the best investment advice

8/13/2019 The Best Investment Advice

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The best investment advice you'll never getFor 35 years, Bay Area finance revolutionaries have been pushing a personal investing strategythat brokers despise and hope you ignore.Mark Dowiehttp!!www.sanfran"ag.co"!story!best#invest"ent#advice#youll#never#get

As Googles historic August 2004 IPO approachedthe co"pany$s senior vice president,%onathan &osenberg, reali'ed he was about to spawn hundreds of i"petuous young"ulti"illionaires. (hey would, he feared, beco"e the prey of )all *treet brokers, financialadvisers, and wealth "anagers, all offering their own get#even#richer invest"ent sche"es.*cores of the" fro" fir"s like %.+. Morgan hase, -B*, Morgan *tanley, and +residioFinancial +artners were already circling co"pany headuarters in Mountain /iew with hopes ofpresenting their wares to so"e soon#to#be#very#wealthy new clients.&osenberg didn$t turn the suitors away0 he si"ply placed the" in a holding pattern. (hen, toprotect 1oogle$s staff, he proposed a series of in#house invest"ent teach#ins, to be held beforethe invest"ent counselors were given a green light to land. o"pany founders *ergey Brin and2arry +age and 4 ric *ch"idt were ecited by the idea and gave it the go#ahead.4ne by one, so"e of the "ost revered na"es in invest"ent theory were brought in to school a

class of brilliant engineers, progra""ers, and cybergeeks on the fine art of personal investing,so"ething few of the" had thought "uch about. First to arrive was *tanford -niversity$s )illia"6Bill7 *harpe, 899: ;obel 2aureate econo"ist and professor e"eritus of finance at the1raduate *chool of Business. *harpe drew a large and enthusiastic audience, which he couldhave wowed with a +ower+oint presentation on his


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Bogle$s closing advice was as si"ple and direct as that of his predecessors those brokers andfinancial advisers hovering at the door are there for one reason and one reason only@to takeyour "oney through eorbitant fees and transaction costs, "any of which will be hidden fro"your view. (hey are, as ;ew ?ork attorney general liot *pit'er described the", nothing "orethan


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an independent adviser, so"eone who was doing things differently fro" the big brokeragefir"s.ventually found a s"all financial "anage"ent fir" in *ausalito called Aperio 1roup that, afteronly seven years in business, already had a stellar reputation.


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in higher co""issions and "anage"ent fees7 it will be by sheer luck, says *olli, who thenoffers "e pretty "uch the sa"e advice %ohn Bogle and his colleagues offered 1oogle. *ell thehyped but fee#laden funds in "y portfolio and replace the" with boring, low#cost funds likethose offered by Bogle$s /anguard.t took *olli a couple "ore painful "eetings and a few do'en trades to clean the parasites out of"y account and reinvest the proceeds in inde funds, the lifeblood of his business. )ithout

eception, he "oved "e into funds that have outperfor"ed the ones was in, like the /anguard&( nde Fund, so"e +i"co bond and stock funds, and Artisan nternational. And he did it foran annual fee of .5 percent of "oney under "anage"ent, saving "e over a full percent inoverall costs and a lot of taes in the future. (hen he did so"ething doubt any other financial"anager would have done. Ee fired hi"self.


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"utual fund ga"eH 1eddes does take referrals fro" invest"ent fir"s like harles *chwab,which thrive on the sale of "anaged "utual funds. *o why the rantH sn$t he, too, in business to"ake a buckHa'' clarinetist in Marin ounty who was present when the first shots were fired in theinvest"ent rebellion. t was 89I:, and revolution was in the air.)hile hippies, dopesters, and antiwar radicals were filling the streets of A"erica$s "ost tolerant

city with rage, sweet s"oke, and resistance, a uieter protest was brewing in the lofty, paneledoffices of )ells Fargo. (here, a young engineer na"ed %ohn Andrew ob at )ells and a generous budget to conductresearch into the 1reat Man (heory and other sche"es to beat the averages. McLuownaccepted, and a few years later Fouse ca"e on as well.(hey couldn$t have been "ore different Fouse, a di"inutive, "ild#"annered "usician, andMcLuown, a burly, boisterous *cot. (he two were like oil and water@McLuown even tried tohave Fouse fired at one point@but their boss, /ertin, was the one who really was in the hotseat.


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n %uly 89I8, the first inde fund was created by McLuown and Fouse with a GJ "illioncontribution fro" the *a"sonite 2uggage pension fund, which had been referred to Fouse byBill *harpe, who was already teaching at *tanford. t was *harpe$s acade"ic work in the 89J:sthat for"ed the theoretical underpinning of indeing and would later earn hi" the ;obel +ri'e.(he s"all initial fund perfor"ed well, and institutional "anagers and their trustees took note.By the end of the decade, )ells had co"pletely renounced active "anage"ent, had relieved

"ost of its portfolio "anagers, and was offering only passive products to its trust depart"entclients. And it had signed up the ollege &etire"ent uities Fund 6&F7, the largest pool ofeuity "oney in the world, and Earvard -niversity, the largest educational endow"ent. By 89:G8: billion had been invested nationwide in inde funds0 by 899: that figure had risen to GI:billion, a third of which was held at )ells Fargo bank.ventually the depart"ent at )ells that handled indeing "erged with ;ikko *ecurities and waslater bought by Barclays Bank, which created the *an Francisco subsidiary Barclays 1lobalnvestors. ts 4, +atricia Dunn, the scandal#tinged for"er chair"an of Eewlett#+ackard whohad worked for : years at )ells Fargo, had been heavily influenced by indeing. &unningBarclays, she beca"e the world$s largest "anager of inde funds.Fouse, now retired in *an &afael, eplains why all this could have happened only in *anFrancisco.


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pronounced that or fund "anagers for allowingpreferred investors to buy and sell shares on news or events that occurred after "arkets hadclosed. *pit'er co"pared the practice to


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he tell his client about the hidden transaction charges that further reduce the return oninvest"entH t$s si"ply not to his advantage to do so.t$s hard to find active fund "anagers who are willing to talk about these issues. spoke toseveral, but no one was co"fortable discussing the high cost of their practice, and few were

willing to talk on the record. &on +eyton, president and 4 of allan Associates, a *anFranciscoPbased institutional invest"ent consulting fir", offered a list of advantages of active

"anage"ent, which essentially boiled down to the fact that it$s "ore fun. ackpot withcost#burdened "utual funds@and that for every 1oogle, there$s an nron@we si"ply refuse tostop trying.+erhaps *olli and 1eddes had it right when they selected the na"e for their co"pany. (he real

purpose of this whole revolution is


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t$s certainly te"pting. (he "ost high#profile "anager, dward


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varieties. Aperio 1roup$s +atrick 1eddes pushes two rules in choosing a fund *The broaderthe better and the cheaper the better1)hen you invest in a broad do"estic fund, you$reinvesting in the entire -.*. econo"y, or

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