The Great Myth in the Financial Services Industry

JFK’s 1962 commencement speech at Yale was special. 

Here is a quote from it I find particularly interesting:

“For the great enemy of truth is very often not the lie -- deliberate, contrived and dishonest -- but the myth -- persistent, persuasive, and unrealistic. Too often we hold fast to the clichés of our forebears. We subject all facts to a prefabricated set of interpretations. We enjoy the comfort of opinion without the discomfort of thought.”

Even though I’m reasonably confident he’s not, it seems like JFK is directing these lines straight at the investment advisory and financial services world. Let’s get right to it. What is the “myth” in this industry?

The myth is that professional money management uses skill to consistently identify opportunities to deliver value to clients by identifying—and then buying or selling—mispriced investments at just the right time. 

There are a whole lot of reasons why this is a myth but let’s hone in on the most powerful. The operative word is SKILL! Here’s the ironic part. It isn’t that there’s not enough skill in this industry; it’s actually the opposite in that there’s an abundance. When all this collective brainpower is combined it becomes “the market.” This means that consistently and repeatedly performing better than the market requires the investment manager to be consistently and repeatedly better than the best and brightest. Let me put it simply—this isn’t going to happen no matter what a glitzy marketing campaign might have you believe. Read the fine print in all ads for financial products! Why do you think it’s in “fine print?”

Now let’s carefully breakdown the three adjectives JFK uses:

• Persistent. Without a doubt the industry is persistent in hyping superior performance when present. Why wouldn’t it be? If financial firms can make more money in management fees convincing people of what they have already predisposed—the unique skills of their firms deliver results. Hmmm, I wonder what role old-fashioned luck might have played?—they have effectively created a vicious cycle (to the consumer) of enviable profitability (for the firm). Rinse and repeat!
• Persuasive. “A well-managed total stock market index fund has no chance of ever beating the market.” Yup, that’s true. Excellent pitch. “In fact, after expenses it’s sure to underperform the market.” Right again. “What good are these models of mediocrity?” We now ask ourselves. Is this what you’re looking for in terms of a great investment? Do you see what I mean by persuasive? Just imagine these logic-manipulated lines in the hands of a skilled salesperson. What chance does the non-professional investor have to refute them? Put a big check in the great myth’s column under “persuasiveness.”
• Unrealistic. If a stock mutual fund could consistently and continually beat the market based on management’s superior skills, why would the fund’s owners be particularly concerned with earning a relatively paltry 1% or 2% a year profit for managing OPM (Other People’s Money)? Surely they could find better ways to raise capital to invest making their firms far more profitable. Does this make any sense? Place another next check to “unrealistic”.

Now take a look at the last sentence of the quote, “We enjoy the comfort of opinion without the discomfort of thought.” I would argue that in the investment management and financial services industry the “comfort of opinion” notion alludes to the idea that professionals know more than non-professionals about where markets are headed and therefore rightfully deserve to be compensated for this prescience. They don’t!

The great myth continues; perpetuated largely by the industry itself that has plenty to gain from those who shy away from the “discomfort of thought.”

JFK has been gone a long time but so many of his words will live forever. Smart investors will always remember these words from 1962 too.

At Fox Financial we relish in the “comfort of thought” and will happily explain to you in plain English why we believe the faster you abandon belief in the financial service industry’s great myth, the better off your nest egg will be. To learn more about how Fox Financial can help you, we invite you to contact us today.