Note: I recently won the Elliott V. Bell Award from the New York Financial Writers’ Association and gave a little speech on the good work financial journalists can still do. The text follows. You can also click here for the video, which includes an hour-long panel discussion I did with the great Gretchen Morgenson and Allan Sloan. 

Thank you so much, Matt. And thanks to everyone for being here…wherever that is. What an honor and privilege it is for me to share this award with so many colleagues, mentors, and friends.

I worked for the second winner of the Elliott Bell award, the great Jim Michaels, for almost nine years. When he made me Forbes’ mutual-funds editor in 1992, I asked him for advice. He said: “Don’t get anybody’s blood on your hands” — by which he meant we have an unshirkable duty never to pander to our readers and never to repeat Wall Street’s propaganda without scrutiny.

And the 34th and 35th winners, Allan Sloan and Gretchen Morgenson, who’ll join me on this evening’s panel, have been my ethical exemplars for decades.

I’ve worked with at least 11 previous winners of the Elliott Bell award and am friends with many more. I can’t possibly name every winner I admire, because I admire them all.

I’d like to thank my wonderful editors at the Journal: mainly Charles Forelle, Emily Gitter, Erik Holm, and especially Dave Reilly, who never stops pushing me to dig deeper and write tighter.

And now, a word about something that isn’t true.

Journalists on other beats seem to look down on us — as if, while they’re exploring important ideas and lofty ideals, we’re rooting around in the septic tanks of society.

I’ve heard other reporters say, “Oh, that’s just service journalism,” as if serving our readers by helping them make better financial decisions were somehow beneath the dignity of people who cover, say, professional sports…or Congress…or the White House.

What nonsense! If the point of journalism isn’t to serve our readers, what is the point?

As the writer Peter Bernstein said: “Believe me, when people have told you about their money, they have told you the most important fact about themselves. Their sex lives, problems with their children, their political views, are all secondary.”

To enlighten people about money is to illuminate what is often the darkest and most anxiety-ridden part of their lives. Every time we expose a fraud or demystify a complexity, we help make someone’s future more secure. Financial journalism is beneath nobody’s dignity. Done right, it’s as noble a calling as I know of.

And it’s fascinating, because of what it tells us about human nature.

Markets are quoted in numbers, but what they trade in is emotions. Markets simply determine prices for risks and rewards over time. Among those risks are not just financial losses, but the surprise and fear and regret they bring. Among those rewards are not just monetary gains, but hope and greed and pride.

Along that axis of time, all these emotions play out as people become unimaginably rich and then go bust, turn from nobodies into geniuses and then into fools, as the goddess of fortune spins her wheel, raising the last to be first, then spinning it again and relegating the first back to last.

The goddess of fortune, though, operates from behind a curtain. Our job is to lift the curtain and show everyone that she is there, silently, blindly, capriciously turning her wheel, again and again and again, as she will until the end of time.

I like to say that the financial markets are the greatest show on earth, and at The Wall Street Journal I have a front-row seat at the circus. Even so, once every few weeks, I think we’ll have to run white space where my column is supposed to be. Yet, lo and behold, the market always provides: a bubble, a crash, a scam, a scandal, a comeback from nowhere, a hot hand gone cold, a regulation gone wrong, a fund manager gone rogue, a computer program gone wild. And so, just in the nick of time, I get my latest glimpse of which way the goddess of fortune has spun her wheel, and there’s my 800 words for the weekend.

So: When I heard I’d won this lifetime achievement award, my first thought was Oh no, my career is over! My second thought was, I want to be the first person to win it more than once!

No, I’m not ready to give up my front-row seat at the greatest show on earth. The show must go on! And it will go on. And we will expose it, cover it, explain it, and illuminate it. And, if we do our job right, we will not only help our readers understand the financial markets; we will help them understand themselves.

Thank you again.

Further reading

My Interview with Jason Zweig

“I wish I could talk to this guy,” I told my wife when I read Ben Graham’s The Intelligent Investor first time sometime in 2005.

“But he is dead, right?” she said.

“Oh, not Graham,” I exclaimed, “But Jason Zweig who has edited this version of Graham’s book.”

