Last week well known USA Today columnist John Waggoner was commenting that while mutual fund performance over the past 4 years has been good, it is his belief that (based on the fees charged) money managers should be able to give you good returns in both up and down markets. He is right regarding the fees charged by most money managers, but does he really believe that a money manager could do such a thing consistently? I hope he is not that naive!
John, if anyone had such a magical crystal ball would they really be managing a mutual fund? Why would they? They would have the secret to infinite wealth. And that is what their wisdom would be, a secret. For obvious reasons the Financial Services Industry continues to promote the idea that they can “see” the future and deliver superior returns, but they can’t. Don’t take my word for it, just look at their record. They love to compete and to show their performance relative to their peer group, but their peers are not any better than they are at forecasting the future accurately.
Investors find this hard to accept for some reason and continue to chase the dream that they will find a “money manager” who can provide them good returns without taking any risk. It was that “dream,” which Bernie Madoff exploited, to cheat people out of a few billion dollars. (I would not be surprised if Bernie is sitting in prison with a big grin on his face remembering how supposedly bright, successful people fell for it.) Bernie was guilty of fraud, plain and simple.
But is the Financial Services Industry guilty of misleading investors to believe in the “dream?” How they market their expertise may not be illegal but does that make it right? That small print at the bottom disclosing that “past performance is no guarantee of future returns,” protects them as they continue to strongly imply that past performance is a good indicator of what the investor can expect in the future. And the dream is oh so pleasant until it turns into a horrible nightmare like many experienced in 2008.
If you have capital to invest you need to stop “dreaming” and learn to accept the reality that forecasting the future accurately is not possible. Once you do, you will have taken the first step towards becoming a successful investor. My next post will give you Steps 2,3 and 4. It is really very simple!