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Sunday, May 19, 2013

Gerard Minack's Message

There are all kinds of data and arguments supporting the low-cost, indexed approach to investing.  There are the academic studies that have examined various asset classes, time periods, investment styles, and fund flows.  There are the admonitions of highly-regarded students of the markets who have spent a lifetime studying markets, such as Bogle, Malkiel, Ellis and, yes, even Warren Buffett.  And then there are those who spent careers on the brokerage side and come to see the mistakes investors make.

Highly-regarded Morgan Stanley strategist Gerard Minack falls into this latter classification and presents what he concludes as he retires from the brokerage business in this interview forwarded to me by a client.

Investors make two mistakes according to Minack:
  •  INVESTORS BELIEVE PAST PERFORMANCE PREDICTS THE FUTURE.  This despite the ever-present disclosure that this isn't the case.  Investors read about the most successful funds, sectors, and managers and pour monies in their direction.
  • INVESTORS ARE TERRIBLE MARKET TIMERS.  Investors pour money in at market peaks and run for the hills when markets are cheap.
Minack presents graphs to support his points.

But this isn't the whole story.  Minack comes from a broker.  He points out that brokers put clients in high-cost active funds with the best recent performance that time the market, and this is harmful to investors.

As it happens, I was leafing through an industry magazine this weekend which had a feature on brokers who had done beneficial community service.  The brokers are names everyone recognizes - especially if you followed the bailout efforts in '08 and '09.  The individuals profiled helped the elderly, low-income kids, people incapacitated, etc.  No doubt their community efforts do considerable good.  And no doubt some do good on the investment side.

Still, at the same time, many brokers are siphoning off huge chunks of client's nest eggs, as Minack implies.  I know because I see the damage firsthand.  Confused potential clients hand me their statements across the table, and I see accounts with huge loads and high expense ratios.  Potential clients tell me they don't understand why their accounts are not going up, and they tell me their broker won't call them back!  And they definitely have no idea what their costs are and that there is another, much different approach.

As I leafed through the magazine, I looked closely at the pictures.  Maybe their community service satisfies their conscience, but it isn't easy to see how.

Like Minack, I guess the reason I have a number of clients is because investors just don't know.


  1. Study after study proves that indexing approach is a winner in the long term. The catch is 'long term'! People look at the phenomenal returns of the current hot stock and run towards it only to lose most of it during the next cycle. Indexing works, because it minimizes emotions out of the investing equation.

  2. I am really impressed by your blog.Thnaks for sharing.

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  3. Human nature dictates that we will always overweight immediate past experiences, while in markets, immediate past experiences are the least relevant.