After working for a few years there (albeit as a lowly programmer), I feel somewhat qualified to comment on the casino known as Wall Street. I like your somewhat accurate description of "soft money", but don't totally agree with your conclusions on investing philosophy. I've read the Random Walk book, and I've also read Warren Buffett's book on "value" investing. Most people are probably better off following your advice and sticking with an index fund, but do you realize what would happen if everyone did that? Think about it.... Warren's recommendations are very interesting.Those who are interested in learning more about Wall Street are encouraged to read "Liar's Poker" and "Nightmare on Wall Street", which both happen to be about Salomon Brothers.
-- Guru --, December 20, 1996
Hey, it's great to see someone exposing mutual funds. Very few beat the index.There is an alternative, a clever way of investing directly. Read about the Motley Fool (www.fool.com). This web site will give you the confidence and information to invest successfully.
-- Dennis Rose, June 24, 1997
Wish I'd read your page before I spent all that money on an MBA . . . Good commentary, and good advice for most investors. But a lot of people like to pick stocks. Buy and hold index investing doesn't sound exciting at a cocktail party! Much better to talk about your triumphs, and to ignore your defeats.
-- Robert Budding, March 12, 1998
You are right about Oppenheimer being a bunch of sharks. Back in my youth about four years ago I decided it would be responsible to invest my money rather than having it simply stagnate in my checking account. I figured (being an idiot) the way to do this was to visit a securities firm and ask for advice. The guy I spoke to seemed decent enough, asked a bunch of questions, and recommended I invest in five different Oppenheimer mutual funds. I did so and let the whole thing aside. Then about a year ago I landed up reading a copy of Andrew Tobias' _The Only Investment Guide You'll Ever Need_. Fired up with enthusiasm, I looked at my Oppenheimer statements to learn that, in the greatest bull market in history, these people had made me maybe 4% return in 3 years. (And the reason for this sort of thing is as Phil says---kickbacks, huge "management fees", huge advertising budgets, a constant impulse to churn stocks simply to create the illusion of business etc).There are a few morals here.
One is that Oppenheimer suck.
A more general one is almost everyone in the finance business is out to screw you, and just because they have nice offices and call themselves financial consultants does not mean that they care about you, or that they have any idea what they are doing.
The most general message is, before investing a cent, READ A BOOK. If you are going to read only one book, IMHO read the Tobias book I mentioned above.
If you refuse to read even one book, invest in a Vanguard fund; unlike Oppenheimer and friends they will try to do good by you. The Vanguard prospectuses are a joy to read, written in clear English, their web site does the job, their funds stick to what they claim in the prospectus, they constantly try to cut costs etc.
-- Maynard Handley, June 30, 1999
About shorting stock. I haven't run across a broker that would allow a client to invest the procedes from a short. Generally they want to hold it in a segregated account (where they can invest it) and pay you nothing. For large shorts (>$100,000) or good customers they will negotiate some fixed return (a low fixed rate) on the funds. If you know a broker that offers a decent return on short procedes (or lets you invest them!) I'd like to know...
-- Matthew Rochlin, September 5, 1999
I keep two quotes prominently displayed above my desk to help me out when I am stricken with a bout of "Materialism": (1) "If you would make a man happy, study not to augment his goods; but to diminish his wants."--Orestes Brownson, 1864. (2) "Being frustrated is disagreeable, but the real disasters in life begin when you get what you want."--Irving Kristol, 1983.
-- Ken O'Brien, September 7, 1999
As a guy who manages a pile of money for others (paid by clients, not commissions), Phil's overall view of the process is quite accurate and his approach is mostly correct. One exception however is the common oversight of confusing indexing with buying the S&P 500 index. There are lots of other indexes out there such as EAFE, the S&P Mid Cap 400 and the Russell 2000 that, when combined with the S&P 500 can actually serve to both increase the chances of better returns over time and reduce short term volatility (our nice way of saying "losing money").There is an old Wall Street saying "don't confuse genius with a bull market." Frank the day trader should take note.
-- Bill Middleton, August 8, 2000
Phil neglects to mention rebalancing in his article. It is not a good idea to manage your own money if you don't rebalance your portfolio on a regular basis.
-- Yi-Lun Ding, October 29, 2002
My favorite mutual fund site right now is FundAlarm . Check in and see if your fund is up to any sleazy business; the discussion board is lively with up-to-the-minute comments and links to articles.
-- W Sanders, December 2, 2003
I don't agree with you idea that to progress in life you must have rich parents.My grandfather quarreled his father and abandoned the home when he was nearly 18 (in 1918) without studies and money and with the only capability of drawing acceptabily well.
He went to the war in Africa in 1921 and came back to Spain where he married and began to work a jewel company making 3D pictures on silver (using his gift for drawing).
Soon he found himself with 4 children and not much income, so he employed his savings in buying some sheep. He would keep on working for others and the 2 or 3 sheep would be under the care of a shepperd. This shepperd would collect a comission when the animal were sold.
3 sheep made 6, 6 made 12, 12 made 24, 24, made 48, and so on.
Reached this point my grandfather left his job and settled as farmer and shepperd.
After he began with pigs and cows.
Apart from meat, he sold milk, and employed many other workers to take care of the cattle.
When the 60's reached and the economy got better, he began buying buildings:
2 buildings made 4, 4 made 8, 8 made 16, etc....
So when he died in 1986 he owned almost one whole neighbourhood of Madrid and gave many flats and buildings in inheritance to each one of his 7 children.
-- Peccata Minuta, September 19, 2006
Two additional items you might have mentioned:1. Taxes & Inflation. Long term ownership of individual stocks has a significant tax advantage over mutual fund ownership, due to tax-free compounding of capital gains. Most mutual funds distribute capital gains, as they frequently turnover portfolio holdings. This applies to index funds too. Seperately, inflation has a greater effect on eventual return than you suggest. Because stock prices rise with inflation over the long term, investors pay capital gains taxes on grossly inflated, empty profits. This is big.
2. Responsiblity for CEO's stealing from shareholders. Since management reports to the board of directors, and the BOD represents shareholders, how do they get away with it? Answer: Most shareholders use mutual funds. Mutual funds do not allow their clients to vote the shares in the funds, even though the clients own the shares. Instead, fund managers vote the shares. Guess who recently played golf with the fund manager? If you want fundamental reform of corporate management, outlaw the practice of funds voting shares. Better yet, outlaw funds altogether (fat chance).
-- Jack Neally, November 30, 2006
Regarding Michelle Bach (no 's'), a quick Google search indicates that this is where she is now: http://www.hadley-reynolds.com/michelle.htmReaders might want to direct any current Hadley-Reynolds clients they know to Philip's above story.
-- Curtis Wayne, May 11, 2007
I think the article is pretty good and comprehensive considering that it was written in 1996. But I recommend adding some newer information, specifically:(1) Vanguard's Total Stock Market tracing Wilshire 5000 is frequently preferable to S&P500, because it is more diversified and it does not buy/sell as frequently as stocks move in and out of the index.
(2) Exchange Traded Funds (ETF) are a good alternative to index mutual funds for those who do not dollar-cost-average into it.
(3) Treasury Inflation Protection Securities (TIPS) are worth considering, especially by retirees.
(4) Single Premium Immediate Annuities (SPIA) may offer a better way not to outlive one's money than a frequently recommended Safe Withdrawal Rate (SWR) scheme. (Note that these are different from variable annuities that generate huge profits to insurance agents and less value to their customers.)
These and many other topics are discussed at the Bogleheads Forum which I linked below.
-- Victoria Fineberg, July 13, 2008
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