“Plant trees that other men will sit under.”- Benjamin Graham
In this second part of our Building the Bridge series, we will sketch the finance landscape, focusing on wealth creation. If we can see the landscape, we can design a clear pathway.
The finance landscape is not obvious. There are untruths, half- truths and undue complexities. Finding what works in the long term is not easy at first. Finding solid evidence-based principles and processes, particularly when starting out, is like trying to find a needle in a haystack. The noise accounts for about 90% of information out there. This is needlessly so, and caused by others not necessarily having your interests at heart, a reality made clear by the recent Australian Hayne Royal Commission of 2018.
The finance landscape can be sketched along a continuum of client interests:
Industry …Centre… Marketers
On the one hand, we have the finance Industry, ranging from active or passive fund managers to financial planners and brokers. On the other hand, we have the Marketers, these are people who are trying to sell you a ‘get rich quick’ scheme of some sort usually through an over-priced ‘education’ program or other questionable product. Both extremes of the continuum rely on a lack of financial literacy, so the everyday person cannot make quality judgements about the product or program being promoted. The financial Centre is an emerging area, where people are doing things themselves in whole or in part, aided by client-centred service providers, independent education and technology.
The continuum represents extremes. Naturally not all industry or other providers are only focused on their own profits. The challenge for us is to see the reality clearly, find integrity and quality, so we can readily build a team or set of processes for our own pathway.
The Industry and Marketers have created needless confusion. The every day investor believes they need the relevant product or service, or the provider has a ‘secret’ that beats the market.
A prime example is the tortured distinction between trading and investing in stocks. Providers use these terms interchangeably, often without a robust, tested methodology to underpin their approach. They do not distinguish between speculation and investing. Brokers in particular benefit from this clouded distinction, enticing ‘investors’ to trade more often. Seasoned investors know this to be wrong. Investing in markets such as stocks should be an exercise in selecting high quality companies, buying them at value, and holding them long term or indefinitely. The Value Investing methodology of Benjamin Graham and Warrant Buffett going back many decades now is clear evidence of this robust methodology. Trading on the other hand is something quite different, usually involving different markets and short term methods, such as futures trading using price or cyclical data patterns.
The Industry and Marketers often seduce people to thinking they can outperform the market. They usually quote short times frames of market beating returns. However, highly successful investors and fund managers, such as Benjamin Graham, Warren Buffett, John Templeton, Peter Lynch, John Bogle and Ray Dalio have track records spanning decades. Studying them and their methodologies in detail is where we can find universal principles.
There is now clear evidence from around the world that most active fund managers do not consistently outperform the relevant index. One of the leading research organisations is the S&P Dow Jones Indices LLC, which has been reporting now for 17 years. In their S&P Indices Versus Active (SPIVA) Around the World Report of May 2019, it found in Australia over a five year period, 80% of active fund managers underperformed relative to the S&PASX200 index. In the US, 82% underperformed over five years relative to the S&P500 index.
This reality is significant. If the Industry, not to mention Marketers on our continuum cannot beat the index consistently over the long term, then where is the every day investor going to turn? Generally speaking, master investors such as Buffett or Dalio outperform the market or relevant index by achieving an average of about 15% to 25% ROI pa over the long term. The ASX or US S&P indices have an average long term return of about 8% to12%. If we take a median average index return of say 10%, then the difference to the master fund managers is an average of 5% to10%. However, the key is to add compounding, and project your returns long term to see if you can then build a sufficient capital balance to achieve financial independence. At 10% most of us can reach this goal through consistency and building what we call a True Wealth Machine.
So, for the every day person seeking financial independence the goal is to achieve at least an average long term return of 10% pa. This can be done by investing long term in stocks and employing a robust methodology, such as Value Investing. Or if you do not have the time or inclination, then you might consider researching low fee, diversified passive index funds, now easily accessible through Exchange Trades Funds (ETFs).
We are now living in watershed times. We are at the cross-roads of the finance landscape, where the extremes of our continuum are slowly converging towards the centre. This is a client-centred space, where the ever day person can simply and practically achieve financial independence. It is a centre characterised by honesty, integrity and serving others first. Aided by technology and the democratisation of financial knowledge, it is my vision that all of us will soon have greater freedom to fuse authenticity with purpose.
By Lee Spano, Creatness International www.creatness.com
S&P Dow Jones Indices LLC 2019, SPIVA Around the World Report 6 May 2019, viewed 9 October 2019, <https://us.spindices.com/search/?ContentType=SPIVA&_ga=2.196484460.1734890763.1521559714-1488324395.1521382159>.