—CHARLIE MUNGER, WESCO ANNUAL MEETING, 2000
— Stansberry Research
Today, more than 9,500 mutual funds crowd the U.S. market. Armies of professional money managers with impressive credentials and access to Bloomberg terminals pore over financial statements and conduct extensive research in search of insights that will give them an edge. They increasingly trade with other professional money managers. Institutional trading accounts for about 95% of trading volume.
Given the growing competition and the zero-sum nature of active management, you might expect the average mutual fund to perform about as well as the market. But that’s not the case. Over the past 15 years, more than 92% of U.S. large-cap mutual funds have trailed the S&P 500.
The vast majority of mutual funds underperform because the fees they charge more than negate any outperformance they’ve achieved by picking well-performing stocks.
Over time, these fees add up…
Let’s say you have a $100,000 portfolio, and you invest in a low-cost fund that tracks an index with a 5% annual return. This low-cost fund charges a management fee per year of 0.17%, which is the average asset-weighted fee for all passive funds. Your $100,000 would grow into more than $411,000 in 30 years.
Now let’s say you had invested in a high-cost fund, instead. This actively managed fund also earns 5% a year. And it charges a 1.14% annual fee, which is the simple average fee across all funds. Your $100,000 would only grow into about $311,000.
In our hypothetical example, the company managing the high-cost fund is essentially siphoning off around $100,000 of your money over 30 years… which is equal to your entire initial investment.
By design, passive funds are lower cost. Vanguard’s asset-weighted average expense ratio – the management fee that the fund charges investors – is just 0.11% per year. That compares with a much higher 0.75% asset-weighted average fee for active funds. And as we’ll show, many funds have fees greater than 1%.”
— Howard Marks:
In thinking about risk, we want to identify the thing that investors worry about and thus demand compensation for bearing. I don’t think most investors fear volatility. In fact, I’ve never heard anyone say, ‘The prospective return isn’t high enough to warrant bearing all that volatility.’ What they fear is the possibility of permanent loss.”
— Bruce Flatt of Brookfield Asset Managment (Forbes.com)
… never put yourself in a situation where you have to sell something in an environment where you should be buying.”
In 1999, Bobby Bonilla was playing for the New York Mets…
And playing poorly.
He was suffering the worst season of his career. He batted a subpar .160 with only four home runs and 18 RBI. This was way below his career average of .279 with 22 home runs and 90 RBI per season.
Because of this, the Mets didn’t want to pay him the $5.9 million he was owed.
Negotiations ensued. Eventually, the Mets and Bonilla agreed to defer payment on his salary until 2011. His agent got the team to agree that the amount owed would increase at an 8% annual rate starting in 2000.
It wound up being a blessing for Bonilla. Thanks to the power of compounding, his $5.9 million payout turned into $29.8 million…
A 405% increase.
Now every July 1, the Mets pay Bonilla – a 53-year-old who hasn’t played ball in 15 years – $1.2 million. In fact, even though he’s retired, Bonilla is the 15th highest paid player on the Mets roster this season.
His final check will come more than 30 years after his last at bat.”
From Stansberry Digest 4/28/2017:
Loans for education and cars contributed to 90% of the growth in consumer debt since 2012. By 2015, roughly 25% of car loans were made to subprime borrowers.
But why should the banks care? These auto loans are securitized, just like the bad mortgages were. In the last five full years, $455 billion in auto loans were securitized. Remember, one out of every three cars that are traded in for a new car have negative equity (meaning the unpaid portion of the old loan is “rolled” into a new loan). And the durations of auto loans have been extended. (The average auto loan is now 68 months)… Given those facts, it’s a safe bet that something like half (or more) of these securitized auto loans have zero equity.
You might recall a major factor in the mortgage crisis of 2008 was that most subprime mortgage holders (and even a lot of prime mortgage holders) had zero equity in their homes. Walking away from those mortgages was a rational (if not ethical) financial decision.
Today, with used-car prices plummeting… how many subprime borrowers are going to keep paying 20% a year to drive a car with zero equity?
And then there’s the elephant in the room…
Student loans. Today, a record number (42 million) Americans have a student loan. This debt is virtually impossible to extinguish in bankruptcy. It’s not going away. And the total debt outstanding has doubled in the last 10 years to $1.3 trillion. That’s bigger than auto loans. Bigger than credit cards.
And the problems in student lending are nightmarish. Currently, 8 million people, who collectively owe $137 billion, are seriously delinquent. That means they’re more than 360 days late. That’s 19% of all borrowers. Another 3 million (owing $88 billion) are at least a month behind on their payments and likely to default. So more than 25% of all student loans are essentially in default.
That’s bad enough. But it doesn’t tell the whole story.
People have all different kinds of ways to defer paying these loans. So if you include all the loans that aren’t being serviced, you find that more than 40% of these loans aren’t being serviced and are likely to default.
And here’s the “good” news… It’s not just “kids” who borrow for college. About 3.5 million adults have borrowed $77 billion on behalf of their children.
We’ve never seen figures like these before in the U.S. economy.
Currently, U.S. consumer debt, not including mortgages, equals 20% of gross domestic product (GDP) – an all-time high amount. The culprit is ballooning auto loans and soaring student loans. We already know that a shocking number of these loans aren’t being serviced and will not be repaid.
The bad car loans will be repo’d and sold. (That’s why used car prices are plummeting right now.) But how will the student loans be cleared? Nobody knows.”