“I am sure you would one day,” she said with an air of confidence. But I junked her thoughts saying, “Why would he even want to talk to me?”

Well, I had this discussion in mind when I wrote to Mr. Zweig in mid-October last year to request him for an interview for our Value Investing Almanack newsletter. I knew it was a shot in the dark, something I had not done for a long-long time after missing a few such shots in the dark on stocks I lost money owning.

But this shot worked, and worked well for me. Not only did Mr. Zweig agree immediately for the interview, he also made me comfortable by asking me to address him as, well, Jason.

It turned out to be a great interview for me as a learner, and I hope Jason also found it worth his time and effort. Before I begin, I remember this quote from Jason in his starting note for The Intelligent Investor –

In the same way, I envy you the excitement of reading Jason’s thoughts in this interview for the first time. So let’s start right here with a brief introduction.

Jason Zweig is the investing and personal-finance columnist for The Wall Street Journal. He is the author of The Devil’s Financial Dictionary, a satirical glossary of Wall Street (PublicAffairs Books, 2015), and Your Money and Your Brain, on the neuroscience of investing (Simon & Schuster, 2007).

Jason edited the revised edition of Benjamin Graham’s The Intelligent Investor (HarperCollins, 2003), the classic text that Warren Buffett has described as “by far the best book about investing ever written.” He also wrote The Little Book of Safe Money (Wiley, 2009); co-edited Benjamin Graham: Building a Profession, an anthology of Graham’s essays (McGraw Hill, 2010); and assisted the Nobel Prize-winning psychologist Daniel Kahneman in writing his book Thinking, Fast and Slow. From 1995 through 2008 Zweig was a senior writer for Money magazine; before joining Money, he was the mutual funds editor at Forbes.

Jason has also been a guest columnist for Time magazine and cnn.com. He has served as a trustee of the Museum of American Finance, an affiliate of the Smithsonian Institution, and sits on the editorial boards of Financial History magazine and The Journal of Behavioral Finance. A graduate of Columbia College, Jason lives in New York City.

Safal Niveshak (SN): What inspired you to write your latest book, The Devil’s Financial Dictionary? What’s the biggest lesson you wish the reader should take from the book?

Jason Zweig (JZ): Ever since I was a college student, I’ve been an admirer of Ambrose Bierce, the 19th century American author who wrote The Devil’s Dictionary, one of the greatest works of satire in the English language.

A few years ago, my teenage daughters were teasing me about how my personal website never featured anything new (at least in their opinion). I looked out the window of my home office and wondered: “What could I do that would be new every day without making readers feel that I’m encouraging them to respond to the market’s every move?”

To the left of my window, I glimpsed the paperback copy of The Devil’s Dictionary that I’ve owned since 1979. I glanced to the right and there, on my other bookshelf, was my second, hardcover copy of the same beloved book. I suddenly realized that I could write and post one satirical financial definition per day on my website. I didn’t expect it to turn into a book; I wrote the entries for fun. Then several publishers stumbled on it, and suddenly it became a book.

Of course, Wall Street and the rest of the financial world provide such a wealth of absurdities that eventually it may turn into a multi-volume encyclopedia.

The lesson readers should take from the book is that the language of finance is often used not to explain, but to obfuscate. Those who know what terms mean can make a lot of money. Those who think they know what terms mean will lose a lot of money.

SN: What do you think happens inside our brains when we hear the financial experts’ gibberish? We all want to simplify our lives, so why is it that many of us admire those in the financial markets who throw at us the most complex stuff?

JZ: Neuroeconomist Gregory Berns of Emory University and his colleagues have found that listening to financial experts triggers a neural response they call “offloading,” which is a lower level of activation in the posterior cingulate and other regions of the frontal cortex normally engaged in decisions about risk and return. Conformity and deference to authority are part of human nature; man is a social animal, and we evolved to learn that following the leader and staying inside the herd helps to keep us alive. That served our ancestors well on the plains of the Serengeti. It doesn’t serve us well in modern financial markets, where computers can outsmart us and many people are richly rewarded for giving advice that is better for their own bottom line than it is for ours.

