Dan Solin on Investing
I had the pleasure of hearing Dan Solin speak recently about investing. He is the author of the Smartest series of books and is an outspoken critic of the investing industry.
Solin’s main message is that if you pay attention to the science of investing, there is no conclusion to draw other than investors should invest in low-cost broadly-diversified indexes rather than chase the dream of beating the market. Almost everyone who tries to beat the market over a decade or more fails.
Some small-time investors think that rich people have some sort of secret access to better investments, but Solin says that the only difference between rich people and poor people is that rich people have more money to lose if they trust their brokers.
He says that the entire active investing industry is a “giant scam” and “there is a huge amount of money invested in keeping you ignorant.” The wealth management industry exists to “transfer your wealth to themselves.”
On the subject of alternative investments such as hedge funds, Solin says they are just a way for rich people to lose money.
Solin’s shortest answer to an audience question came when he was asked whether we should be buying gold. His answer: “don’t”.
Some of the audience questions made it clear that they did not really get Solin’s message. He doesn’t believe that anyone has any useful insight into future investment prices, and that we should all just seek to capture market returns at an appropriate level of risk. Yet questioners asked about market timing and the future of various specific investments.
Solin believes that you should ask your advisor “what besides investing are you going to do for me?” Given that advisors are useless for picking stocks or mutual funds that will beat the market, you should be getting tax planning and other useful services from your advisor.
Solin’s main message is that if you pay attention to the science of investing, there is no conclusion to draw other than investors should invest in low-cost broadly-diversified indexes rather than chase the dream of beating the market. Almost everyone who tries to beat the market over a decade or more fails.
Some small-time investors think that rich people have some sort of secret access to better investments, but Solin says that the only difference between rich people and poor people is that rich people have more money to lose if they trust their brokers.
He says that the entire active investing industry is a “giant scam” and “there is a huge amount of money invested in keeping you ignorant.” The wealth management industry exists to “transfer your wealth to themselves.”
On the subject of alternative investments such as hedge funds, Solin says they are just a way for rich people to lose money.
Solin’s shortest answer to an audience question came when he was asked whether we should be buying gold. His answer: “don’t”.
Some of the audience questions made it clear that they did not really get Solin’s message. He doesn’t believe that anyone has any useful insight into future investment prices, and that we should all just seek to capture market returns at an appropriate level of risk. Yet questioners asked about market timing and the future of various specific investments.
Solin believes that you should ask your advisor “what besides investing are you going to do for me?” Given that advisors are useless for picking stocks or mutual funds that will beat the market, you should be getting tax planning and other useful services from your advisor.
On the same note: EuroNews runs a commercial for forex trading something (I do not listen). Their slogan is: Trade Forex like a pro. I think the key word here is 'like'. I can do lot of things 'like a pro', but hardly with the same results as a pro. Since no value is created in forex trading, the only wealth management process actually happening there is a transfer of wealth from those who want to be 'like a pro' to those who actually knows what they are doing, which is extracting funds from the like-a-pros.
ReplyDelete@AnatoliN: Very true. Of course, some of the wealth transfer goes from "like-a-pro"s to the creators of the game in the form of commissions and spreads.
ReplyDeleteHearing Dan Solin would have been good.
ReplyDeleteI need to index more. Yes, I'm serious :)
The evidence is overwhelming but I likely won't sell any existing stocks, just not buy any new ones other than via synthetic DRIPs.
"Solin’s main message is that if you pay attention to the science of investing, there is no conclusion to draw other than investors should invest in low-cost broadly-diversified indexes rather than chase the dream of beating the market. Almost everyone who tries to beat the market over a decade or more fails."
ReplyDeleteThe majority of those buying DFA funds do so to beat the market. Does the above apply to DFA funds?
@Anonymous: Solin didn't specifically discuss DFA funds. I don't know what's in the mind of DFA investors, but they can't beat the market if they own it. They may be hoping to own a better-performing version of the market by sticking to value and small-cap tilts. This just means that they own a different market from plain vanilla S&P/TSX or S&P 500.
DeleteAnonymous:
ReplyDeleteYou may find this blog post helpful:
http://bit.ly/175zBGl
@Dan: Thanks for the pointer to the clear explanation. I tend to think of value and small-cap indexes as owning a different market, but I suppose that some investors think of it as trying to beat the market.
DeleteThe small premium is closely linked to the value premium. The value premium increases as market cap decreases. Small growth stocks historically have underperformed the market. So a case could be made that a tilt towards small and value is really value investing. Benjamin Graham was talking about value investing in the 1930s.
DeleteA tilt towards value and small is active quantitative investing done to outperform index investing.
If you say that DFA is passive, please read the link below:
http://www.bogleheads.org/forum/viewtopic.php?f=10&t=112405
If you say that DFA is not quantitative investing, then how do you explain their negative momentum screens? How do you explain their recent interest in profitability, as shown by their growth funds?
This is not index investing. DFA's approach may very well be better than traditional mutual funds. But the goals of DFA investors are the same as those investing in traditional mutual funds.
@Anonymous: I've bet my future primarily on Vanguard ETFs like VTI and some Canadian iShares funds like XIU. I see passive-active as a continuum rather than a binary property. I agree that DFA is less passive than VTI or XIU, but they are more passive than the average mutual fund. I'm not overly concerned about finding DFA's exact spot on the continuum because I don't intend to own their funds.
DeleteI mention DFA, because of the following link:
Deletehttp://www.theglobeandmail.com/globe-investor/investor-advocate-daniel-solin-names-the-good-guys-and-bad-guys/article12291019/
Quotes from the above link:
ReplyDelete"But Mr. Solin said it’s not possible to consistently pick winners. “I cannot find a single peer-reviewed article demonstrating that anyone has the expertise, as opposed to luck, to consistently pick stocks that will outperform the market. People who claim to be able to do this are usually confusing luck with skill.”
"Dimensional is an Austin, Tex.-based company that runs low-cost mutual funds using a quasi-indexing strategy that puts an emphasis on smaller-sized companies and “value” stocks that are trading below their true worth. Mr. Solin said this approach offers the opportunity to generate higher returns without a proportionate increase in risk."
My point is that there are those associated with indexing (Mr. Solin is far from the only one), who are advocating quantitative investing. And quantitative investing is not indexing, but an attempt to beat index investing.
@Anonymous: If we call pure indexing a 0 on the active meter and personal stock-picking 100 on this meter, then I would say that DFA is somewhere around 10.
Deletehttp://news.morningstar.com/articlenet/article.aspx?id=598326
ReplyDeleteAbout where DFA ranks on a score of 0 to 100, I would suggest reading the above article from morningstar on DFA methodology. The article excludes the recent decision by DFA to stock pick on the basis of profitability criteria.
@Anonymous: Let me explain my scale and we'll see if we actually disagree about DFA. If we start with the assumption that all stocks have similar return and volatility characteristics (but are not perfectly correlated), then all trading and lack of perfect diversification has the expectation of losing money. My scale is based on how much money one expects to lose to trading costs and lack of diversification. My rough guess is that DFA funds would trail a pure index by only one-tenth as much as the typical individual investor who buys and sells stocks on his own.
DeleteOf course, DFA managers and investors would likely object to the idea that they are likely to lose any money at all to a pure index. Keep in mind that this one-tenth rough guess is based on an idealized market where pure indexing is obviously the best strategy.
I don't really care whether DFA managers and investors in their hearts think of themselves as active or passive. What matters to me are the expected trading and lack of diversification losses. As of the last time I looked at DFA funds, they seemed reasonably well diversified and their managers didn't trade hyper-actively. It's certainly possible that this will change in the future.