A broker-turned-Boglehead offers insights into fees, behavioral biases, and the ugly side of the wealth management business.
Rick Ferri has gained a loyal following as a vocal opponent of questionable and unethical antics in the wealth management business and as a champion of index investing. Since having his “aha moment” while reading a Jack Bogle book, he’s built a low-fee advisory business, authored several books of his own, and helped to grow the Bogleheads.org community. He’s also managed to write regularly on his own site, and his column is one of the few on my “must-read” list.
Our feature on the best of Josh Brown was so popular that we felt compelled to pull together the greatest hits of another favorite. Below are some of the most insightful and amusing quotes from Rick’s columns over the years, in which he’s vocally promoted indexing, offered advice on avoiding behavioral investing traps, and generally skewered the shady characters roaming through the advisory business.
Rick on Gimmicks and Shenanigans
On financial advisers:
Financial advisers lie. Not all the time, but often enough to matter. Most lies are small and amount to fudging the truth to build fame and fortune.
On likelihood of becoming a famous money manager:
Any inkling of achieving fame or fortune in the financial markets left my body a long time ago.
On alpha (and marketing):
There are three universal laws in the investment business: expected return is a function of risk, active management is a triumph of marketing, and alpha goes to the manager.
On fiduciary duties:
The number of times I have seen fiduciaries barely scrape the legal limit is profound.
On shady backtesting:
This exercised (sic) proves beyond a shadow of doubt that you CAN earn gazillions in make-believe paper profits if you know the future. In fact, using this same 20/20 strategy, I believe our nation could avoid all future military conflicts, turn trade around, get everyone back to work, balance the federal deficit, and cure cancer. Anything can be done when we know the future.
On the MoneyShow (and similar events):
The MoneyShow is a huge “investment circus” of sorts that spans three days and features continuous performances by stock-picking clowns, global asset-allocation wizards, and dozens of dressed-up gurus who think they’re psychic.
Education and experience in the investment business are secondary to a good story.
On past performance:
Past fund performance tends to stay in the past.
On smart beta:
There is only one beta, and it is the market. Everything else is marketing spin.
More on smart beta:
The very idea that investors should “expect more beta” makes no sense. It can’t happen. It’s like saying expect more than 8 ounces of water from an 8 ounce cup. It can’t be done.
One more on smart beta:
What is Super-Duper Brilliant Beta? I have no idea. It doesn’t exist. But that doesn’t mean we don’t want it to exist – and Wall Street knows it. Our quest for a perfect investment strategy gets the creative marketing minds in the industry flowing. This spawns an endless supply of spin that attempts to convince us that the fundamental link between risk and return has been broken, and that unlimited wealth awaits every investor who puts trust in their products.
On being a broker:
I realized that success in the brokerage business is more often measured by how much commission and fees a broker took in, not how well investments performed or how much clients earned. The industry was all about making money from you, not for you.
Rick on Fees
On advisor fees:
The last bastion of gluttony in the investment industry is stubbornly high financial advisor fees. It’s as though technology has passed over this business and financial advisors are getting rich from increasing profit margins.
More on fees:
There is nothing an adviser does for 1.0 percent that they can’t do for much less and still make a fair profit.
There is an alternative to Boston. It’s Malvern, Pennsylvania.
Rick on Active Management
On star fund managers:
Did you see that!? Another amazingly bright mutual fund manager burned out. After a streak of greatness, his fund’s performance went pitch black. Missed it? Just wait — they’ll (sic) be plenty more.
On medieval medicine:
Medieval medicine and active fund management have a lot in common. They both have a success rate that’s based mostly on faith rather than scientific fact.
On overused fund clichés:
I wish mutual fund companies were required to pay $1 toward the national debt every time one of their representatives said their company’s goal is to participate in the market upside while preserving capital on the downside. The deficit would be eliminated in a year.
Rick on Investor (Mis)Behavior
On bear market investing:
Here are my suggestions for dealing with this bear market:
1. Go for a walk and take the dog. If you don’t have a dog, borrow one.
2. See a dumb movie. Have you seen The Hangover Part II? That’s a good one to watch when you want to become brain dead. It will make you feel better, even though the title may remind you of what it’s like to be an equity investor these days.
