Dumb Money Ain’t So Dumb

By David B. Armstrong, CFA | Nov 30, 2018 | Weekly Market Commentary

I don’t normally write blogs about articles that other folks write, but in this case I must.

In Wednesday’s edition of The Wall Street Journal, the venerable Jason Zweig published an article called, “Why Charities Do Good—but Not Well—With Your Money.”

I’m a WSJ subscriber so I don’t know if this is behind a paywall, but I’ll highlight some of the article.

It starts with two NYU Professors, Sandeep Dahiya and David Yermack, reviewing some endowment returns.  Assume they are smart – I’m reasonably smart, they teach at NYU and my NYU MBA application got rejected.

The typical small endowment, with assets between $1 million and $10 million, earned an average of 4.4% annually from 2009 through 2016. The median large endowment earned 6.1%—a little better, but not much.

Worse, 70% of the large funds failed to outperform the U.S. stock market, adjusted for basic risk factors; 59% of the small endowments fell behind on the same measure.

“You could have done better just by investing in Treasurys,” Prof. Yermack said in an interview, “and that’s pretty sorry.”

Then they go on to apply some analysis.

For the smallest nonprofits, according to the new study, returns improve with proximity to the financial centers of Boston, Chicago, New York and San Francisco, presumably because some advice from nearby professionals is better than none at all.

So, it looks like getting advice was helpful.  But then there is this…

For the biggest endowments, however, “investment performance deteriorates if the fund is located closer to Wall Street or to another major financial center,” the researchers write. The closer the smart money is to the heart of the financial industry, the more susceptible it may be to “professional money managers’ sales pitches that lead to over-investment in exotic products with high fee structures,” they add.

It concludes with:

Even with those limitations, the study is a reminder of just how rare the smart money is.

In the words of Peter Lynch, former manager of the Fidelity Magellan Fund: “The smart money isn’t so smart, and the dumb money isn’t really as dumb as it thinks. Dumb money is only dumb when it listens to the smart money.”

But really, here’s my favorite part, just for emphasis…

…the more susceptible it may be to “professional money managers” sales pitches that lead to over-investment in exotic products with high fee structures…

That’s the best.  I mean…THE BEST.

I see and hear about stupid investment ideas all the time.  The fact of the matter is that there are people in my industry who get paid to sell products.  That’s why there are quotations around “professional money managers” above.  They are dirty.  The fees are disgusting and since they have no advisory responsibilities, they give zero F’s about the illiquidity, fee drag, performance or the client who buys their shit.

To punctuate my last paragraph, I’ll leave you with this picture from the Twitter account of Anthony Isola (@ATeachMoment) which shows this and a tweet that reads:

This just in! Portfolio of Champions 42% Annuities, 29% Non-Traded Reits and a separate managed account charging 2% which holds a 20% position in a Business Development Co.

 

Want to hear about a better way to manage money than using a bunch of shit?  Email me, I’d love to tell you about how Monument is leveraging new technology to offer a simple, rules-based, globally-diversified, fee-effective and tax-efficient portfolio that is shit free. Figuratively…but literally too.

Because maybe dumb money ain’t so dumb after all.

Keep looking forward,

Dave

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