By ROBIN POWELL
As well as working together, we’ve become good friends over the years, and I’m full of admiration for the work that Chas has done in making the case for evidence-based investing in the United States.
Here in Europe, of course, we’re still some way behind the US in terms of the take-up of EBI, and Chas has played a part by helping firms here with transitioning to an evidence-based approach. He has even taught himself German and frequently so that he can assist German and Swiss advisers too.
Chas recently interviewed me for his excellent new podcast, The Wealth Cast. In it we discuss the growth of EBI on both sides of the Atlantic, how much work still needs to be done, the vested interests lined up against us and what keeps me going when progress seems slow. We also compare notes on how investors and advisers responded to the market turmoil earlier this year.
The show is 32 minutes long, and I hope you enjoy it:
Chas Boinske: Robin, I’m so glad that you were able to join us and talk about the important subject of evidence-based investing.
Robin Powell: It’s a real pleasure to speak to you again, Chas. Thanks for having me on.
CB: You’re very welcome. Why don’t we start with the basics, which is, from my perspective, how do you define evidence-based investing?
RP: It’s a strange name, isn’t it? If you don’t know anything about it, you’d think, “Investing would be based on evidence. What else it going to be based on?” You’d be amazed to learn that most investing is based on hunches, on guesswork, on opinions, on personal relationships and working with people who you’ve worked with before. We’ve got a long way to go in the investing industry to get to anywhere near, for example, what has happened in medicine. The history of evidence-based medicine isn’t all that old. I’ve just been reading Bill Bryson’s book, The Body, and in there, he was saying how up until about 100 years ago, people who were extensively trying to help patients were causing them more harm.
Thankfully, that has all changed in medicine. We’ve seen huge increases in longevity as a result. It’s much slower to take off in investing. Broadly speaking, I would define it as relying not on hunches and guesswork, but on what the academic consensus is and what the latest data tells us. By data, I don’t mean industry data. I don’t mean data provided by product providers, but by academia and third parties like S&P Dow Jones Indices, for example. Morningstar is another reliable source of objective information. That’s what I would call evidence-based investing.
When I started my career in 1984, the name “evidence-based investing” didn’t even exist. In those days, a diversified portfolio was a portfolio with 20 stocks. That was considered a “widows and orphans portfolio” and very defensible. Nowadays, that kind of portfolio would be considered borderline irresponsible. That’s changed. How do you think that happened? Who or what has been the cause of it? In your view, what has accelerated that evolution around the world, but particularly in the UK?
It’s still too early to say that we’re on the winning side. Evidence-based investing has grown very quickly. It’s grown over about a 30-year period. We’ve still got a long way to go in the US, let alone the rest of the world. Here in the UK, this is still very much a minority interest. Australia is exactly the same. In South Africa too, they’re also a long way behind the US on this.
The main reason it took off in the US was the development of the computer, which enabled the likes of Eugene Fama, the Nobel Prize-winning economist, at Chicago Business School to do his research into asset pricing. The data, the evidence became overwhelming.
In the 1970s, we had a couple of very important landmark books. One by Charley Ellis, Winning the Loser’s Game and the other by Burton Malkiel, A Random Walk Down Wall Street, which we are told influenced Jack Bogle in setting up the first index fund. It took a long time to take off, but then people started to realise, “I’m saving a heck of a lot of money by investing in a low-cost index fund, rather than trying to chase the latest top manager.”
The media plays a huge part. In the US, you’ve got some good journalists. I’m thinking of the likes of Jonathan Clements, for example. He was writing about this stuff a long time ago. Jason Zweig took over from Jonathan on The Wall Street Journal. He too has told it as it is. As a result, there is now a consensus, if you like, in the American media that low-cost investing is the way to go.
In the early days of my career, one of the criticisms of indexing was that it was “un-American”, because the idea was that if you worked hard, you could always outperform the competition through hard work. Over time, that thought process changed. There are so many hardworking people out there ferreting out prices and doing price discovery every day that it’s very difficult to outperform an index.
