Every year, with great fanfare, the gurus of Wall Street put on a "Seeking Alpha" conference. This year was no exception. The conference was held on July 18, 2012 at the Pierre hotel in New York City.
You can see the list of speakers here. It was a prestigious group, featuring Timothy Geithner, the Secretary of the Treasury, as the keynote speaker. The event was "produced" by CNBC, which provided breathless coverage. CNBC personalities were there in abundance, including Michelle Caruso-Cabrera, Maria Bartiromo and, of course, Jim Cramer.
Presumably, attendees at this conference were there to figure out how to achieve "alpha", which is a fancy term describing the value added by a fund manager over its designated benchmark. You can find a more technical definition here. If a fund's benchmark is the S&P 500 index, the fund manager will achieve a positive alpha if she beats the returns of that index. Almost every fund manager believes in their ability to "beat the market", which means they feel confident they can deliver "positive alpha".
You would think the speakers and members of the advisory board of the conference would have a stellar track record of actually achieving positive alpha. After all, those attending presumably assumed they were there to learn from real "alpha" experts. They must have been disappointed.
The inclusion of Mr. Cramer should have sent a signal that something was seriously awry. David Swensen, the chief Investment officer of Yale's endowment fund, had these observations about Cramer's investment prowess:
"Jim Cramer exemplifies everything that's wrong with the advice -- and I put advice in quotation marks -- that is given to individual investors. Investing is a serious business. We're talking about retirement security of American citizens, and he turns it into a game. It's a game where his listeners lose. It's ridiculous. These high-turnover, rapid trading strategies enrich the brokers. If you look at Jim Cramer's approach on an after-fee, after-tax basis, the individual doesn't have a chance."
I don't think Mr. Swensen will be relying on Cramer for advice on how to achieve alpha.
Jim O'Neill, the Chairman of Goldman Sachs Asset Management, is on the advisory board of the conference. If anyone should know how to deliver alpha, it would be Mr. O'Neill.
Speakers included Mary Callahan Erdoes, Chief Executive Officer of J.P. Morgan Asset Management, and Gregory J. Fleming, President of Morgan Stanley Investment Management.
I thought it might be an interesting exercise to look at the proprietary funds offered by Goldman Sachs, J.P. Morgan and Morgan Stanley to see what percentage of them actually achieved positive alpha. These are the largest, most prestigious firms on Wall Street. Their most senior executives are lecturing to the investing public on how they can emulate their success. What is their track record?
Pretty dismal.
I reviewed all of their proprietary funds with data over a 1 year, 3 year, 5 year, 10 year and 15 year period. The percentage of these funds (in the aggregate) which failed to beat the returns of their Morningstar assigned benchmark ranged from a low of 67.57% to a high of 75.57%. Over the longest period measured (15 years), 66.05% of the 324 proprietary funds of these firms failed to outperform their benchmark.
This is legitimate news, but you would not have heard about it from the financial media covering this event.
The pursuit of "alpha" has decimated the returns of millions of investors and enriched the securities industry, which claims an expertise that does not exist. By glorifying this elusive goal, the financial media perpetuates this myth, causing incalculable harm to investors.
As an alternative to "seeking alpha", next year let's have our own conference. We'll call it: "Capture Market Returns and Secure Your Financial Future." My wish list of speakers includes Eugene F. Fama, Kenneth R. French, Robert C. Merton, John Bogle, Roger G. Ibbotson, William F. Sharpe and Myron Scholes. These distinguished Professors of Finance, Nobel Laureates and authors can support their views with solid, peer reviewed data. It would be a refreshing contrast to the massive hypocrisy of the "Seeking Alpha" conference.
Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read, and The Smartest Portfolio You'll Ever Own. His new book is The Smartest Money Book You'll Ever Read. The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.