Introduction

One of the great joys of a professional life, as physicist Richard Feynman once explained, is the joy of “figuring it out.” Of course, figuring out investing questions is not as important and certainly not as enduring as figuring out the basic laws of physics, but it certainly is, has been, and likely will be as fascinating—and more fun.

Readers leafing through this collection of pieces will, I hope, enjoy being reminded of some of the great controversies that have animated the world of professional investing over the past 60 years. For me, the privilege of engaging in those controversies in various ways—depending on my role as teacher at, lucky me, Harvard, Yale, and at Princeton, or as a speaker at conferences all over North America, Europe, and Asia, or as a participant in a 30-year series of seminars for senior investment managers (sponsored by a leading Wall Street research firm) or in a seemingly infinite number of lunches and dinners—gave me a wonderful way to learn from others and to learn how best to express my own thoughts.

Within the enormous world of the economy, the world of investing always was and is relatively small, but that reality has also offered great advantages. Within our community, we know each other and are friends, often dear friends. We like to share our best ideas and insights and are always learning from each other. And almost always, we have fun. Do you know of any other field in which age differentiates so little? Is there any other field in which practitioners continue well into their eighties? Any other so replete with new learning? Any so well paid? Any in which each individual would be good friends with at least 100 peers and often with over 300 all over the world? Of course, the number of friendly acquaintances might be 10 times greater.

When I left Harvard Business School 60 years ago with an MBA and headed to Wall Street in 1963 and a happy career in investing, the School offered no courses in investing, there were no CFAs, and almost nobody was interested in the stock or bond markets. Worldwide employment in the securities and investment fields was less than 5,000. Half a century later, employment was well over 500,000 and likely one million and HBS offered three dozen courses on all sorts of investing, and almost everyone seemed interested in the securities markets. At least as important, the average talent of the men and women engaged in all aspects of investing had steadily increased to make the field known today for having many of the most talented, best-informed, hardest-working, and best-paid people in the world.

Over the years, many, many forces have combined to change—and change again and again—the realities of the field of investing. It has been my great privilege to be an active observer of the forces driving those changes.

Changes in beliefs have come far more slowly. Among those “slow to change beliefs” have been the belief that identifying first-rate managers is the client investor's main priority, that fees are low (“only one percent”), and bonds should be used in substantial amounts to create “balanced” portfolios. Meanwhile, a few other beliefs have changed. Market timing is now viewed negatively. International investing is viewed positively—and “active” investing continues to give way to indexing.

Performance measurement firms have shown that identifying superb managers is not easy and SPIVA data shows grimly that, over the longer term, fewer and fewer active managers have been able to achieve market-beating results. Worse, identifying the favored few in advance is nearly impossible and those who fall short fail by much larger amounts than the slim benefit of “success.” Gradually, but slowly, more and more investors have taken note and now, at an accelerating rate, indexing is gaining greater and greater acceptance as the rational way to invest in today's stock markets because, over the long term, indexing assures “Top Quartile” results.

Fees are increasingly recognized as large—particularly relative to lower returns—and investment managers increasingly compete for business by advertising their lower fees. (But recognition has still been moderate, most likely for two reasons: First, nobody actually writes a check to pay for a manager's service: fees are quietly deducted from the assets managed. Second, fees are almost always described as a percent of assets. If fees were described as a percent of returns—or worse for active managers, as a percent of risk-adjusted incremental returns—surely, the pressure would be far greater.)

Belief in bonds as the way to damp down changes in the stock market continues among investors and their advisers. This will likely continue. The “opportunity cost” of owning bonds vs. owning stocks is hard to compare to the “anxiety cost” of being exposed to stock market fluctuations. Canards like “Invest your age in bonds” are easy to remember and somehow sound like experience-based wisdom. And, of course, few investors see their securities portfolios correctly as only one component of their Total Financial Portfolio which, for most of us, has large stable value components like our homes, the net present value of our future incomes or savings, and our Social Security benefits.

Psychologists tell us that beliefs, whether political or social or financial, are very hard to get believers to change, particularly if those beliefs are long held or part of a system. Attempting to cause change in beliefs by using logic or evidence typically leads to increasing resistance or “digging in.” That's why Darwin lamented that his scientific friends would have to die off before his carefully documented theories would be accepted—and he was right!

Many unusual realities contributed to my life of learning: studying for my PhD when the academic community was super-charged with the exciting discovery of efficient markets and MPT; teaching advanced courses on investing multiple times at both Yale and Harvard; teaching for 15 years in week-long programs for experienced professionals at Princeton, leading a 30-year series of twice-a-year three-day seminars with the “best and brightest” fund managers; many years of service to the CFA Institute; service on over a dozen investment committees around the world, consulting repeatedly with well over 100 of the world's best investment managers; writing several books on investing; and, best of all, having the privilege of many great personal/professional friendships around the world with leading practitioners, so I was, time and again, able to see the process of change. These 39 articles, like reports from the field, tell my story of learning about important aspects of investing.

While many investors focus their attention on finding a really good investment manager, my unusually wide exposure—largely through three decades of consulting for Greenwich Associates with many investment managers and securities firms around the world, particularly in the US, Japan, and the UK (but also Germany, Switzerland, Canada, Singapore, and Australia) gave me a special insight. I realized that it was almost easy to find excellent investment managers but that was not the right question; the right question was whether it was realistic to search for a manager who was sufficiently better than the many really good investment managers so that he or she would achieve “better than the market” results after costs and fees and, for individual investors, taxes. That is a very different question. And the grim reality is that the answer to that question is almost always, No!

So, while some part of these articles can be claimed to be original ideas, most are reports by an observer who was fortunate to have learned from others and was able to join the pieces into a hopefully useful whole. For me, the experience of writing and figuring things out has been great fun and a chance to learn from others. Sometimes my learning came before the particular pieces came together and sometimes came afterwards because some pieces seemed controversial when they first appeared and led to great discussions—and clearer explanation. One happy surprise for me: While some of these pieces may have become outdated because things changed, none have proven to be wrong. As always, my hopes are two: First, that readers will enjoy them and, second, that any disagreements will be shared with me so I can keep learning.