National Public Radio featured an interview with Michael Lewis on April 1 during which he offered some valuable investment advice. Lewis is arguably one of this era's top financial journalists after having started with the book "Liars' Poker" and "Moneyball" about the Oakland A's. While "The Big Short" is his account of the financial implosion, he will soon be dogging President Barack Obama's footsteps to produce an inside account of what it's like to walk in that man's shoes.
Lewis' jaundiced view of money managers was not surprising. He said, "I never hire experts because none of them actually know as much as they want you to think they know."
To twist the knife, he added, "and men are worse than women in that respect." It's crazy, in his mind, to think that we laymen can actually pick stocks that will outperform the broader markets when professionals fail for the most part. "And," he said, "if we develop that habit, we will spend hours every day in front of the computer trying to determine how smart we have been -- only to be disappointed."
His antidote for disappointment is to just invest in index funds. To the extent he is tempted to buy individual stocks, he sticks to unexciting large companies that pay generous dividends.
Coincidentally, the New York Times last week had a story about the money that large government pension funds across the country had been squandering on, as Lewis might put it, "experts who don't know as much as they want you to think they know." The article talked about the billions in fees paid to hedge funds and alternative investment managers that, in the end, have failed miserably. In spite of this, private equity, hedge funds and real estate now capture as much as 19 percent of institutional assets -- up from just 10 percent in 2007.
And that's not all. Half way to the finish, Warren Buffett is currently winning his 2007 bet that a hand-picked collection of five hedge fund managers wouldn't beat the S&P 500 index fund between 2007 and 2017. The bet is for $1 million. While the bet still has five years to run, one would think that hedge funds have just had their biggest window of opportunity to beat the averages (i.e. they would have "hedged" during the 2008 crash and thus avoided the huge plunge the major indexes saw) -- but now they're in a tough race to beat the averages in a rising market.
In California, Joe Deer, the new boss of CalPERS, is committed to increasing the percentage of derivatives and other exotic investment instruments. In addition, CalPERS has developed so-called tactical investment teams that will be effectively trying to time the market -- a losers' game if there ever was one.
There's more. Consider a mutual fund managed by one of CalPERS' new advisers. The Gateway Fund's 10-year average annual return is 3.68 percent after what is described as a process of "writing index calls on a basket of S&P 500 stocks while hedging the downside by purchasing puts."
You the reader don't have to know what this means. Just know that this fund run by one of our newer CalPERS' outside advisers earned roughly half as much per year as Vanguard's balanced index fund for the past 10 years.
My suggestion, which I'll offer for free: CalPERS should just deposit the money in stock and bond index funds that charge about 3/100ths of a percent per year in fees (on a $200 billion account) and rebalance periodically. This approach would have earned about 6 percent per year over the past 10 years -- about 2 percent better than what I estimate as CalPERS' actual 4 percent annual results over the period.
This would support Michael Lewis's aversion to hiring experts, and it is confidence-inspiring to those of us who think we might be missing something by keeping our investments simple and cost-effective.