I also feel that financial jargon is even more insidious than other professional dialects, like medical lingo or info-tech gobbledygook. When a financial advisor uses jargon, we want to pretend to understand it so we can feel like privileged insiders who are “in the know.” Pretending to comprehend financial gibberish confers an illusion of power on those who purport to know what the jargon means.

In truth, the ultimate power lies in understanding that you don’t know what it means – and that the person using those words probably doesn’t, either.

SN: That’s true! Anyway, in a mid-October 2016 front-page article in The Wall Street Journal titled The Dying Business of Picking Stocks, you wrote about investors giving up on stock picking and moving into passive funds. Can you please elaborate more in that? Do you see it as a long-lasting trend?

JZ: Our article was primarily about the U.S. market, although I believe these trends will inevitably percolate worldwide. Active management will never disappear entirely; hope springs eternal, and most people never entirely abandon their belief in magic.

Furthermore, active management gives investors someone else to blame. If you buy an index-tracking fund that loses 30% in six months, you have no one to blame but yourself; if you buy an actively managed fund that does the same, you can tell your family or your boss or your pensioners that the fund manager “strayed from his mandate.” You get to sack him instead of being sacked yourself. Finally, at least in the U.S. (and I’m sure in many other places), institutional investors are often required to make periodic “due-diligence” visits to the asset-management firms they hire. Many such firms seem to have home offices near beautiful beaches or in historic cities that are delightful to visit. Perhaps that is some kind of coincidence, but it certainly gives their largest clients a lifelong incentive to ignore high fees and low performance.

Nevertheless, index-tracking funds will continue to grow worldwide, as they should and as they must. Research by Fama and French, among others, has shown that nearly all outperformance relative to a market index can be explained by such common dimensions of risk and return as value, size, “quality” (profitability), and momentum. These factors can be systematically packaged into a tracker fund at extraordinarily low cost. An active manager whose success has come from picking stocks one at a time that score high on one or more of these factors must charge high fees to cover the considerable research costs; a passive fund can algorithmically mimic what the active manager is doing for a fraction of the cost. In the U.S., such “factor ETFs” are available for annual fees of under 0.1%, or 10 basis points and less. Active managers charging 10 to 20 times as much are doomed to lose market share.

SN: You define “forecasting” as “the attempt to predict the unknowable by measuring the irrelevant; a task that, in one way or another, employs most people on Wall Street.” Let’s talk about financial journalists here, who are in the prediction mode all the time, whether it’s newspapers, television, or the Internet. What role has financial journalism to play in promoting the devilish financial jargon you have defined in your book?

JZ: The financial media can’t be dissociated from the prediction industry in general. We are all guilty of perpetrating the myth that someone, somewhere, knows what the markets are about to do. Decades ago, the psychologist Paul Andreeassen showed that people who get more frequent news updates on their investment portfolios earn lower returns than those with no access to the news at all. That doesn’t mean that financial journalism is useless: Ignorance won’t make you a better investor. But the financial media should focus investors’ attention on the elements that separate success from failure – how to be optimally diversified, how to minimize fees and taxation, how to increase one’s own self-control – rather than pretending to clairvoyance or trumpeting whichever investment has been hottest lately.

I try to write for my high-school English teacher’s wife, who tells me whenever I see her that she likes my columns even though she doesn’t understand them. My goal is eventually to write one she can understand; I think, after 20 years, I am getting closer.

SN: You’ve defined “News” as “noise; the sound of chaos.” Bombarded with such noise from all sides, how does an investor go about blocking it to be able to make sound investment decisions?

JZ: Whatever can be a matter of policy and procedure must be. You should have a checklist that you must follow before taking any action. The rules should be yours, not mine, but they must be rules, not wishes. A few possibilities:

• Never buy a stock purely because its price has been going up, nor sell purely because it has been going down.
• List, in writing, three detailed reasons why you are buying, in terms that – like a scientific hypothesis – can be falsified by subsequent findings.
• Stipulate a price target, a time by which you expect the stock to reach that level, and an estimated probability that those forecasts are correct.
• Set up, in advance, automated alerts to remind you when price changes significantly – for example, 25%, 50%, etc. At those thresholds, assess methodically whether the value of the underlying business has changed comparably.
• Sign a contract with yourself, witnessed by family or friends, binding you to sell only when the value of the business, rather than the price of the stock, decays.