I would say that the active fund management industry is distinctly un-American in the sense that it’s a very large, powerful, unwieldy industry, which is very uncompetitive. It was absolutely right for disruption and it has finally, and thankfully, been disrupted. We’re now getting your big fund managers, Vanguard or Dimensional over here. At first, there was a bit of, “Who do they think they are parking their truck on our yard?” sort of thing. But people over here are now realising that we should have had a Vanguard, a Dimensional of our own. I can only see those two companies growing their market share in the UK.
I’ve had a little bit of a window into primarily the German financial services industry, but also the financial services industry in the UK through presentations I’ve done in both places. Years ago, when I was in the UK talking about this, it was well understood, but it was still very early. The thinking was still being developed. I’ve been impressed by how quickly it’s been adopted it seems by practitioners in the UK in particular.
It’s funny you should say that because I remember talking to David Pitt-Watson, who is one of our leading transparency campaigners here. He is now a Visiting Professor at Cambridge Judge Business School. I was saying, “David, there is all this evidence that low-cost investing is the way to go. The active management and the returns that we’re getting are not good enough. They don’t justify what we pay for it. When do you think all this will come out?” This was years ago. He said, “In the next two or three years,” and I remember thinking, “That’s optimistic.” But I have to say the rate of progress has been amazing. One thing has led to another.
There’s been a number of major events which have accelerated this change. For example, the chief executive of The Investment Association, which is the fund industry trade body here in the UK, effectively said, “We should have a code of conduct for all our members. Everyone should sign up to this.” One of the key points of the code of conduct is that firms should act in the client’s best interests. Members did not like this at all. He lost his job. He was got rid of. That opened people’s eyes to what’s been going on.
We then had a report by the Financial Conduct Authority. The FCA is our equivalent of the SEC. The interim report was very critical of the fund industry. Unfortunately, as is the nature of these things, the industry lobby got working on the regulator, and they got it watered down. The final report was not as hard-hitting, but even still, it was very critical.
The third thing, and bigger than all the others, has been the spectacular demise of Britain’s best-known fund manager, Neil Woodford. He was considered untouchable a few years ago. You read about him in the press and he would be spoken about in glowing terms. But he spectacularly failed when he left the fund management company he used to work for and set up his own.
There’s a big platform here in the UK called Hargreaves Lansdown, which stuck by him and said, “No, he’s done well in the past. He’ll do it again.” But the fund went down and down. It turned out he was investing in a whole load of illiquid stocks. Everyone involved in the fund, including Hargreaves Lansdown, did very well out of it. The only people who didn’t do well out of it are the people who invested their money in it and they still haven’t got all their money back yet.
Th Woodford scandal has opened people’s eyes. We’re seeing now in the UK press much more awareness that all might not be as rosy in the active management garden as we were led to believe.
There are certainly a lot of big buildings and fat salaries that are dependent on the active management industry. It’s very hard to change your philosophy when your economic interests are intertwined with the foundation of that philosophy. That has to be true.
I read a comment by Ben Johnson, who you’ll know is the director of ETF research at Morningstar. He was being interviewed about how active managers have done in 2020. We’ve heard for years that active managers do better when markets fall. Did that happen in March and April 2020? No, it didn’t. They spectacularly underperformed. They did even worse than they did when the market was going up. This claim that anti-management somehow offers downside protection is nonsense. Ben Johnson said, “It’s a concept that belongs in the same category as the Easter Bunny or Santa Claus.” He went on to say, “That’s the problem, we want to believe it’s true.” There are so many people with a vested interest in it being true. Most of these people are not being dishonest, only in the sense that they’re being dishonest with themselves. They can’t admit that they’re wrong.
