Efficient Markets: Markets are not perfect but neither are really smart guys

Next time you think you, your mutual fund, your broker, your stock picking software can beat the market; scan the graphic below and read this short excerpt from Business Week July 16-21, 2013, "The Hedge Fund Myth"

"Hedge funds are built on the idea that a smarter guy (and they are almost all guys; only 16.8 percent of managers are women) with a better computer can make miracles possible by uncovering inefficiencies in the market or predicting the future. In pure dollar terms, there are more resources, advanced degrees, and computing firepower devoted to chasing this elusive goal than almost any other endeavor, and that may include fighting wars. Yet traders face the immutable fact that every second, each megabyte of information, blog post, one-line rumor, revenue estimate, or new product order from China has already been taken into account by the efficient market and reflected in a security’s price. This means that trying to gain what traders call an “edge,” at least legitimately, is almost impossible. As the financial incentives on Wall Street have become enormous, so have the competition and pressure to gain an advantage at any cost."

Full Article: http://www.businessweek.com/articles/2013-07-11/why-hedge-funds-glory-days-may-be-gone-for-good#p2

What if You Paid Your Doctor Like You Pay Your Financial Adviser?

There would be moral outrage if we lived in a world where doctors didn't directly charge patients, but earned all their income from the pharmacy companies for the prescription drugs they prescribed. We would ask "how can the doctor be objective?"

Reality: We live in a world where the vast majority of financial advisors dont directly charge the client a penny, but receive commissions and fees from the investments and insurance products they sell clients. This is how brokers and many fee based advisors earn their fees. There is no moral outrage, no cry of "how can they be objective?"

This year the UK, Netherlands, and Australia have made commissions in financial products illegal, see Jason Zweig's WSJ blog:

http://blogs.wsj.com/moneybeat/2013/06/21/the-intelligent-investor-going-dutch-could-fee-hurdles-come-down-everywhere/

A fee only advisor charges a client directly. The charge is generally based on time spent or on the amount of money managed. The client receives an invoice and pays directly or may pay directly from the investment portfolio.

Ask your advisor how they get paid and then ask whether they can be objective in their advice.

Full Disclosure: AWM is a fee only advisor.