Good reads from around the Web.

The best article I read this week was 6 Harsh Truths That Will Make You A Better Person on Cracked.com.

It’s full of swearing and aimed at under-sexed 20-something males. You’ll either love it or hate it. I wish I’d written it.

I also really enjoyed a podcast interview on The Motley Fool with ex-hedge fund manager Jim Rogers – particularly his career advice for kids thinking of getting rich in The City:

Jim Rogers: We’ve had long periods in history when the financial types were the masters of the universe, followed by long periods when the producers of real goods were the masters, and then followed again by the financial types.

I was a student at Oxford once upon a time, and when I was at Oxford in the Sixties, my professors used to say to me, what’s wrong with you? Why are you so interested in the stock market? It’s not relevant to anything, including the world economy or the English economy, and they just thought I was very peculiar, and I was, I guess.

So in the Fifties, Sixties and Seventies, Wall Street and the City of London were backwaters, serious backwaters. A big day on the New York Stock Exchange when I first went there in the mid-Sixties was three million shares. I mean, nowadays three million shares is not even one trade – that’s an odd lot, almost. So then we had the big bull market, and now every kid at Oxford wants to start a hedge fund in his dorm room – it’s totally changed.

But those days are ending, as far as I’m concerned. Finance now has huge competition. In 1958, America graduated 5,000 MBAs; the rest of the world graduated none. Now last year, America produced a couple of hundred thousand MBAs; the rest of the world, tens of thousands more. So you have staggering competition now which you didn’t have before. You have huge leverage, I mean all the financial institutions are very, very leveraged now, and you have governments all over the world coming down hard against financial types. Nobody likes us any more – taxes, regulations, controls.

At the same time, in America, the average age of farmers is 58. In the UK, the highest rate of suicide is in agriculture, because it’s a terrible business. The average age of farmers in Japan is 66; in Australia, it’s 58. I can go on and on.

In America, more kids study public relations than study agriculture, so the farmers are all dying and retiring, there are no young people going into the business. Farming’s been a terrible business for 30 years; finance has been the height for 30 years.

It doesn’t take much for me anyway to figure out, I’d rather be a farmer than an investment banker in 2018.

Is he right? Who knows, but it’s a provocative line of thinking.

I have my doubts that the financial sector has been squished down to size, but Rogers has an admirable habit of being ready to invert the status quo. And unless most of the new billions being born are going to eat algae grown in vats (they might) then we certainly need to grow a lot more food.

In his book Adventure Capitalist, Rogers writes: “While I have never patronized a prostitute, I know that one can learn more about a country from speaking to the madam of a brothel or a black marketeer than from meeting a foreign minister.”

That’s the spirit! As I always say, most people are going to come a-cropper trying to invest actively, and will be far better off in passive funds. But if you’re going to get neck deep in the markets you’d better enjoy it – it could be an expensive hobby, after all – and Rogers clearly relishes it.

I would certainly take anything he – or any other pundit – says with a wheelbarrow of salt. (See this old article from Fortune for more).

However it’s surely better than listening to this guy.

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The onset of Christmas brings with it for many a sense of refuge. The promise of a few days when our everyday worries are neutralised by a haze of twinkly lights, booze, food, and family bonding. As long as we can just get there…

I felt I recognised a touch of that pre-Chrimbo fatigue in a comment from Monevator reader, Sarah, requesting a motivational piece on Financial Independence (FI) in the face of evaporating savings rates and warnings of muted equity returns ahead.

Actually, reading that comment from Sarah gave me some cheer. Not because I’m a git that revels in the misery of others, but because it helps to remember that I’m not the only one who finds the FI going hard sometimes.

It can be a tough old plod, and I think this is partly because even the followers of FI generally think of saving the way the rest of society does – as a sacrifice.

Yes, we’re deferring consumption today to enjoy consumption tomorrow, but we don’t have to swallow the notion that every pound socked away until Independence Day is somehow happiness denied.

Because that’s thinking like a good little consumer. Falling back into the trap that we can buy off our lows and woes with a new iPad, hair extensions, or a posh meal out. Essentially acting like a caffeine addict who staves off the headache with another Venti latte.

We’d do better to cheer ourselves up with the thought that whatever comes our way, the FI good times start long before you smash off the final shackle.

I want to break free

I believe the journey to financial freedom can itself create a profound sense of personal change for the good:

• You realise you’re thinking for yourself and that’s something to be proud of given societal pressures to conform. You’re no longer accepting the world as it’s presented by family, friends, and the advertising industry.

