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Dear Mr. Solin,
I’m a senior executive with a major financial media outlet. I’m sure you can understand why I must remain anonymous.
I was motivated to contact you by the content of your recent newsletter. In it, you set forth headlines you say will never appear in the financial media. Here they are:
1. It’s likely the stock or bond mutual fund we recommend won’t even survive the next decade, much less outperform a comparable index fund.
2, The higher the cost of a mutual fund, the less likely it is to outperform a comparable index fund.
3. If it really was “different this time”, we would still have no clue.
4. There’s an inverse relationship between the supreme confidence of our “gurus” and their track record for accuracy.
5. There’s also an inverse relationship between the frequency of media appearances by our “gurus” and their track record for accuracy.
6. Predicting and writing about “doom and gloom” is much more profitable than following this advice.
7. Running a hedge fund is much more profitable than investing in one.
8. The primary beneficiaries of 401(k) plans are record keepers, brokers, insurance companies and mutual funds.
9. 403(b) plans give the most valuable members of our society (those who are employed in public schools, hospitals, not-for-profits and members of the clergy) such appalling investment options their retirement goals are unlikely to ever be met.
10. The most important person making a positive impact on investors today is someone you’ve probably never heard about: Jerome Schlichter.
Here’s the good news, Dan. You’re right. You’ll never see those headlines.
Now for the bad news: You’re clueless.
The financial media isn’t in the business of benefitting investors. It serves its clients: Advertisers.
Think about it, Dan. Who supports the financial media? The securities industry. Do you think we would stand for the kind of information in your books and blogs being disseminated on our outlets?
Get real. We’re not stupid. We know investors should ignore the pundits we feature who talk about the next hot stock or how to restructure your portfolio in the event of war. We also know investors would likely achieve higher returns if they bought index funds and did nothing.
But Dan, here’s what you’re missing. “Doing nothing” would include paying no attention to us. Fewer viewers means lower ratings. Lower ratings means we can’t charge as much for ads.
It would also mean sharply reduced trading, which lowers commissions for our advertisers. Remember, it’s those advertisers that keep us in business, Dan. Not you. Not investors.
Here’s something else you don’t understand. Even with the massive shift in assets from active to passive management, about 75 percent of investors are still buying what we’re selling. You’d be amazed at how many people believe Jim Cramer has the ability to pick “hot” stocks and pundits predicting doom and gloom can foretell the direction of the market.
You and I know it’s nonsense, buy hey, it pays the rent and keeps us in business.
Keep up the good work, Dan but don’t delude yourself. You may have the facts on your side but we have the bully pulpit and we know how to use it. You use data. We tap into powerful emotions, like fear and greed. This isn’t a fair fight. We will always prevail.
I want to end with a consoling thought — more in the nature of a confession. If you looked at my portfolio, all you would see is a couple of low-cost, broadly diversified, index funds from Vanguard.
I told you I wasn’t stupid.
Get real, Dan.
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