| The securities industry knows that chasing | | | | charts. Those in the industry who do not |
| historical performance is bad for individual | | | | understand this have not bothered to do their |
| investors, but they encourage this behavior by | | | | homework. And, why should they? If these |
| publishing historical performance charts and 4 star | | | | superior performance hustlers learned what is |
| and 5 star ratings, which are also largely | | | | good for individual investors, they might also |
| meaningless. For the industry not to know would | | | | realize that they should find another career that |
| imply that many very smart professional | | | | adds some genuine value to our society. |
| investment managers have had their heads in the | | | | How one fund family solves this problem -- They |
| sand about decades of financial research. | | | | refuse to play the game. |
| The securities industry and many of its brokers | | | | In the May/June 2007 issue of the Journal of |
| and investment advisors know that low cost | | | | Indexes, there was a "Straight Talk" interview |
| index strategies are better for individual investors. | | | | with John Brennan, CEO of the Vanguard Group, |
| However, the | | | | who succeeded John Bogle in 1996. (Pages 24-25, |
| "active-management-beat-the-market" industry | | | | 50) When asked about performance chasing, |
| crowd will not make any money off of you, if | | | | Brennan said the following: "The way(s) you |
| they tell you that. They have to push the "we | | | | mitigate against it are several. One, you never -- |
| deliver superior performance" mantra, because | | | | in our view -- never promote performance. You |
| that is the justification for their excessively high | | | | just never run a performance ad. I think that is |
| and performance killing fees. Since market realities | | | | endemic to our business, and I think it's a shame |
| make it virtually impossible for actively managed | | | | for our industry. When you read a performance |
| funds to consistently beat the market after their | | | | ad, there is an assumption that the strong |
| fees, they have to resort to promises, | | | | performance will continue. And that is not |
| deceptions, and what Darrel Huff would call | | | | necessarily true. The second thing is ... when you |
| "statistical" lies.* | | | | call Vanguard to talk about our funds, or when |
| * (Darrell Huff wrote a short and very | | | | you read our literature, you won't find a |
| informative book, "How to Lie with Statistics," | | | | Morningstar Star Rating. ... At the end of the day, |
| which was first published in 1954 and was | | | | firms that promote performance do so at their |
| amusingly illustrated by Irving Geis. This book is | | | | own peril." (And, The Skilled Investor would add -- |
| still in print and remains very popular on Amazon. | | | | at the peril of their clients, that is, you!) |
| It plainly and humorously discusses how statistics | | | | (Note that there is no business relationship |
| can be distorted and misused to serve the | | | | between The Skilled Investor website and the |
| self-interest of the presenter.) | | | | Vanguard Group or the Journal of Indexes. I have |
| These lies include: #1 selecting only winners to | | | | not received any kind of compensation for this |
| promote, #2 easy index benchmarking, and #3 | | | | article whatsoever. |
| hard to interpret cumulative historical performance | | | | |