
Where Are the Customers' Yachts? Or a Good Hard Look at Wall Street (2012) - Tomte
https://www.ifa.com/articles/hard_look_wall_street/
======
dsacco
This article seems to be a short rehashing of material from the titular book.
In that regard it's mostly content marketing for Index Fund Advisors Advisors,
a firm with a bias against expensive active management (but hey, it's not
exactly an unjustified bias these days :). I do think it raises a good point,
just as the book did - for the most part, customers do not get rich in the
markets with active management, despite how highly paid many professionals in
the industry are.

It's a little enthusiastic in its point about there being no evidence that
active management can be successful, even in the paper it cites. One of the
difficulties with points against active management from research papers or
e.g. Buffett's public bet is that the entire industry as a whole is often
assessed, not just the outliers consistently capable of beating the market.
The firms that can consistently beat the market exist in an entirely different
strata from the rest. There are fair arguments against their ability to
perform consistently, but a more honest analysis would follow the relative few
that have evidenced success in the past. Otherwise they conflate "most active
managers are not successful" with "the industry is based on a fundamental
fallacy."

It's probably easy to read this and overlook the fact that while rare, there
are indeed active managers who make their clients far richer than they are
when they start, sometimes extremely so. These managers and their firms more
or less quickly become richer than the dreams of avarice themselves, along
with all the celebrity that comes with. It's not hard to find people who beat
the market consistently - the real magic is finding them before everyone else
does and prices you out of investing with them.

Finally, for the most part truly successful active managers work with
institutional investors, for whom "where are their yachts?" is not necessarily
a coherent question. The customers of hedge funds who become very rich are not
necessarily going to indicate this in a visible way. The legitimate argument
raised by the article and the corresponding book should probably have a more
modern question used to convey its point.

~~~
FabHK
I'd agree that there are some investment opportunities that can "beat the
market".

But typically, the average retail investor doesn't get access to them. There
are some hedge funds or VC/PE firms that might have alpha, active management
skills, the golden touch (or just such a reputation that they get the best
deals), but they tend to be closed by now or require huge investments. If
you're a Goldman partner, you'll come across some excellent investment
opportunities.

Furthermore, as you highlight, just like it is difficult to evaluate single
stocks ex ante, it is difficult to evaluate active managers ex ante. Thus, as
their expected contribution is negative, I think the advice to most retail
investors to go for cheap, passive funds is sound.

~~~
moxious
Cheap passive funds are good advice if you want to maximize your return in the
most frequent outcomes, but it ignores some powerful psychological stuff
that's real and in play.

An index fund is like a bus: everyone is going to the same place, and you're
not driving. Many investors just can't deal with that, and may rationally and
happily take bigger risks seeking excess returns, even if they know the odds
are against them.

~~~
FabHK
That's a good point, though I would think you can handle a lot of that with
the macro asset allocation (shares, bonds, alternative; domestic,
international; etc.), which is still something one needs to do and look at
every year or so.

~~~
SirLJ
The name of the game is proper risk management and a lot of work to find and
setup a winning strategy that will work for you...

------
arjie
I suppose a smart-ass response is "in the Bahamas, because we make them so
much money".

In any case, excellent analogy there to illustrate the random walk.

Now, the article alludes to the idea that successful active management is a
fiction. If this is the case, what's the currently most plausible hypothesis
for why active fund management is so attractive? Somehow fund managers have
sold themselves as Gene Sarazens, and supposedly there is evidence that they
are not. And the evidence is strong. And yet these not-Genes successfully sell
their services. How?

~~~
wtvanhest
There are so many complex things at play here, but...

1) there are people who work for major institutional investors (think pension
funds) who are paid very well to pick managers. If they just pick beta funds,
it is hard for them to justify their salaries.

2) not all market participants are interested in 'beating markets'. Many are
interested in matching the liabilities to their assets or accomplishing
another goal.

3) I believe that there are some managers that are much better than other
managers for at least short times. I do not believr i know how to pick them,
but the idea that it may be possible may make this bet worth it.

4) If there are good managers, the investment world is winner take all and
they will accumulate a lot of assets.

~~~
user5994461
> 4) If there are good managers, the investment world is winner take all and
> they will accumulate a lot of assets.

Unlikely. Any winning strategy is limited by the funds you have and the
liquidity available in the markets.

~~~
wtvanhest
Funds flow to winning strategies in the investment world so a repeatable
strategy will grow their assets very very quickly. Liquidity of markets is the
limiting factor.

~~~
user5994461
In the context of multi-billion dollars edge funds and investment banks, they
always have money to play with.

For everyone else, it's a high barrier to entry. An edge is of limited value
if you don't have the xx M$ to risk on it.

------
SirLJ
Why don’t you test it yourself? Theses days you can find quant historical data
on ebay for less than $100 bucks... You can backtest passive investing with
ETFs, trend following, momentum, tech stocks, value investing, technical
analysis... you name it... and who knows maybe you’ll turn to be the next
Warren Buffett or the next big hedge fund quant genius ;-)

~~~
ktRolster
This is what I found: [http://www.ebay.com/itm/1912-VALUATIONS-MONEY-BONDS-
STOCKS-H...](http://www.ebay.com/itm/1912-VALUATIONS-MONEY-BONDS-STOCKS-
HISTORICAL-FINANCIAL-DATA-JS-BACHE-CO-/222419263743)

I think I need something a little more modern :)

~~~
SirLJ
This is the one I got: [http://www.ebay.com/itm/20-years-stock-market-
exchange-histo...](http://www.ebay.com/itm/20-years-stock-market-exchange-
historical-data-equity-price-quant-history-quotes-/122367974379)

Good luck and don’t forget to post the results :-)

------
paulpauper
_Once in the dear dead days beyond recall, an out-of-town visitor was being
shown the wonders of the New York financial district. When the party arrived
at the Battery, one of his guides indicated some handsome ships riding at
anchor. He said,

“Look, those are the bankers’ and brokers’ yachts.”

“Where are the customers’ yachts?” asked the naïve visitor._

I bought Air Jordans. Where is my multi-million dollar NBA contract? I bought
golf clubs...why am I not as rich as Tiger Woods? That is literally the same
logic. Brokers provide a service to clients by managing money. Some do a
better job than others. Whether or not such services are worth the fees is a
matter of debate though. But expecting the recipients of a service to be as
wealthy as whoever is providing them is unrealistic.

------
pjc50
Fred Schwed's book is great, and surprisingly relevant to the modern financial
world despite being written in 1940.

