The Investment Answer
If there is one skill that investors, as well as financial professionals value the most, it is the power of prognostication. Yet that is a talent that is also revered in many other areas of human activity, and this has been so perhaps since the dawn of mankind’s existence. Ancient civilizations used various types of practices for divination purposes, including observing the flight of birds, consulting oracles, astrology, crystal gazing, haruspication (inspection of sheep entrails), scatomancy (you don’t want to know), and many more. Perhaps the fact that all of these efforts were doomed to failure dawned on the practitioners, but rarely on their naïve, believing clients. If you suspect a relationship here to the modern version of the ancient prognosticator, namely the investment guru, you are probably correct.
CXO Advisory Group is a research company that offers a free web site providing a surprising amount of interesting investing information. One of its recent surveys attempted to answer the question: “Can experts, whether self-proclaimed or endorsed by others (publications), provide reliable stock market timing guidance? Do some experts clearly show better intuition about overall market direction than others?”
The two-year survey analyzed the market (the S&P 500 Index) forecasts of 61 major market commentators (the majority of them quite famous in the financial community) and posted them in its “Guru Grades” report. This report covered some 5,000 forecasts, tabulating the percentage of times the forecasts were correct. The Gurus’ individual accuracy levels range from 23 percent to 65 percent, with an overall average of 47 percent. CXO concludes, “In summary, stock market experts as a group do not reliably outguess the market. Some experts, though, may be better than others.” It also emphasizes, “Many seasoned investors/traders understand that stock market gurus are, by and large, self-promoting and unable to provide accurate financial market forecasts and winning trades with significant reliability.” (For more information, including “guru” names, google: “cxo+guru grades).
It is truly unfortunate, perhaps even bizarre, that what the financial industry peddles––the perceptions that well known market gurus have the magical ability to predict the market; that the average investor, sometimes heeding the blandishments of these same financial gurus can outpace the market indexes; and that managers of actively managed mutual funds can consistently do the same. Although commonly accepted, by naïve investors, these are actually pseudo precepts with no basis in fact.
Over the years, empirical evidence proves that the average investor can't beat the Street, even with lots of professional help. Although investment pros have winning streaks, very few have proven their ability to consistently outperform the stock and bond indexes over a long period of time. The savvier investor is finally awakening to the fact that passive investing, in the form of Index Funds, and more recently, Exchange Traded Funds, have beaten the Wall Street gurus for most of the past decade. OK, I know you’ve heard this song before, in fact many times in this column. So, what’s new?
About three months ago, a story in The New York Times catapulted a new self published book onto the pages of a late December issue of Forbes that stated the book is “flying off of the Amazon cybershelves. The book zoomed to the top of the most e-mailed list at The New York Times the weekend after it was published in late November.” The book’s original printing of 20,000 sold out almost immediately, and an additional 120,000 printing was announced. This is remarkable for a book of only 80 pages (66 pages of actual text) that can be easily read in one hour. In January it was announced that the popularity of the book induced a division of a large, well-known publisher (Hachette Group) to acquire world rights to the book. (It will be available in hard cover form by the time you read this.)
The prologue to the book reads as follows: “Wall Street brokers and active money managers use your relative lack of Investment expertise to their benefit…not yours. The financial press uses your inclination to be afraid during falling markets and confident during rising markets, to its benefit…not yours. The record shows that our elected representatives, once trusted rating agencies, and government regulators have placed their own interests first…not yours. None of these parties has demonstrated an understanding of what you are about to read in this book. Its time for you to put yourself first and take charge of your investment future. It will be simpler than you think.”
One of the co-authors, Gordon S. Murray is the 25-year veteran of Wall Street who wrote the above quote. What could have compelled him, a 25-year veteran of Wall Street, who held institutional sales and senior management positions in such renowned organizations (well, formerly renowned anyway) as Goldman Sachs, Lehman Brothers, and Credit Suisse First Boston, to castigate those involved in the investment process in the diatribe quoted above?
When Mr. Murray retired about nine years ago, he realized that despite his intimate experience as a Wall Street professional, he was not satisfied with the way he was managing his own portfolio. After spending most of his professional life trying to beat the market he recognized he could not do so. As a result, he turned to Daniel C. Goldie, a former tennis professional (he beat Jimmy Connors for the Wimbledon quarterfinals in 1989 but then lost to Ivan Lendl), who has been named by Barron’s as one of the top 100 independent financial advisors in the United States. Mr. Goldie is a fee only money manager who works closely with Dimensional Financial Advisors (DFA), a highly respected, venerated management and index fund provider that has taken on an almost cult-like reputation in the financial field. After working with Mr. Goldie for about a year, Mr. Murray was so impressed, he joined DFA as a consultant where he worked for eight years. (For more on DFA funds, go to dfaus.com/strategies/performance).
The book is titled, The Investment Answer: Learn To Mange Your Money & Protect Your Financial Future. Helping to publicize and stimulate interest in the book is the unfortunate fact that Mr. Murray discovered he was dying from an incurable brain tumor. Having expressed an interest in writing a book about his investment experiences, and to leave it as a legacy to future investors, Mr. Goldie encouraged him to do so by agreeing to co-author it with him.
In just 66 pages, Murray describes his investment philosophy, one that emphasizes the futility of stock picking, timing, and speculation. He fully supports the classic concepts of asset allocation, controlling portfolio risk, broad diversification, containing costs, and remaining invested –– nothing new here.
What is different is that the book is divided into just five separate chapters, each answering a specific and critical question. The book is written in everyday language, simple (and quick) to read, and is easily understood.
The first chapter however, breaks somewhat from the usual do-it-yourself investment theory. Murray suggests that investors should use a financial advisor, one however that not only abides by Murray’s principles but is also a “fee only” advisor, and equally important, one who is legally required to act as a “fiduciary.” That means he is required by law to put your interests ahead of his own. (Stockbrokers do not have that requirement). To help select a good one, there is a section on “How to select a fee only advisor.”
The second chapter covers “The Asset Allocation Decision.” The book states emphatically that “the primary determinate of your portfolio performance is not what Wall Street brokers and the financial press would have you believe –– that market timing, successful stock and bond picking, and finding the next top performing manager or mutual fund (or all of the above) is the answer.” It states, “It is important to understand that the primary driver of investment returns is risk, specifically the riskiness of and the relationship between the asset classes you use in your portfolio and how you allocate your investment dollars among them.”
The third chapter deals with another classic decision, that of diversification. The benefits of a fully diversified portfolio are described.
Chapter four covers perhaps the most controversial aspect of investing, choosing between an active manager and a passive manager. As described in the book (and in the opening paragraphs of this article) the average active manager rarely ever beats the market indexes. A graph in the book shows that for the period of 2005 through 2009, in six of seven major equity fund categories, a minimum of 60 percent to a maximum of 90 percent of active managers failed to outperform the appropriate index. Only Small Cap International managers beat the index by a whopping 73 percent. To the individual investor who manages his own portfolio, or to the average investor who uses some form of financial advisor, this should provide a cautionary tale.
Chapter five discusses the desirability of rebalancing a portfolio. Once a target asset allocation has been established, every so often, perhaps once a year, assets should be rebalanced back to the target percentages.
The book is a worthwhile addition to any investment bookshelf, especially since it is available in paperback at about $10 on Amazon. Of course if you are a purist, you may go back to reading sheep’s entrails, but remember, despite the myths about the Oracle of Delphi, only the Oracle of Omaha (Warren Buffett) is the real thing.
Gordon S. Murray died at the age of 60 on January 15 th, 2011.