If that sounds like too much work, then owning individual stocks probably isn’t a good match for your temperament. Buy a passive fund instead – but don’t forget to sign a comparable contract with yourself.

SN: You recently quoted Keynes, who said that courage is the key to investing. But showing courage when everyone is running for cover in a falling market is harder to do than to imagine. Given that such scenarios are playing out quite often in the current times, how does an investor build the necessary courage to combine with his/her capital when the opportunities come knocking?

JZ: Cash and courage go hand in hand, as Benjamin Graham wrote in 1932 after stocks had fallen more than 80%. Cash without courage will do you no good in a falling market, as you will be too afraid to invest it. Courage without cash is equally useless, as you can’t buy anything no matter how brave you feel if you have no money to buy it with. So husbanding some cash is the first step.

I am also great believer in what I call “financial fire drills.” Just as office-workers are periodically required to rehearse what to do if the building catches fire, investors should rehearse how they should behave if the stock market erupts in flames.

Build a watch-list of investments you would like to own at much lower prices than today’s, specifying the prices at which they will become bargains. Cultivate good mental hygiene now, before it is too late: Break bad habits like watching financial television, frequently checking the value of your brokerage accounts, or getting constantupdates on the market. Go back and study your behavior during the last market crash: Did you sell? freeze? or buy more? (Don’t rely on your memory, which is likely to be illusory; consult your actual brokerage records, and be honest with yourself about what they show.) Then look at how those decisions worked out: Did your behavior rescue you from further losses, or preclude you from further gains?

Using what you learn about your past behavior, you should be able to structure rules to improve your future behavior.

SN: Your book basically mocks the outrageousness of the financial world which, in other words, is laying bare the truth of how the system works. In fact, you’ve defined “stock market” as “a chaotic hive of millions of people who overpay for hope and underpay for value.” Amidst all this, what advice do you have for a small, individual investor on how to safeguard his/her capital and grow his/her money?

JZ: The great investment philosopher Peter Bernstein liked to say that investors without much money should take small risks with most of their money and big risks with a little of it. Maximizing diversification should be your primary goal. If you put at least 90% of your investable assets into a small set of low-cost, widely diversified market-tracking funds, then there’s nothing wrong with trying to pick a few market-beating stocks with the rest of your money. You can’t lose much of your total wealth if you turn out to be incompetent at stock-picking, while you could enhance your wealth significantly if you turn out to be good at it. But you must be serious about it, willing to devote great amounts of time and effort and scholarship and emotional resolve. If you treat it as a game, you are certain to lose, sooner or later.

SN: How can an investor improve the quality of his/her decision making?

JZ: Study the markets. Study history. Study psychology. Above all, study yourself. Successful investing isn’t about picking the right stocks and avoiding the wrong ones. It is about making sure that you don’t let your own emotions deflect you from your strategy at the worst imaginable time. The best investors are those who think constantly about their own shortcomings and how to overcome them.

SN: What are the most important qualities an investor needs to survive the complexity of the financial markets?

JZ: Self-control. I don’t know what proportion of people who call themselves “investors” are, in fact, just speculators, but I wouldn’t be surprised if it is above 90%.

I find it remarkable that in India, the world’s wellspring of yoga, so many investors give themselves endless stress trying to chase short-term market performance.

Investing is not a 110-meter race. It is a marathon. If you want to finish the race, you shouldn’t try to go faster; you should slow down. And you need to learn how to resist investing in any asset or strategy you don’t understand.

SN: You talk about self-control. Can someone learn to have self-control or learn to behave well, if that attribute is not already ingrained in him/her? I’ve read this wonderful book called Sapiens, where the author [Yuval Noah Harari] talks about the gorging gene theory, which suggests that we carry the DNA from our ancestors of gorging on sugared or fatty food even when we have our refrigerators overstuffed with such foods. This is because our ancestors used to gorge on sugared fruits, but that was purely out of scarcity and fear that if they did not eat them, the baboons would. So, with such DNA, can we as investors really learn to behave well?

