Follow the Money

Hedge funds per CarlHal Holbrook had a wonderful supporting role in the Watergate saga All the President’s Men, a 1976 Alan J. Pakula film based upon the book of that name by Pulitzer Prize winning reporters Bob Woodward and Carl Bernstein of The Washington Post. Holbrook played the conflicted, chain-smoking, trench-coated, shadowy source known only as “Deep Throat” (over 30 years later revealed to have been senior FBI-man Mark Felt). Woodward’s meeting with his source when the investigation had bogged down is a terrific scene.

Sadly, Holbrook’s iconic line – “Follow the money” – was never spoken in real life and doesn’t appear in the book or in any Watergate reporting. Still, Woodward insists that the quote captures the essence of what Felt was telling him. “It all condensed down to that,” Woodward says. More importantly, it provides a profound truth. Indeed, when asked 25 years later on ”Meet the Press” what the lasting legacy of Watergate was, legendary Post editor Ben Bradlee replied with the words of screenwriter William Goldman, if not Mark Felt: ”Follow the money.” It provides good guidance for reporters generally and really good guidance when one is looking at the financial advice business.

With this important touchstone at the forefront, it’s crucial to recall that the financial advice business generally builds products and portfolios for marketing purposes rather than investment purposes. For the industry as a whole, “results” relate to sales far more than to what investor-clients end up getting. Accordingly, the idea is to play to people’s hopes, fears and prejudices rather than speak the (less marketable) truth. Moreover, if something can be positioned as new, novel or complex — and thus offering a plausible justification for a high fee — so much the better.
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The Charley Ellis Challenge

Charles D, Ellis is a really smart guy — retired academic, founder of Greenwich Associates, former Investment Committee Chair of the Yale Endowment, and the author fifteen books, including two of particular import.  These two books are Winning the Loser’s Game: Timeless Strategies for Successful Investing and The Elements of Investing (with Princeton’s Burton G. Malkiel). 

Ellis sat for an interview with Consuelo Mack recently (it may be seen here).  As most of my audience will know, Ellis is a proponent of index investing for individuals.  Over the course of the interview, Ellis makes a number of interesting and provocative points.

  • For individuals, everything begins with saving, and the earlier we start, the better (because “catching up is hard and keeps getting harder, the longer you wait).
  • A few great investors (like Warren Buffett and David Swensen) can beat the market, but most don’t, which is why indexing is smart policy.
  • The competition among the hoards of industrious and talented investors to outperform is vigorous, effectively cancelling each other out.
  • A few investment firms have clients’ interests as central (such as the Capital Group, Wellington, T, Rowe Price, American Funds and Vanguard, but most are simply “commercial” and do not.
  • Investors should diversify as broadly and deeply as possible.
  • Commodities offer no economic productivity, making investment in them entirely speculative and to be avoided generally.
  • A key to investing is simply to avoid mistakes, like panic selling and greedy buying (but doing so isn’t simple).
  • Investors need accountability to someone who knows and cares about them.
  • Individual investors need to “stabilize” their portfolios as they get older, usually by owning more high quality bonds.

The interview is well worth your careful attention.  In essence, Ellis is making the case for careful asset allocation using low-cost index funds with regular re-balancing and adjustments as needed to keep the portfolio in line with one’s risk tolerance.  This carefully articulated viewpoint leads to my statement of what I call “the Charley Ellis Challenge” — to the extent that you do not agree with or follow his advice, why don’t you and upon what evidence do you rely for not doing so?

Discuss.