3. Go out for a nice meal. Perhaps to a nice Italian restaurant. Unfortunately for me, where I live in Central Texas there aren’t many good Italian restaurants. Split a good bottle of wine with your date. I like Pinot Noir, but you may prefer Chianti or Merlot.
4. Have a long conversation with your spouse or significant other about where you’re going on your next vacation. Never mind that you have less money to go, just have the conversation anyway. Watch the Travel Channel or House Hunters International over the next few days. Stay away from Jim Cramer’s Mad Money show and other financial related programs.
On feeling overwhelmed by markets:
People are constantly trying to convince you that the financial markets are a force to be reckoned with and that you need expensive help and complicated solutions. That’s not true. The markets are not the problem, the markets are the answer.
On bad investor behavior:
Seeking financial advice is bad for your wealth.
On financial noise:
One of the keys to investment success is to avoid the noise. Investment noise is the constant drumbeat of extraneous information that we’re all subjected to day in and day out. It comes to us via the financial press, the internet and even in the workplace.
On market volatility:
There’s nothing like good market volatility. It makes me sleep well at night. Plunging prices, several days of bad news, it makes me all smiles.
On building a portfolio:
The problem with many portfolios is that too much time is spent trying to decorate a failed strategy rather than following a successful recipe from the start.
On investor anxiety:
My thesis is that many people have difficulty investing in the stock market because they suffer an anxiety similar to the fear of flying. It’s a fear that something bad will happen that has a very low probability of happening. Statistically, investing in stocks is very safe in the long term.
On responding to the collapse in emerging markets:
Rebalance — it’s that simple. This time is not different.
Do you have what it takes to be Wall Street’s next victim? If you consider yourself to be smarter than the next investor due to your social status, education or success in an unrelated career, then watch out because you’re going to be eaten by sharks.
The optimal portfolio does exist — just like the winning Mega Millions lottery numbers exist.
On human nature:
We’re only human — and that’s not good for stock investors.
Rick on Predictions
On media predictions:
Don’t believe what you read or hear in the media about where a stock is going or where the market will be by a certain date. The people who make these predictions have no idea what prices will be in the future. They do it just for attention. Following their advice will probably make you poorer, not richer.
On guru predictions:
Guru predictions are not investment advice — they are entertainment. Treat them as such and you will be better off for it.
On TV appearances:
Don’t ask famous market gurus if you want to know where the markets are going, and don’t listen to their advice when you see them on television or hear them on the radio.
On market timing:
If you want market timing advice, try a shiny new penny. It’s more accurate than the gurus.
On networks and predictions:
But it doesn’t matter that forecasters can’t predict. The networks aren’t keeping score. Why would any producer let bad forecasting get in the way of good theater?
The more things change, the more they stay the same. There weren’t any market timing experts in the 1980s and 1990s, and there haven’t been any since. There are no experts at predicting markets — there are only experts at marketing predictions.
People can’t predict markets but markets can predict people.
Rick on Stock Picking
On investing in good companies:
Good companies make good stocks, average stocks and bad stocks. In contrast, bad companies can also make good stocks, average stocks and bad stocks. It really doesn’t make much difference. Don’t count confuse being good with being better.
On feeling smart:
A stock will either go up or down after you buy it. If it goes up, does that mean you’re smart, and if it goes down, does that mean you’re stupid? It means nothing except that you’re either lucky or unlucky. There is no skill in flipping coins.
Even More Rick Quotations
Being a gold bug is painful.
On investment conferences:
I get the odd feeling that I’m the old guy at conferences these days. I’m a black-and-white TV sitting on the shelf among hundreds of brand new LED LCD flat screens. My voice is heard, but just for a little while. Then the next “negatively correlated alternative asset class” takes the stage.
On technical analysis:
Technical analysis reminds me of searching for gold at the end of a rainbow. Children of all ages are mesmerized by the story, yet no one to date has found a pot of gold. It’s not because gold isn’t there – it most certainly exists in the mind of every child. The problem is the rainbow; it’s circular, there is no end to it.
I’m sure there are some great insights I’ve overlooked. If you have any other favorite pieces of advice, please leave them in the comments below!
Featured image source: Bogleheads.org
About the Author: Michael Johnston
Michael Johnston is senior analyst for Fund Reference, and also serves as COO of parent company Poseidon Financial. His investment expertise has been featured in The Wall Street Journal, Barron’s, and USA Today, among other publications. He resides in Chicago.