JZ: Genetics is predisposition, but it doesn’t have to be predestination. We’re all inclined to love sweet, salty, or fatty foods, but we aren’t all doomed to like them. With diligence and discipline, we can train ourselves to have higher resistance to them. And we can recognize that willpower is insufficient, in and of itself, to achieve that resistance. We must make our environment more hygienic. Think of alcoholics, for example. You might tell yourself, When someone offers me a drink, I will just say no. But, over time, you will learn that that doesn’t work, because of what psychologist George Loewenstein has called “the hot-cold empathy gap”: In a cold, or emotionally unengaged state, you will picture your future desires as much more manageable than they will, in fact, turn out to be in the heat of the moment. So eventually alcoholics learn to control their environmental hygiene: They avoid walking down the street where the tavern is, they ask their friends to tell the party host not to serve alcohol, they bring their own non-alcoholic beverages with them when they travel. All of those behaviors are intended to keep dangerous emotional cues at bay.

By the same token, investors need to avoid the cues that can trigger self-defeating behaviors. Use checklists and watchlists to prevent impulse from determining your behavior. Remove any trading apps from your smartphone. Don’t bookmark any websites that encourage you to update your account values in real time. Build a spreadsheet of all your holdings that you refresh only once every calendar quarter. Change the password on your brokerage account to a personalized variant of IWILLTRADEONLYWHENABSOLUTELYNECESSARY; there is evidence from psychological research that frequent subliminal repetition of such a message can change your behavior.

You should be under no delusion that these techniques will eliminate your genetic frailties. But they can help you exert at least some control over them.

SN: Are successful investors born, or made?

JZ: Both, of course. A great deal of investing success comes from temperament, which is (largely) inborn. But every good investor I’ve ever met is a learning machine – someone who eats information ravenously and who is obsessed not by how much he already knows but by how much he has yet to learn.

An underappreciated factor that great investors share, I believe, is that they relish being proven wrong. Most people dread making mistakes with a kind of visceral horror. But great investors welcome making mistakes, because errors are opportunities to learn. Whenever I encounter a professional investor with a track record of outperformance who boasts only about what he got right, I know I am in the presence of someone whose overconfidence is dangerous, if not deadly.

SN: Apart from Ben Graham, Warren Buffett, and Charlie Munger, who inspires you the most when it comes to investing and investment behavior?

JZ: I would name three people: two giants and one few people have ever heard of.

First, John Maynard Keynes: Chapter 12 of his book The General Theory of Employment, Interest and Money is probably the most concentrated set of profound insights into investment behavior ever written. He teaches us that to be rational you must reckon with how irrational other people can be.

Second, Daniel Kahneman, whom I have known for 20 years and whose book Thinking, Fast and Slow I helped research, write and edit: From Danny I learned how important it is to try answering difficult questions by beginning with the words “I don’t know.” The admission of ignorance is the gateway to learning, and the more you learn the clearer it should become to you how much you do not know.

Finally, an individual investor and retired U.S. Army colonel named Jack Hurst, whom I met when amyotrophic lateral sclerosis (motor neurone disease) had already paralyzed his entire body save a few muscles in his right cheek. Unable to speak or move on his own, Jack nevertheless exemplified the patience, skepticism, independence, discipline, and courage that characterize the intelligent investor. Using a computer-brain interface powered by the electrochemical signals in the facial muscles over which he still had voluntary control, he meticulously researched stocks, bought them after severe price declines, sold them to capture tax benefits, and watched financial television – but with the sound turned off so it wouldn’t influence him emotionally! I wrote about him here. He taught me that courage is the most underappreciated of all investing virtues.

SN: You have inspired millions through your writing, but which are some of the books on investing, behavior, and multidisciplinary thinking that have inspired you the most over the years? If you were to give away all your books but one, which one would it be and why?

JZ: I have listed the books I regard as indispensable here, here, and here.