The very nature of the issue is that it’s complex. It makes it difficult for investors. As a result, when there’s a lot of noise, it’s a confusing environment for people. When you combine vested interests with the noise of the capital markets, it makes it almost an impenetrable wall to get through. But investors can use to their advantage by being disciplined and lowering their costs, etc. I liken it to riding a bicycle. Once you ride a bicycle, you can do it the rest of your life. Once you see clearly how the capital markets work, success becomes relatively straightforward.
There’s a lot of noise in periods of extreme volatility, Let’s face it, March 2020 was horrendous, wasn’t it? Even for you and I. We don’t normally look at the stock markets, but even I was looking at it and thinking, “How much lower can it go?” I would say this: it is possible to be worried about the situation, about your family and your health, about the economy and where all this is going to end up and whether you’re going to have a job at the end of it. You can do all that, but you can still also acknowledge that there is nothing that you or I can do about it. The rational thing to do is to sit tight. To sell when markets have already fallen is a bad idea, unless you’ve realised that you just can’t handle it. In that case, you’ve been badly advised in the past. You had the wrong asset allocation to start with. Generally speaking, the thing to do is to sit there.
I’ll be honest, and I’m sure you would say the same thing, I am absolutely amazed that the markets are where they are at the moment. That’s only my personal opinion, but it’s probably the opinion of most observers. I just posted something on Twitter about one of the worst crashes in the UK, which was from 1972 to 1974. I don’t think it was quite so bad Stateside. Here it was very bad I remember talking to someone who was a trader at the time who said there was genuine talk of the FTSE 100 going down to zero. It went on for two years. What I wrote was, at times like this, when markets are at or near all-time highs, and amazingly, that’s where we find us at the moment, we have to remind ourselves that stock market crashes happen and they can be absolutely horrendous. We need to make sure that we are prepared, that our portfolio is prepared and we are prepared mentally and emotionally for what might happen.
I’m not speaking with any knowledge of what will happen or what could happen. There’s all this talk about the current uncertainty, but there’s no more uncertainty now than there was six or 12 months ago. It’s just that we’ve had a heck of a fright. Time and again, the evidence has proved that the best thing to do is to stay calm and keep putting money into the stock market. When markets have gone down, if you can put a little bit more in every month, then do so, but more or less, carry on exactly as you were.
It’s very understandable from my perspective that people would be unusually sensitive to what happened in March 2020. I would agree with you. What happened subsequent to that is a surprise to most people — the fact that the markets recovered as quickly as they did. It supports the idea of having a strategy that you can stick with. Being disciplined in executing the strategy in all times, whether that’s good or bad, is the best recipe for success.
There were many advisers over here on social media saying, “I’ve gone to cash. I’ve recommended all my clients go to cash.” People like me and other evidence-based investors and advisers were saying, “Keep calm.” They were calling us irresponsible, saying you’re encouraging people to throw more good money after bad and all the rest of it. Those advisers who went to cash, they all have a very strong case against them for having not acting in their clients’ best interests. They should know better than that. I would be very surprised if even 10% of those advisers caught the rebound because the rebound happened so quickly. The market is down five per cent one day, then up ten or whatever it was the next day. There’s no way that those advisers got them out at the right time and back in again at the right time. It defies belief.
In your career, interviewing folks around the world about evidence-based investing, you’ve had the opportunity to have conversations with some important financial experts. When you think back on those interviews, where do you think you got your extra charge to keep going forward? Who inspired you in those conversations the most?
I suppose you’d expect me to say this, but I would I would have to say Jack Bogle. I was lucky enough to interview Jack a couple of times. He was the most extraordinary character. It’s funny. At that time, not very many people, or certainly from outside of the US, had interviewed him about Vanguard, the growth of indexing and so on. A lot of advisers over here were saying, “How did you persuade him to talk to you?” But he was the most charming, humble lovable guy who genuinely wanted to do the right thing for consumers. He was a very astute businessman as well, but once he realised that I’d done my research and that I wanted to find out about the work that he was doing, he was very welcoming. He said, “We’re all set, Robin. You come over and we’ll have a chat.”
