The Broker Did What??????????????

DIY Investor is an unabashed fan of Dan Solin. I  just want that out front. In fact, when I detect a person is searching for a DIY investment philosophy or even when I feel they would benefit from considering a different approach to investing, I strongly recommend Solin's The Smartest Investment Book You'll Ever Read.  The book can be read in a weekend and presents the case for low-cost indexing. For those who don't like to read, DIY Investor directs them to Solin's talk on YouTube as part of Google's author series.

Solin stands out from the "how to invest" crowd because he is a securities arbitration lawyer. He has seen first hand the portfolios and lives destroyed by unscrupulous brokers.

One of the cases he has come across  is presented in this post from Arianna Capital Management. The Salomon Smith Barney broker took a conservative portfolio of muni bonds and used it as collateral to buy stock on margin. In the process, he lost over $2.0 million for the client. The interesting point is that, for an account that had an average value of $3.6 million, "...the brokerage firm gained $1.3 million (in commissions and margin interest) for “managing” this portfolio."  Although admittedly an extreme case, Solin points out this is how wealth is transferred from clients to brokers.

It is also well worth noting that the $1.3 million portfolio would have been worth in excess of $5 million, on a conservative estimate, if it had been managed with low-cost indexed funds.

Evidence For Low Cost/Indexed Investing

What's the evidence for low cost/indexed investing? Good question. There is lots and it is varied. We'll eventually look at most of it in one form or another in this blog. But one type I'd like to look at here is less academic and more real world. It looks at what institutions do. It mirrors my experience as an advisor for the multi-billion dollar multi-employer United Mine Workers Health & Retirement Funds in Washington D.C. during the 1980s. There we did a lot of work to try to identify the "best of the best". Consultants brought us the best managers in terms of outperforming the S&P 500. We chose the best 3. Guess what? After 5 years, their return was below or close to the S&P 500 when looked at in the aggregate. This got us to move into low cost indexing.

When you look into institutions, you realize they have large staffs of analysts to advise the Trustees. You see that they spend most of their time focused on how they can enhance investment returns. They utilize the top consultants in the investment arena. Clearly, their actions speak loudly.

So what do institutions do? Dan Solin, on page 100 of "The Smartest Investment Book You'll Ever Read", lists the following as having "over $50 billion invested to achieve market returns:

-California Public Employees Retirement System
-New York State Common
-New York State Teachers
-Florida State Board
-City of San Diego
-State of Maryland
-State of Utah
-Los Angeles City Employees Retirement Association

The list continues with educational institutions and other organization types, but you get the message.