Of all the (mainly positive) feedback I received about my documentary How to Win the Loser’s Game, one of the most memorable emails came from an adviser in Canada.
He referred to what he called “the perfect rigging of the investment system”, which he described as the greatest social and economic issue of our time. “It is systemic and endemic,” he went on, “and envelops the industry, the regulatory regimes and a great deal of the media. It reminds me a great deal of the power and influence of the tobacco industry of the 1960s and 70s.”
I remember at the time considering this a fairly extreme view, but the more I learn about this subject, the more appropriate I find his comparison to be.
That email came to mind the other day while reading a fascinating article about agnotology — the study of the deliberate propagation of ignorance.
The term was coined by Professor Robert Proctor, a science historian from Stanford University. His interest in the subject was piqued by the discovery, in 1979, of a secret memo from the tobacco company Brown & Williamson. Written a decade earlier, the memo revealed many of the tactics employed by big tobacco firms to counter “anti-cigarette forces”.
The way to market cigarettes, the memo suggested, was to spread doubt, because that was “the best means of competing with the ‘body of fact’ that exists in the mind of the general public”.
The tobacco industry, Professor Proctor discovered, spent billions obscuring the facts of the health effects of smoking. It was, he argues, a perfect example of effective agnotology — an industry with vested interests working to cloud the truth and create confusion among the scientifically illiterate.
There is a ‘body of fact’ about investing, amassed since the 1950s, which runs counter to what the industry would like us to believe.
The industry wants us to think, for instance, that successful investing is all about actively trading, picking the “right” asset classes (and ditching the “wrong” ones) at the right time. But the evidence shows that market timing is counter-productive and overtrading a significant drag on returns, and that investors are better off buying a broadly diversified portfolio of assets and more or less forgetting all about it.
Similarly, the industry stresses the need to pick the best fund managers, who know which securities to buy and which to sell. The evidence shows that only a tiny fraction of managers outperform the market after costs, that those who do so are almost impossible to spot in advance, and that people would do better to invest in low-cost index funds instead.
Of course, like the tobacco industry of the 60s and 70s, today’s investing industry spends a fortune on PR and advertising. It also exerts considerable political influence. And it suits the industry down to the ground that most of us are completely clueless about investing.
Sure, the trade bodies make the right noises about investor education. But my experience is that when fund houses talk about educating investors what they really mean is teaching them the importance of saving more, which means more fees for them. Yes, investors do need to put more away for their retirement, but they also have to learn, as John Kay put it so succinctly in the FT recently, that “the lowest risk way to increase returns is to pay less to the financial services sector.”
High-fee actively managed funds that consistently underperform are just as harmful to our long-term financial health as cigarettes are to our physical well-being. But they generate a huge amount of income for the fund houses that produce them. They in turn spend part of that income on a formidable support industry that includes fund shops, brokers, platforms, advertising agencies, PR companies, trade journals and lobbyists. But that still leaves a substantial sum for very large salaries and bonuses for staff, as well as dividends for shareholders.
It is, in short, a vastly lucrative system that benefits everyone apart from the person who really matters, namely the consumer.
Believe me, I’m not normally one for conspiracy theories but I’m really starting to think that our Canadian friend has a point.
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