• You stop looking for answers in the wrong place. A desire for power, status and trinkets is replaced by the values of freedom, fellowship, and a sense of true worth.

• Perhaps most of all, you gain a sense of purpose. When you have a bad day, week or year, you know that it wasn’t for nothing… your efforts are still moving you towards your goal.

Like any other worthwhile pursuit, FI sharpens your skills. You get better at it. You stop seeing yourself as a number on a pay check. You’re able to value things because they make a difference to your life rather than because they’re fashionable or because they offer an off-the-peg sense of identity.

“I must be successful because I drive a BMW.” That sort of mind-rot drops away long before you reach FI.

Just knowing there’s a finishing post fills your lungs with oxygen, but something amazing happens as the financial furlongs slip past. You gallop faster and faster until you feel like you’re running downhill.

“Hey, you know what? This is easy. I feel great! I feel less vulnerable. Even if my wages are stagnating and growth rates are tunnelling out the bottom of the graph, I’m still better off than if I’d never started this thing. I’m living on 90%, 70%, 50% of my income – I didn’t even realise that it was possible before and I don’t feel any worse off.”

That’s how it can feel when you look at it through the spectacles of optimism rather than the soap opera glasses of pessimism.

The choice is not freedom or consumption. We need both.

The choice we’re making on the way to financial independence is being free to consume only what we need and to spend the rest of our time gorging on the most amazing good of all: freedom.

Take it steady,

The Accumulator

Good reads from around the Web.

The behemoth of low-cost investing is having a great year, reports Bloomberg’s Businessweek:

Vanguard is not just having its best year ever. (It shattered that record in September.) The $130.4 billion in deposits in mutual funds and exchange-traded funds that Vanguard has taken in through November is the most ever for the industry, according to data from Strategic Insight.

That beats the $129.6 billion that JPMorgan clocked, mostly for money market funds, in 2008. This year’s not over.

The article is peppered with interesting quotes about the advance of Vanguard’s business, and the rise of passive funds and ETFs in general.

But consider this section:

It’s asymmetric warfare, as Vanguard’s sole ownership and constituency is its fundholders, the savings it wrings from its buying power are passed on to them, not to shareholders or partners.

As Vanguard grows from niche player to one of the biggest beasts in the investing jungle, I think this practice of redeploying money towards its customers might enable an unbeatable feedback loop.

The Robin Hood of the fund world

Consider how much Wall Street and The City has syphoned off returns over the past few decades. Now imagine more of that vast amount of money going to lowering Vanguard’s already tiny fees on its passive products, and you see the power of the model here.

Customers owning the company would be a template for a new kind of capitalism if it worked everywhere, but it doesn’t. Usually self-interest allied to the profit principle works better. The pursuit of self-interest produces innovations and superior results at the expense of lazier competitors. That in turn generates superior profits, driving out weak competitors while making the winning companies even stronger.

But I think financial services might be different – and Vanguard able to exploit that difference – because historically it’s been the case that superior marketing – if you include the very idea that active funds beat the market – is what has generated superior profits, as opposed to superior performance being duly rewarded.

After all, in aggregate, active management can’t outperform passive funds, after fees. That is the whole point of index investing.

Passive index funds are cheaper, so will deliver better profits for most investors over time. Yet while index funds are on the rise, they don’t yet attract the lion’s share of money their performance should theoretically deserve.

The worm that turned

Because of superior marketing – which we might define to include everything from a more compelling story to established and trusted brand names – active fund management still attracts investment ahead of passive funds.

Indeed, hugely expensive hedge funds can potentially net their promoters the best profits of all – despite these funds in aggregate failing to beat a 60/40 balanced tracker portfolio!

Yet this is a zero-sum, largely zero-skill game, after costs ¹, which is what makes cheap passive investing so attractive.

In the past, the excess profits generated by the myth of active fund management has gone to enriching the employees and shareholders of City companies.

But because it reinvests the profits that most of the rest of the industry hives off, Vanguard is different. In its case it’s the fundholders that are going to be enriched. The more record-breaking fund flows it attracts, the more its customers will benefit through better (i.e. cheaper) performance.

Will there be a tipping point where ‘everyone knows’ that passive investing is the mainstream choice for greater returns over the long-term?

Or will active fund managers always be able to sell short-term outperformance as a more exciting long-term prospect?

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1. It is not that active fund managers are not hard working and clever that is the problem. It is that they are ALL hard working and clever, as well as competing against each other. In aggregate across the fund universe there is no out-performance in returns – there is only seepage to fees and expenses.[↩]