There are so many others. Charley Ellis is another lovely guy, and very smart. Whenever I hear him being interviewed, he’s so polite about active fund managers. He always says he’s friends with active fund managers and so on. He could, if he wanted to, stick the boot in because he’s been saying the same things for 40 years. No one’s been listening to him, or not enough people anyway. He’s very inspiring.
Ken French up at Dartmouth College. He’s a bright guy. Eugene Fama, obviously. What an honour. I’m lucky to have interviewed a few Nobel laureates as a journalist, and not just in the field of investing, but that interview does stick in the memory. I felt completely out of my depth and hugely honoured that there was this guy willing to talk to me about his painstaking research into asset management and investing.
The other guy I would mention is William Sharpe. We went to his home at Carmel in California and spoke to him there. Again, he’s been saying this stuff for years. He wrote a good short paper, as you probably know, in 1991, The Arithmetic of Active Management, which is all you need to know to understand why you should index.
That’s brilliant, when you can distill a complicated subject down into one-and-a-half pages or something. You certainly had the advantage that few people have had of talking to people from Bogle to Fama to Sharpe. What do you feel is your responsibility now? Is it a personal thing? Is it a business thing? What’s giving you the energy to do this work and to talk to people about these subjects?
When I found out about all this, and I interviewed these people, I did my own research and I had the “a-ha moment” that Rick Ferri talks about that we’ve all had. It suddenly all clicks. I don’t want to describe it like a religious conversion, but I knew at that point that this is a big story — and I talk about stories because I’m a journalist. I’ve done some big stories. I was in Iraq. I was one of the first journalists to report on what was happening at Guantanamo Bay. I reported on some interesting things around the world, but I genuinely believe this is the biggest story I’ve ever worked on. Investing is so important. It has such an impact on everyone’s lives.
We have an industry that is getting in the way of people having their fair share of capitalism. For me, that’s what it boils down to. Millions and millions of people around the world are not getting their fair share. I’m not saying everything will be hunky-dory when they do, but they’ll have more money in their pockets. The fund industry will put less into the exchequer here in the UK, and give less to Uncle Sam in America, but there will be more money in ordinary people’s pockets. People will be able to enjoy their retirement. They’ll be able to have a retirement because at the moment, for a lot of people, it’s looking like we’re going to have to work for a very long time.
That’s certainly a noble cause, trying to educate and democratise this information in the face of a lot of vested interests. That’s fantastic. In closing, what are your next projects? What’s on the horizon for you that you’re excited about?
I am very involved in what we call the transparency movement here in the UK. We’ve got an organisation called The Transparency Task Force, which is a voluntary organisation. It is working in the US as well, in Australia and various other countries around the world. We’re trying to make the financial services industry more transparent so that everyone knows what’s going on. We want os show, for example, the actual performance that private equity funds and hedge funds are delivering rather than what they claim to be delivering, and how much people are paying for it. It’s not just the headline charge.
The industry has a responsibility to be transparent. We’ll never get 100% transparency. But when it is more transparent and people can see clearly with their own eyes what’s good value, and what’s bad value, they will start to do the right thing. More and more people will come to advice firms like Independence Advisors. More and more people read my blog. That’s the next big battle, if you like. I remember listening to one of Jack Bogle’s last final addresses. He gave it in Philadelphia. He said, “Transparency is the next big frontier.”
I’m looking forward to seeing what you’re up to. I’m a big fan and I wish you the best of success. Thank you for spending time with us.
It’s great to see your company going from strength to strength as well, Chas. I’m not at all surprised that it is.
Thank you so much for the kind words. Until next time, Robin. Cheers.
ROBIN POWELL is the founding editor of The Evidence-Based Investor. He works as a journalist and consultant specialising in finance and investing, and as a campaigner for a fairer, more transparent asset management industry. He is the founder of Ember Television and Regis Media. You can find him here on LinkedIn and Twitter.
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