Tough Job: 5% of Active Investment Managers Will Add Value

alpha200People always argue about how “efficient” the market truly is. Only academic, ivory-tower geeks believe in efficient markets right? My longstanding opinion is that no, markets are not 100% efficient, but it’s a tough, cutthroat world out there. Especially over the long run. Here’s yet another reminder to put in the anecdote folder.

This WJS article (paywall) talks about Jack Meyer, a superstar manager of the Harvard endowment that went on to run a high-profile hedge fund called Convexity Capital. Unfortunately, his hedge fund has lost over a billion dollars (!) of client money recently, in fact losing money every one of the last 5 straight years.

This recent bout of poor performance has altered Mr. Meyer’s worldview… of other managers (emphasis mine):

Mr. Meyer has often told smaller endowments and foundations that ask for advice to index 75% of their assets and use board connections to access world-class active managers for a sliver of their portfolios. He says he used to think 80% of active managers didn’t add value but now thinks it is closer to 95%.

Convexity is in that remaining 5%, he said.

Matt Levine of Bloomberg has a funny yet wise take on this:

I assert that 100 percent of active managers believe that only 5 percent of active managers add value, and that 100 percent of active managers believe that they are in that 5 percent, or at least say so in interviews. Otherwise why come to work every day? But that means that 95 percent of them are wrong. If you’re looking for the ones who are wrong, I guess one place to start would be among the ones who lose money five years in a row.

That 5% number reminded me of this quote from Charlie Munger of Berkshire Hathaway (source):

I think it is roughly right that the market is efficient, which makes it very hard to beat merely by being an intelligent investor. But I don’t think it’s totally efficient at all. And the difference between being totally efficient and somewhat efficient leaves an enormous opportunity for people like us to get these unusual records. It’s efficient enough, so it’s hard to have a great investment record. But it’s by no means impossible. Nor is it something that only a very few people can do. The top three or four percent of the investment management world will do fine.

As Josh Brown puts it, edges are ephemeral. Okay, so somewhere around 4 out of 100 people *whose job it is to add value*… will actually add value. Sounds like a tough job, but something to consider when they come asking for your money.

Barron’s Best Stock Brokerage Rankings 2017

barrons2017Barron’s has released their 2017 annual broker rankings. Two major themes this year are (1) trade commissions dropping overall and (2) improved mobile app trading.

To analyze 2017’s top brokers, we took a hard look at the value they offer to clients, analyzing security, mobility, and social-media features as well as the depth of their investment tools and their trading capabilities. Our primary consideration in judging these 16 firms is how they work for our readers, who are high-net-worth active investors. Price-improvement statistics are built into our Trading Experience and Technology category.

Note that part about high-net-worth active investors, which may or may not describe you. Their overall winner this year was Fidelity Investments, which barely beat out last year’s winner Interactive Brokers. Thankfully, Barron’s also supplied separate rankings for novice investors, long-term investors, and those that value in-person service:

Top 5 Brokers for Novice Investors

  1. TD Ameritrade. Performed well in customer service & education, portfolio analysis, research tools, and mobile offerings. Free real-time quotes across desktop and mobile.
  2. Fidelity
  3. Merrill Edge
  4. E-Trade
  5. Charles Schwab

Top 5 Brokers for Long-Term Investing

  1. TD Ameritrade. The only broker to provide a wide range of commission-free ETFs from various providers based on popularity instead of in-house ETFs or paid placement).
  2. Fidelity
  3. Charles Schwab
  4. Merrill Edge
  5. E-Trade

Top 5 Brokers for In-Person Service

  1. Merrill Edge. This is mostly about physical branches, and Merrill Edge is technically Bank of America.
  2. Charles Schwab
  3. Fidelity
  4. TD Ameritrade
  5. E-Trade

If you really want to get into the details, another handy feature is Barron’s huge comparison chart with data from all the brokers surveyed. As in past years, Vanguard declined to participate in the survey.

Quick commentary. I agree that TD Ameritrade is good for long-term investors who want to use an independent brokerage. They combine a full brokerage feature set with a list of 101 commission-free ETFs based on overall popularity (which means they are the ETFs you’d actually want to buy).

There was no mention of the Robinhood free trading app. Does the lack of any competing free trading apps indicate that this business model isn’t viable?

I keep most of my long-term assets directly at Vanguard, while my individual stock trades are done through Merrill Edge. I’m happy with them so far. If you have $50,000 in assets across Merrill Lynch, Merrill Edge, and Bank of America accounts, you get 30 free trades per month. That’s already more trades than I need, but $100k in combined assets gets you 100 free trades per month.

Fundrise eREIT Quarterly Liquidity Details and Redemption Process

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I've been putting some side money into crowdfunded real-estate investments - see here and here - and I am now closing out my Fundrise eREIT investment. An important difference between most of these private real estate investments and … [Read the rest]

Buy, Hold, Rebalance a Globally-Diversified Portfolio 2017

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When I think about it, I am impressed with how different 2017 feels compared to when I started seriously learning about investing in 2003. Instead of only reading about it in few books mostly read by finance nerds, nowadays nearly every … [Read the rest]

Callan Investment Returns Ranked by Asset Class 1997-2017

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We've all been told that past performance is no guarantee of future returns, but it's still hard to buy an investment that has been performing poorly. We need to remember the historical power of diversification and that even though something may … [Read the rest]

Apple iWork Suite, iMovie, and GarageBand Now Free on Mac and iOS

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If you have an older Mac OS or iOS device, it may be nice to know that Apple has made their iWork productivity suite, iMovie, and GarageBand apps free to download for all users. These apps come free with new hardware, but users with old hardware had … [Read the rest]

Early Retirement Portfolio Income, 2017 Q1 Update

While I understand the arguments for a "total return" approach, I also appreciate the behavioral reasons why living off income while keeping your ownership stake is desirable. The analogy I fall back on is owning an investment property that … [Read the rest]

Early Retirement Portfolio Asset Allocation, 2017 First Quarter Update

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Here is an update on my investment portfolio holdings after the first quarter 2017. This includes tax-deferred accounts like 401ks, IRAs, and taxable brokerage holdings, but excludes things like our primary home, cash reserves, and a few other side … [Read the rest]

Simple Portfolio Rebalancing Spreadsheet Template (Google Drive)

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Updated. Automated portfolio management services like Wealthfront and Betterment will help you manage a diversified portfolio of low-cost index funds for a fee. While I understand their appeal for those that wish to outsource that task, I choose … [Read the rest]

Savings I Bonds May 2017 Update: 1.98% Inflation Rate

Savings I Bonds are a low-risk investment backed by the US Treasury that pay out a variable interest rate linked to inflation. You could own them as a replacement for cash reserves (they are liquid after 12 months) or bonds in your portfolio. New … [Read the rest]

Amazon Coupons: $10 off $50 Warehouse, $15 off $40 for Amazon Student

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Here are a couple of quick Amazon promotions before I sign off for the weekend: Amazon Warehouse Deals $10 off $50. Get $10 off a $50+ purchase at Amazon Warehouse with coupon code EARTH10. This is where Amazon sells their open-box and pre-owned … [Read the rest]

E-File Federal and State Tax Extension Online For Free (Updated 2017)

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Updated for 2017. This year, the deadline for federal tax filing is Tuesday, April 18th, 2017. If you file for an extension, you can extend the time allowed to file your return by six months to Monday, October 16, 2017. (It does not extend the time … [Read the rest]