A couple weeks ago, the Wall Street Journal published an article that explained why the gap between professional and amateur-ish players is narrowing: the proliferation of information about every possible minutia and technique associated with poker playing gets debated endlessly on online forums accessible to everyone that the information asymmetry between the pros and the aspirational is quite small compared to what it once was.
That general trajectory applies to investing as well. The free, easily accessible information that we take for granted today—how much profit each Johnson & Johnson brand makes, IBM’s dividend history over the past century, profit reports from Chevron, are all easily available through a Google search. If you have a question about a company’s business model, you can find the answer in a couple mouse clicks in a second or two. Up until twenty or so years ago, that kind of information was only in the hands of the stock brokers and professionals that wanted to take 1-2% of your hard-earned wealth each year in exchange for managing your assets.
Take something like Fidelity’s Blue-Chip Growth Fund.
The fund charges 0.90% annually, and invests in Google, Apple, Visa, Coca-Cola, Pepsi, Wells Fargo, JP Morgan, Procter & Gamble, and so on. Those are companies I’m perfectly capable of figuring out on my own whether I want to buy or not. There’s no particular craftsmanship there, yet the fund has almost $13 billion in assets. You have to give Fidelity $900 every year (for every $100,000 you invest) in exchange for the privilege of owning those companies. A $100,000 investment would cost at least $9,000 in fees over the course of ten years, and probably much more so as the amount goes up.
The only time a fund manager is necessary is if you think there is any realistic chance that you would sell low. That’s what screws people up, and is the reason why the average investor has achieved only 3.8% annual returns over the past twenty years while the S&P 500 has returned between 8% and 9% each year on average (see the Dalbar studies for more information on the disparity between the performance of indices like the S&P 500 and what individual investors actually earn). If you think that’s a potential problem, then get an advisor—it’s a lot better to pay out 1-2% of your wealth each year if you do not have to sell stocks at 30-40% during a market low.
If I were a financial advisor for someone, I would do everything in my power to make stock ownership seem real. I would get Coca-Cola stock certificates. I would point out that those 100 shares of Coca-Cola are generating $190 in profits, $112 of which gets sent to shareholders each year as a dividend. And if that wasn’t real enough, I’d take the client to Wal-Mart, sit on the bench, and spend fifteen minutes during prime-time traffic pointing out the Coca-Cola products that are in each person’s cart. I’d rather look like a weirdo for fifteen minutes than destroy thousands and thousands of dollars in wealth.
But if you have the gumption to avoid selling low, there is no reason why you can’t self-educate yourself to a point where you don’t need an advisor. The common holdings in most of the top mutual funds are the kinds of companies that are the obvious profit generators. We know Pepsi, Coca-Cola, and Dr. Pepper rule the soda scene in the United States. You don’t have to pay someone 1-2% to figure that out for you. The free information is there and easily accessible. That wasn’t always the case. All you have to do is put in the time (I’d guess 7-10 hours per week ought to be enough to do it right).
If you restrict yourself to modest investments in tech and bank stocks (because the management of each company is crucial), only own companies that have raised their dividends for two decades straight, and insist on owning stocks that have an average annual growth rate over 5% since 2003, and split up your wealth across 25-30 different companies, you’re a fortress. You can’t screw up. The tools to execute that kind of strategy are all over the internet, and you can save yourself a lot of money in frictional costs over the course of your lifetime if put in the time.