treason on the part of
'Capitalists-Gone-Wild', and the effects are costing Americans dearly, and possibly jeopardizing our safety.

I think we should trade with the traitorous traders. You give back what you stole and get out of Dodge and we won't give you a cigarette and a blindfold. Sounds fair to me.

  (for effect)

[Rob Rigg]

Steve,

Fair point. Like anything, you need to do your due diligence on ETFs or Index Funds.

There are many ETFs out there that charge you more than Actively Managed Mutual Funds. And there are many ETFs that make about as much sense as CDS.

However, many Vanguard funds or Index ETFs provide huge savings in fees because the vig is only 5-20 bps.

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