Your last question is painfully difficult for someone who has loved books since he first learned to walk. I suppose if you held a gun to my head and made me pick only one book to keep, it would be the Essays of Montaigne. While that book has nothing to do directly with investing, it has everything to do with learning how to think and live. I can’t think of another book that is so good a guide to what it means to know oneself, to embrace uncertainty, to live within one’s means, to value humility above all other virtues, and to remember that the two greatest intellectual endeavors in life are to learn as much as possible and to accept how little you will ever be able to learn.

SN: Hypothetical question: If you had a magic wand, which ill of the financial system would you eliminate first, and why?

JZ: I suppose I would require anyone providing investment advice to have a formal fiduciary duty to the client. Enforcing that requirement would be difficult, however. The supply of people whose minds and hearts qualify them to be fiduciaries for others is probably insufficient to meet even one-tenth of the demand. The sudden imposition of such a requirement would force millions of advisors around the world to try meeting a standard that most would fall short of. Perhaps there should be some sort of centralized training and licensing regime, the same way most nations require physicians, attorneys, and accountants to meet rigorous professional standards. Unfortunately, the magic wand you have handed me doesn’t seem to work; we are probably many years, if not decades, away from seeing fiduciary duty become universal. That is a shame. Investors, in the meantime, will have to rely largely on themselves; identifying good financial advisors is going to require great effort for the foreseeable future.

SN: You’ve talked about the importance of being a learning machine. And it seems that reading widely – apart from learning from, say, role models – is one of the important means to becoming a learning machine. In this regard, what are your thoughts on how one should go about selecting which books to read? There are so many books that come out these days, and each one of them looks inspiring and highly recommended by someone. But time is limited. So, is restricting to the supertexts on investing, thinking, and behavior a good idea? Else, how should one go about selecting which new books to read? Do you have such a process in place?

JZ: I don’t have a formal process. However, I do pay close attention to what the people I respect the most are reading. When someone I admire recommends a book or a website or anything else to read, I try to read it. If minds better than mine have benefited from something, then so can I. It’s also worth bearing in mind that people without high standards will often recommend reading something that sounds better than it is. It’s disconcertingly easy for anyone to write a review or summary of just about anything and make it sound exciting even if, in fact, it is barely better than garbage. So if (for example) Charlie Munger says a book is “not bad,” you should regard that as much higher praise than if a second-rate or third-rate mind says some other book is a “must-read” or a “masterpiece.”

SN: As I’ve read at a few places, you also seem to hold Richard Feynman in very high regard. What are some of the most important things you like about Mr. Feynman and his teachings, which readers of this interview could also benefit from?

JZ: What I love about Feynman was his determination to think for himself and to be honest about his own limitations. In his books, he tells remarkable stories that can help even humanists think like scientists.

When Feynman was young, his wife, Arlene, was dying. Every day, she would send him little gifts at his office to show how much she loved him. Among them were bespoke pencils she’d had made with lettering along the lines of “I LOVE YOU, RICHARD. ARLENE.” (I don’t remember the exact wording, but it was something like that.) Embarrassed lest his colleagues see these emotional messages on his pencils, Feynman scraped them off with a knife. Soon, the next round of pencils arrived. This time, the message on them read: WHAT DO YOU CARE WHAT OTHER PEOPLETHINK?” From that, he – and all his readers since then – have learned the importance of disregarding the opinions of others when important matters of the heart (or mind) are at stake.

My other Feynman story involves the time he was asked by the state of California to sit on the committee that approves science textbooks for schoolchildren. He requested a copy of every single book on the list and read each from cover to cover. At the final committee meeting, the other members all said their favorite book was X. To Feynman’s astonishment, they had picked the book with the prettiest cover but without a word of text. It turned out that none of them had even opened the textbook; they liked how the cover looked and picked it as “best” on that basis alone. From that I learned the importance of always reading the source material, rather than relying on someone else’s representation of it. It still amazes me how many people who say “studies have shown that…” have never read the studies they are citing.

SN: Can you name some of the current publications (newspapers, magazines, blogs etc.) you read and respect a lot for their learning quotient? As far as reading newspapers is concerned, there have been proponents (like Warren Buffett) who say it is a great source of ideas and information, and opponents (like Taleb) who think newspapers are plain noise. Which side are you on? Is there a way to read newspapers effectively to differentiate between noise and signal?

