Forget Active vs. Passive; say a prayer for the mavericks.
Cults, and cult leaders, can be found wherever there are people. The famous ones end in disaster: David Koresh and the Branch Davidians led to the Siege of Waco and 76 deaths; Jim Jones persuaded over 900 followers to drink poisoned Kool Aid in 1978; most tragic of all, Scientology convinced John Travolta to make 'Battlefield Earth'. Some cinema goers may never recover.
All cults have a Messianic figure at the helm: charismatic, mysterious, focused on higher things and privy to arcane secrets.
Fund Managers and Cult Leaders
There are some disturbing parallels between cult leaders and fund managers. Just look at a typical advert for a 'star' manager: the serious, yet fatherly, expression; the air of a chess grandmaster interrupted in mid battle; the black and white photography making the man (and it is nearly always a man) seem like a demi-god armed with ancient wisdom, sent to Earth to redeem you, the poor sinner, the unsaved private investor.
Cult leaders gather their followers by offering a higher meaning to life; a narrative arc for existence; a victory over the mundane grind of human experience. Fund managers work in the same way: they offer investors something more than mere exposure to a basket of shares.
They offer the prospect of victory against the market and membership of an enlightened elite. "Follow me, child, and you will be one of the chosen. That'll be 5% upfront and 1.5% a year."
The Role of the IFA
IFAs are often the biggest recruiting sergeants for a fund manager cult. Anthony Bolton has announced his new Chinese venture, and financial advisers are already phoning their clients with the Good News: He is come, a Star in the East; a saviour in these dark times.
Never mind which shares the fund will buy, whether Chinese equity is suitable for the client's portfolio, or what the prospects are for the Chinese economy. It's Anthony Bolton! The Second Coming. See how he gazes down upon you from this poster! That's all you need to know, Mr Client. Sign there, and here's your complimentary Kool-Aid.
Is this a bad thing? Bolton's track record with Fidelity Special Situations was unarguably superb. It is a fact that a small number of fund managers successfully lead their investing flock to the land of milk and honey. But it is also a fact that most of them do not, and never will. They are false prophets offering false profits.
A 20-year chart of the UK All Companies fund sector against the FTSE All-Share tells one story and conceals another. It shows the index rising, on average, by 8.1% per annum against 6.8% per annum for the funds. The gap between the two increases gradually as each year goes by.
It's a tale of the great mass of fund managers failing to add value against the index; the story of the outliers, the exceptionally good and the exceptionally bad, is hidden by averaging.
Active versus Passive
So we come to two rival religions: the active investors, and the passive investors. True Believers and Skeptics. It's a threadbare debate, and nowhere more so than the Fool.
The atheists tell us to reject fund managers and track the market: cut costs, wait patiently, and returns will come. Logic is on their side: on average, all fund managers must produce market returns, minus charges. But the passive argument can sound just as preachy, just as fervent, as the active believers.
In the same way that Richard Dawkins has become a high priest for those who reject priests, passive investors can state their case with missionary zeal. The 'cult of the tracker' has as much blind faith at its heart as the cult of the deified fund manager.
And then we come to the mavericks. They aren't taken in by sermons from either side. They follow their own, private credo of stockpicking. They may, quietly, keep a small shrine to Buffet, or Graham, or Dodd in their office; but they follow no man and have no holy book. Their only faith is in themselves and their own destiny. They answer to no shareholders, and have only their own money at stake.
Perhaps active investing, whether through a highly paid pseudo-guru or as a solo effort, is a waste of time and money. Perhaps.
But the drive to be exceptional is not. Who wants a world where people bow down, not to skill, guts and genius, but to maths, logic and defeatism? Who wants to meekly accept life's median return? It is striving for the unlikely that makes men into gods. Many of the great human achievements have been dragged to life by those who said "it probably won't work, but let's do it anyway".
Who is Right?
So I leave theology to the experts: Active and Passive will wage their sectarian battle for as long as there are markets to trade. There will probably never be an outright winner. But away from the carnage, verbiage and sheer garbage of the investment business a quiet breed of investor will continue to thrive.
They are skeptical enough to reject all of the cults, but faithful enough to believe in the possibility of personal triumph through skill and endeavour.
Dear Fool, the markets belong to you.
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