Is fiduciary responsibility compatible with craps-style investing and high fees?

It was a weekend of the legends in Dana Point, Calif. On hand for the Research Affiliates advisory board meeting were Harry Markowitz, Burton Malkiel, Peter Bernstein, Mohamed El-Erian, Jack Treynor and of course … Rob Arnott. And the topic was fiduciary responsibility. 

Rob Arnott brings out a lot of strong feelings in people, who either seem to love him—as a smart, articulate, largely investor-focused researcher—or to hate him—as a self-promotional, flamboyant, market-grabbing shyster. Love him or hate him, he’s not dumb, and he is extremely articulate, and often right in the vicinity with his market observations.

And it’s been hard times for Rob’s RAFI indexes, which I was not shy about bringing up during the Q&A of his cleverly titled (Rob is great at clever titles) “Clairvoyant Value” presentation. I believe the term actually came out of something Bill Sharpe said to him in ridiculing his new concept, which is essentially the idea of being able to look at future growth priced into equities and to determine their “true value.” (I think it was Bill who said … “Well, that would be clairvoyant value.”) The concept is described in the current issue of The Journal of Portfolio Management.

Anyway, I asked Rob what the outlook for the RAFI indexes would have been with the insight of “clairvoyant value” from a basis of two or three years ago. He liked that question, I am sure (RAFIs have gotten crushed over that time period). The answer was that with that info, the projection would have been “flat or slightly up.”

And Rob does make a very convincing case for value based on how the dispersion of current returns looks in the market … but Rob does make convincing cases.

The lesson here is a simple one. You can be as smart and as right as can be about the markets (see Rob’s recent experience as well as Matt Hougan’s own lesson in the humility of being right and getting beat on USL and USO), and STILL get CRUSHED. 

As it’s been said, the market can stay irrational longer than you can stay solvent.  

Basically, most exercises I’ve had in trying to game the market were exercises in humility. And the ones that weren’t were probably exercises in luck. Still, it’s worth the effort of trying to get your hands around it all. The conclusion I come to again and again is that one should: 1) invest enough, 2) keep the fees low, and 3) stay broadly diversified with minimal turnover.    

As a side note, see Rob’s very cleverly titled “Bonds: Why Bother?” article on 40-year bond outperformance in the current Journal of Indexes, and get on the train for the webinar that we’re doing with him, as it’s nearly sold out already. 

Last 5 posts by Jim Wiandt

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