JZ: I’ve listed many of the sources I regularly read here. Nowadays, I don’t use the term “newspapers” much; I call them (including The Wall Street Journal) “news organizations,” because that’s what we are. We don’t only, or even primarily, publish a newspaper. We publish online and on your phone and by email and so forth. To be honest, I don’t believe there is much debate to be had on this matter. Just ask yourself: Would I be able to make better decisions if I knew nothing whatsoever about what is happening in the world around me? It seems to me that the question answers itself, in the negative. While most investors probably pay too much attention to the news, an investor who pays no attention at all would be entirely in the dark.

As for me, I read The Wall Street Journal in both print and electronic form. First thing in the morning and last thing at night, I whiz through the top stories of the day on my iPhone to get a quick feel for what is happening. When I arrive at my desk for the work day, I read the print edition. I find that the “What’s News” column on Page One, which provides a one-or-two-sentence summary of every important article, is an invaluable guide to focusing my attention. Then I will often open some of the stories in my Internet browser, since the online versions often have interactive features that the print versions don’t. However, I don’t read every article every day; far from it. I focus on a handful that interest me, some in finance, some in politics or economics, some in technology, some in culture. On the weekend I mainly read our coverage of history and culture. The only other observation I would make is that when I am not working, I am always reading – but never about work. In my spare time away from the office, I have an iron rule never to read anything relating to finance or economics. Instead, I read classic fiction, poetry, history, philosophy, or science. The mind, like any muscle, must rest in order to grow. If all you read is finance, morning, noon, and night, eventually you will stop being able to learn anything new about finance. The best way to deepen your mastery of specific knowledge is by broadening your horizons of general knowledge.

SN: On that wonderful note, Jason, let me thank you for sharing your amazing and deep insights for Safal Niveshak readers. I’m sure readers are going to attain great benefits out of your thoughts and experience.

JZ: Thanks for the interview, Vishal! I really enjoyed it.

Source: Safal Niveshak, http://www.safalniveshak.com/interview-with-jason-zweig/

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This article was originally published on The Wall Street Journal.

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Further reading

One reason almost too obvious to mention: Actively managed funds are absurdly, stubbornly overpriced. They may well be the only important consumer good in modern life whose price has risen, rather than fallen, since they were first invented.

And it’s not as if people in the fund business aren’t aware of that. Here’s the first thing I recall writing about it myself. Note the date: I gave this speech more than 21 years ago. In all the intervening years, the ownership cost of actively managed funds has come down only a hair — and is still probably higher than it was in the 1920s. It’s definitely higher than it was at the dawn of portfolio management (search for “Foreign & Colonial” in the text below).

The text follows:

Why Do Mutual Funds Cost So Much?

Keynote Address

Morningstar Mutual Funds Conference

Chicago, Illinois

June 1, 1995

Jason Zweig

Senior Editor, Forbes Magazine

When it comes to mutual funds, what is the role of financial advisers? In my opinion, fund-picking is no place to hang your shingle. Let’s demolish one myth right at the start: Mutual funds are a commodity product. There’s not a lot more difference between, say, Berger 100 and Twentieth Century Ultra than there is between Kellogg’s Raisin Bran and Post Raisin Bran.

I’m not saying there’s no difference. (Just as some people can tell one brand of raisin bran from another after chewing for a while, some people can tell these two funds apart.) But I am saying the difference doesn’t matter a lot. They’ve both owned Oracle, Motorola, Microsoft and Sybase. And over the past ten years, Berger 100 returned 18.0%; Ultra, 18.6%. If Berger’s expense ratio had been lower, their returns would be identical. In short, one is Kellogg’s, one is Post, but they’re both basically raisin bran.

Now not every fund is a commodity product. If they all were, Morningstar wouldn’t exist, and I’d be out of a job. But most funds are commodities. There are now more than 425 growth‑and-income funds. There might be seven ways to run a growth‑and‑income fund; there might even be 50. But there are not 425 different ways. I daresay most of these funds are trying to get some growth and trying to get some income. There are now 194 California muni bond funds. That’s more than three funds for every county in California. Before long, if your name is Martha Jones and you live in Pasadena, you’ll be able to buy the Martha Jones Pasadena California Tax‑Free Bond Fund. Or maybe they’ll draw the line at one fund for each zip code.

