It is hard to watch Bloomberg or BNN without laughing at the lack of financial expertise among the guests

Talking heads keep promoting trading, making clients poorer

I watch very little TV and usually confine that to watching BNN for a few hours during the days when markets are open and there is an expected news event. BNN Bloomerg invites industry “experts” to promote “hot picks” and “top picks” and review past “performance”. The whole show is designed to fabricate the narrative that with the right “advisor” investors can “outperform” the market if only they can choose stocks that are “likely to rise” in trading price. BNN ignores the reality that secondary trading creates no value and, as a class, traders in secondary markets necessarily lose money with every gain by one trader coming at the expense of a loss by another with intermediaries clipping coupons in the form of transaction fees, commissions and fees based on “assets under management” (AUM’s). Operating companies need management. Intermediaries in the secondary securities markets are “management lite” since secondary securities comprise no more and no less than fractional interests in the underlying companies where the real wealth is created and sometimes lost.

Eugene Fama famously claimed the in an efficient market no trader can systematically outperform the market over any extended period, winning a Nobel prize for his now legendary theory. Business corporations on average earn a higher rate of return on capital than the providers of that capital - all investors as a class - earn on those investments. That paradox is explained by the reality that investors as a class worldwide pay billions to “wealth managers” each of whom claims some special skill in selecting stocks that “will go up” in trading price and avoiding those that “will fall”.

In this Alice in Wonderland, the financial services industry has created the illusion that investors benefit from higher stock prices when it is tautalogical that they benefit from lower stock prices. A higher price for the same stream of income compels a lower return to the business owners but a higher fee structure for those paid a percentage of AUM. Pay more, get less. A classic “bait and switch” inflicted on the investing public by trading institutions, banks and regulators who claim to to be “helping people manage their money”, for a fee of course.

The guests on BNN include some very fine investors and some charlatans. The charlatans are always drawing lines on charts in red claiming (with about as much success as astrology) that their squiggly lines, Bollinger bands, “head and shoulders” formations, and “double tops” or “double bottoms” have predictive validity and those who claim some insight into “market trends”. They often equivocate between client money and their own, saying “we bought into . . .” or “we got out” at a certain price or time. Who is the we? It is not their money, and they didn’t buy in or get out of anything, except maybe a larger house or a new BMW paid for by their “clients”.

I set out to give my daughter a gift of some shares today, and to do so I was compelled to attend at the offices of an “advisor” to provide a witnessed declaration authorizing the advisor’s firm to accept my instructions to transfer shares. The advisor then told me to execute the transfer I had to call one of the firm’s traders to give my instructions and that she had no ability to make the transfer on my behalf. At age 78, I don’t have much time to waste since my days are numbered according to actuaries. But in this case, what I should be able to do in nanoseconds takes hours and effort. Those hours are hours for which “advisors” are paid, and investors ultimately pay them since their compensation comes from the fees, commissions and percentages of AUM their employers receive at investors’ expense. Intermediaries not only offer little value, they are cumbersome and inefficient and costly.

Investors would be better off if the financial intermediaries limited themselves to advising investors which securities comprises interests in profitable companies that were likely to grow in line with the economy and “advised” them to buy and hold and ignore short term fluctuations in trading prices.

Hard data exposes reality. On January 1, 2000 the S&P 500 stood at 2,562 and today it is 4,221. The continuously compounded rate of return in that 22.5 year period adjusted for inflation is 2.2%. (ln(4221/2562)/22.5 = 2.2%) The average management expense ratio for “managed money” in that period is about 1-2%. Basically, investors cede over one third of the profits the companies they invest in to the financial interediaries who pretend they can “outperform”. That is why there are far more “money manager” billionaires than billionaires among their clients.

When advisors offer to “help” you manage money, you become the financial product, not the client.