There is a disappointing and sometimes shocking story to tell about the
financial services industry. It may be even called the industrys
dark secret. This secret was first revealed and published on March 29,
1900 by Louis Bachelier, and was followed up by hundreds of academic studies.
Unfortunately, few investors pay any attention to academics and Nobel
Laureates. This secret costs investors billions of dollars, maybe even
a trillion dollars each year. It causes many investors to lose sleep at
night and be distracted from their work during the day. It drains the
investment portfolios and retirement pension accounts of almost every
worker in America.
The dark secret
is that managers do not beat markets. In fact, markets
outperform investors by a substantial margin over long periods of time.
This 12-step program demonstrates this point and will show you how you
can obtain your optimal rate of return by matching your Risk Capacity™
to an appropriate risk exposure. That risk exposure is a portfolio of
index funds that is periodically rebalanced.
In 1985, I received a large sum of money due to the sale of the company
I co-founded. I never took the time to study how the stock market worked.
I wasnt fortunate enough to have read a little 85-page book published
that same year by Charles Ellis entitled, Investment Policy. I was completely
unaware that since 1930, academic researchers had been applying scientific
and statistical analysis to large sets of stock market data. Instead,
I turned my newly found fortune over to a major brokerage firm. This particular
firm had a stellar reputation with offices in a huge skyscraper. How could
I go wrong?
Twelve years later, I finally decided to try to understand how my investments
had performed compared to an appropriate benchmark, a process first applied
by Alfred Cowles back in 1938. As I spent months combing through book
stores and the internet, the knot in my stomach grew tighter. I finally
started asking the right questions about my risk exposure and performance.
I was distraught about what I discovered and didnt sleep well for
several nights. My lack of understanding of how markets worked cost me
a mind boggling amount of money. When comparing a risk appropriate portfolio
of index funds with what I actually achieved in my own portfolio over
the previous seventeen years, I ended up with thirty million dollars less.
I repeat, thirty million dollars less than a simple index fund portfolio.
Did I have to pay that much tuition to finally get my degree from the
University of Index Funds (UIF)?
I first wrote a twenty page letter to my broker of twelve years and moved
all of my assets into Vanguard index funds. I continued my investigation
of indexing and was led to the discovery that there was another firm that
is more academically grounded and highly
rated than Vanguard. This firm is Dimensional Fund Advisors (DFA).
I was so impressed with what DFA had created, that I started a new business
to educate and advise others on ways to optimize market rates of returns.
I developed an extensive and interactive website to educate investors.
I also wanted to put the information in print, so I wrote a
book with input from a large number of talented and creative people
mentioned in the acknowledgments.
Following my epiphany,
I spent many weeks asking my friends what they knew about the capital
markets and how much tuition they paid to UIF. The more I looked, the
more astounded I was at the dearth of relevant information and lack of
risk-adjusted performance achieved by almost everybody I knew. One morning
it occurred to me that investors just follow their innate instincts to
trade and to be fooled by randomness. In essence, they experience various
levels of addictive behaviors caused by the lure of striking it rich with
their hard earned money. The financial services industry is also addicted
to the massive profits it achieves from their clients gambling.
Therefore, they are highly motivated to continue to keep their dark secret
locked up in the mathematical formulas of the Journal of Finance or a
university text book. The secret is very safe there, because the overwhelming
majority of investors cant decode Riskese™, the language of
risk. They prefer to believe in the mystical powers of market beating
So how can investors
break these destructive patterns of investing? The same way thirty other
addictions are addressed - with a 12-step program. This 12-step program,
Active Investors Anonymous™, is the treatment of choice for wayward
investors. The program is altered to more specifically address the investigation,
education, and implementation needed to cure the self-destructive behavior
of active investors.
My passion and
mission is to clear the smoke and mirrors that conceal the failure of
active management and lead investors to a highly efficient, tax-managed,
low-cost, and risk appropriate portfolio of index funds.