Questions & Answers
You wouldn't hire the cheapest doctor, why buy the cheapest fund?
I don't care about anyone else, as long as my manager makes me money.
My manager has a 15-year track records that proves his worth.
I don't believe my manager is a genius, but I don't believe in throwing darts either.
Can you pick the pickerer?
You judge an orthopedic doctor by how well he heals broken bones. If you discover
an expensive doctor who heals 80 of 100 broken arms you'd hire him over the cheaper
doctor who heals 20 out of 100. But you wouldn't be surprised if, a year later, a technical advance allowed
both doctors to heal 100 out of 100 bones. Medical science creates improvements for all. For many medical
services you would pay the cheapest rate possible.
A fund manager chooses from the securities pie in which every investor shares. Some securities will do well,
others poorly. Fund managers cannot create improvements
for all. They can only get you a bigger slice of the pie.
But let's imagine a world where every fund manager picks the best stocks. The only difference you'd notice then, would
be how much their wealth increased through their fees, which would be the same amount by
which your wealth would decrease after paying them.
No one can prove that your manager can't pick the best stocks and earn his fees through
a higher return.
But if you gathered everyone into a room who
said 'I don't care about anyone else' you would discover, as hundreds of PhDs have
before you,
that as a group they did not earn higher returns.
Therefore, what you're really saying is 'I don't care about the other smart people who
don't care about fees as long as they make money', I'm even smarter.
Then why doesn't he put his money where his mouth is? Why don't managers promise to
deliver a certain return or they don't get paid? They don't for the same reason
casinos don't promise that everyone will won. Everyone doesn't.
This is a good reason.
If every fund were put into a giant no-fee index fund, every company would look to go public. Once they
were public they could rely on the index funds to hold their stocks through thick and thin.
Through stock selection, fund managers weed out bad companies and help good companies, through higher
stock prices, raise more capital.
Granted that most people who pay for active management don't do better than index funds, they
create a competitive atmosphere which is good for the public.
Such arguments are muted by the fact that active investors buy stock individually and create enough
competition in the market.
Low-fee investors would argue that they end up with higher returns because they enjoy the fruits of
competitive weeding-out that they didn't have to pay for. Instead of trying to make money in the
casino, they buy the casino itself. Over time the casino will do better than most winners
because most winners eventually hit a patch of bad luck.
Let's assume there are fund managers who can 'beat' the market. They pick the best stocks. What
gives you the expertise to pick the pickerer? Without that expertise how can you possibly pick
the pickerer who will pick the stocks that beat the other pickerers?