“Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees.” Warren Buffett 

I recently quit Wall Street to help improve the investment industry.  I do this through promoting intelligent investing in the form of low-cost indexing – google it, literally.  Despite the emphasis Wall Street places on active investing strategies – stock picking, mutual funds, etc. – the arguments in favor of low-cost indexing have been made over and over and over.  In fact, the arguments are so simple, factual, and conclusive that they can be condensed into a handful of bullets:

• Active investors fail:  Stock picking is a fool’s errand and few mutual funds beat the market.  Over the past 20 years, more than 80% of active investors FAILED to beat the market.

• Asset allocation matters:  Active investors fail because gambling on the direction of the market (market timing) and stock picking (security selection) don’t work and don’t matter.  Instead asset allocation accounts for 90% of the variability in returns.

• Distinguishing luck from skill:  At the very least it’s difficult to distinguish luck from skill – see Fama and French.  As Michael Lewis once wrote, “If millions of monkeys throw a bunch of darts at the Wall Street Journal, at least one monkey would pick a group of winning stocks.”

• Indexing is not dismissive of active managers:  The market isn’t efficient and exceptional investors exist (e.g. Bruce  Berkowitz).  Unfortunately, it’s near impossible to systematically take advantage of inefficiency and to identify and bet on exceptional investors over the long-run (e.g. Bill Miller).

• The only predictor of investment performance is low-cost.  It’s a fact. Even Morningstar concludes that low fees are a better predictor of performance than its own ratings.

• It’s not a “stock picker’s market”:  Poor U.S. index performance over the last decade doesn’t imply it’s a stock picker’s market – the index still beat almost all stock pickers.  Instead it implies that global asset allocation matters most.

Unfortunately, despite the conclusive arguments in their favor, index fund assets only account for around 5% of mutual fund assets.  As Charles Ellis writes, “leaving almost 95 percent of assets in the hands of wealth-destroying active managers.”  Why?  Because we don’t invest; we gamble.  Improving Wall Street and the investment industry means changing this.  It’s that simple.

**ADDENDUM: To my readers in the mutual fund and alternative asset industries. I am a student of investing and am enamored by truly exceptional investors – the value school and men like David Einhorn and George Soros. My views on investing are factual and targeted at the aggregate, not you or your fund in particular. Please stop sending me emails telling me how wrong I am and telling me how much alpha you create. It’s not about you. It’s about your industry.  I’m sure you are all above average.

 

First impressions count.  In the field of communications and influence they say we only get one chance.  Today, however, I’m writing about execution and a different type of impression, a physical impression – the result of an action.

In order to make any impression – to make a dent in the universe, as I lifted from Rework – we must take action.  However well we plan an action, it is for naught until we take it.

But because the first impression counts, it can be hard to take action.  Instead, it becomes easy to stall, delaying action while ever-planning the perfect first impression.  Unfortunately, often this prevents us from making any impression at all – to paraphrase Voltaire, the perfect becomes the enemy of the good.

And without a first impression, there can be no second, third, fourth, and so on.  In this context, the first impression counts because it builds the momentum required to achieve any goal.  As Chinese philosopher Lao Tzu noted, “a journey of a thousand miles must begin with a single step.”

I’ve been researching a book for years and planning a blog for months.  In doing so, I’ve been talking my book, planning the steps, improving my writing, etc.  But when Napoleon Hill hit my inbox last week – Don’t wait. The time will never be just right – I realized I’d made the task too big and was stalling.  So, I dumbed it down and am stepping up to take action, to make a first impression.

Today 35 years ago and six weeks premature I made my first impression.  Today at least six weeks premature I’m making a different type of first impression.  In the field of communications and influence a first impression is only the first step to building rapport.  Visit again.  We’ll have more to discuss.