2013 June 08 Saturday
Mutual Fund Management Industry: Parasites

Half Sigma has made it a point to distinguish between value creation and value transference activities. He's correct to draw this distinction because some really large scale value transference activities are going on. Money managers transfer value from you to them and give nothing in return.

By 1960, though, the mutual fund business was booming, and selling investors on high-cost, high-risk products called "performance funds." Within a few years, researchers armed with more statistical skills (and these new things called computers) were examining the industry's performance and finding it wanting. "[W]e find no evidence to support the belief that mutual fund managers can outguess the market," Jack Treynor and Kay Mazuy of the consulting firm Arthur D. Little reported in the July-August 1966 HBR (sadly, we don't have the article online). Multiple academic studies soon backed up that conclusion.

They've continued to back it up ever since.

The investment industry is a giant extraction industry.

To many observers, the investment industry of today is like a giant extraction machine. The incredible growth in the industry during the last forty years has resulted in a billionaire’s club made up of the owners of asset management firms, hedge funds, pension consulting organizations, and the like — and tens of thousands of others in the business have gotten plenty rich from the mother load of fees.

You are better off investing in low fee passive index funds.

Share |      By Randall Parker at 2013 June 08 02:05 PM 


Comments
Days of Broken Arrows said at June 10, 2013 10:01 AM:

Glad to see a blog post like this. It bewilders me that the Internet has eradicated all sorts of jobs, except for those in the financial industry -- despite the ease with which anyone could use an online stock trading service.

The industry makes things out to be more complicated than they are so they can scare civilians into using their services. And what are their services? Well, they charge commission per trade. So if they make you money, they make money. And if they lose you money, they also make money. Does this sound like a system anyone with half a brain should be buying into?

Most Americans do buy into it, though, because basic finance isn't taught in school nor do colleges require it as a core course. This is deliberate. The elites want workers just smart enough to get by, but not smart enough to know how to work the system, so they make finance out to be like it's a mystery only a few can solve.

This is not 1985. You can DIY. Yahoo and Google both have finance pages where you can research stocks down to the last morsel of info. They even link recent articles about each stock. Then there are financial blogs like Seeking Alpha. And most of us have a family member or two who is willing to offer advice. If you're just looking to invest for dividends and/or growth, odds are you're smart enough to handle it on your own.

Days of Broken Arrows said at June 10, 2013 10:08 AM:

Glad to see a blog post like this. It bewilders me that the Internet has eradicated all sorts of jobs, except for those in the financial industry -- despite the ease with which anyone could use an online stock trading service.

The industry makes things out to be more complicated than they are so they can scare civilians into using their services. And what are their services? Well, they charge commission per trade. So if they make you money, they make money. And if they lose you money, they also make money. Does this sound like a system anyone with half a brain should be buying into?

Most Americans do buy into it, though, because basic finance isn't taught in school nor do colleges require it as a core course. This is deliberate. The elites want workers just smart enough to get by, but not smart enough to know how to work the system, so they make finance out to be like it's a mystery only a few can solve.

This is not 1985. You can DIY. Yahoo and Google both have finance pages where you can research stocks down to the last morsel of info. They even link recent articles about each stock. Then there are financial blogs like Seeking Alpha. And most of us have a family member or two who is willing to offer advice. If you're just looking to invest for dividends and/or growth, odds are you're smart enough to handle it on your own.

Financial Advisor said at June 10, 2013 10:29 AM:

I'm a Certified Financial Planner. It's literally been more than 50 years since finance academics statistically proved that mutual fund managers don't add value. By the early 90s, French and Fama's Three-Factor model explained 90+% of mutual fund returns and showed no "alpha," i.e. manager skill. It's ridiculous that Wall Street still gets away with this fantasy. On the other hand, most people want to believe the fantasy, so many it's not so crazy.

Do yourself a favor, read a book or two about investing from either William Bernstein or Larry Swedroe. They do a nice job of explaining the basics of what real investing is all about. Putting together a low-cost, well diversified portfolio isn't difficult. Sticking to the plan, however, is incredibly hard - if you don't understand why the portfolio works. That's why you need to read a few books, so you can understand the "why."

James Bowery said at June 10, 2013 12:20 PM:

"And now the two forces, Industry and Finance, are in a struggle to see whether Finance is again to become the master, or creative Industry." -- The Antisemite


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