Troubling questions for a financial guru
On Monday, I sat in on a value investing talk given by hedge fund manager Joel Greenblatt, best-selling author of
The Little Book That Beats the Market
. He's started a money-management firm based on the "Magic Formula" outlined in the book, and the talk was attended by a smattering of reporters, financial advisers, and academics.
If you haven't read the book, it's a good primer on value investing, though the conclusion it boils down to -- that to beat the market, you just have to invest in stocks with low P/Es and high returns on capital -- would raise the ire of plenty of his value manager peers. I'm oversimplifying, and there are other places where you can read more about Greenblatt's strategy, but what interested me at this talk were the questions fired at Greenblatt after he finished.
Let's just say that some of these questions didn't inspire confidence in the investing process. A couple paraphrased examples:
- From an adviser, apparently: "What's the economic benefit to an adviser of recommending the service? How do we get compensated for referring people to your firm?"
At Money, we go on and on about the benefits of hiring a fee-only financial planner, such as those from NAPFA or Garrett Planning Network, instead of one working on commission. This is precisely why. When your adviser hears about a new service, do you want one of the first questions from his mouth to be, "What's in it for me?"?
- From a professor: "So the formula beats the market, but what good is that when the market did crap? Wouldn't it be better to just not invest in the market at all?"
I don't know if the professor just wanted to elicit a response or if she really considered stocks too risky for individual investors. Greenblatt said that his methodology just dealt with the stock portion of a portfolio and that proper asset allocation was needed to bring an investor's risk in line with his tolerance.
I myself would ask the professor, "What's the alternative?" The fact is, over long periods of time, the stock market does outperform just about any other asset class, precisely because it's risky. You can always lower your risk by investing less in stocks, but you need to offset that by saving more to meet your goals -- in some cases, a LOT more.
Boston University professor Zvi Bodie, whom I interviewed a few months ago, tells investors to put all their money in inflation-protected Treasury bonds. In exchange, they have to either stick upwards of 30% of their income in their retirement savings or not retire at all.
So what sounds the most crazy: Saving 30% of your income, working until you're dead, or investing in stocks?
It's not a stupid question. We get similar ones from readers all the time. And there were plenty of other smart questions from the audience. But it's good to keep in mind that advisers and academics have the same foibles and doubts that we all do about how to invest.
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