But will the Martha Jones Fund or the Beverly Hills 90210 Fund be any better than Vanguard California Tax‑Free Insured? The only real difference will be a higher expense ratio, and thus more risk. The 90210 fund might buy bonds with slightly lower credit ratings. The Martha Jones fund might have a little longer duration. But in the end, it’s all just raisin bran. And Vanguard’s generic raisin bran has the same number of scoops at a much better price.

In short, it’s tough to add value with fund‑picking. It’s nearly impossible to know in advance which funds will beat the market over the long term. And among similar funds with good long‑term records and economical expenses, any one is a reasonable choice.

If you’re spending lots of time figuring out whether Scudder International is much better than T. Rowe Price International, you’re just not being very useful. Even worse, you’re defining yourself as someone who can be replaced by a $29.95 computer disk. You’ll have a hard time competing with anything that comes out of a computer.

If you’re not fund‑pickers, are you asset allocators? You can subtract your clients’ age from 100 and urge them to put that percentage in stocks. You can take them out for spicy food to get them to put 10% of their assets in emerging markets. You can make them drink coffee out of the Ibbotson mountain‑chart mug until they run for the bathroom. But asset‑allocation advice comes on a computer too.

What’s more, stocks have not delivered 10% annually ever since Eve bit into the apple; long‑term real returns have been pretty constant at 6% to 7%. But there’s no way to know future stock returns unless you can forecast inflation.

If you must do asset allocation, I urge you to think about three things. First, ask yourself whether you should always put all your clients’ long‑term money into stocks‑‑regardless of relative valuations. Might there come a time when stocks are just plain overpriced relative to bonds or cash? Would Warren Buffett buy shares of Berkshire Hathaway right now? Someone who really believes that you can allocate assets with no regard to underlying valuations should go see a witch doctor the next time they’re sick. It’s voodoo financial planning.

Second, remember that the top line on the Ibbotson mountain chart, which shows small stocks riding a bright green lightning bolt up into the ionosphere, is not a perfect proxy for today’s small‑cap market. As I believe David Dreman has pointed out, it makes the case for value stocks instead, since many of the companies in this time series were fallen angels left for dead on the floor of the New York Stock Exchange. And thus that line excludes those famous NASDAQ bid‑asked spreads. So put transaction costs back in. Go back to the 1960s and 1970s and look at the real‑world performance of small stocks as measured by the few true small‑cap funds then in existence. Then decide if the small‑cap gospel makes much sense.

Third, be skeptical about emerging markets. Let’s take a quick look at what people refer to as “the original emerging market,” the United States. From 1802 to 1870 the compound real annual return on U.S. stocks was 7%. From 1871 to 1925 it was 6.6%. And from 1926 to date it’s been 7%. In other words, our returns as an emerging market were no higher than our returns today as a developed market. Of course the emerging economies are growing faster than the U.S.; but might that already have been priced into their valuations? It was in the U.S. in the last century; it is in Asia and Latin America today.

One other point: Dividends accounted for more than 80% of real total returns from 1802 to 1925; real capital appreciation was about 1% a year. Remember that the next time some fund manager raves about a taco company that doesn’t pay a dividend.

So if I don’t put much stock in fund‑picking and asset allocation, what do I think you should be doing? There is enormous value in being an emotional disciplinarian for your clients, the Sister Mary Elephant who tells them to sit down, be quiet and hang on for the next market upturn. Making them stay the course is a vital public service. Making sure they have realistic expectations is even more important; most investors don’t realize that money will double in 12 years at just a 6% real return. Maybe if they did, they’d stop reaching for yield.

Instead of using mountain charts showing unsustainable past market returns or fund returns, you should be customizing your own little ”hill charts” showing how money is likely to compound in the future at realistic rates of return.

And the work you do in navigating your clients through the treacherous waters of IRA and 401(k) distributions, of estate planning, of technical tax planning‑‑those are indispensable services that you are justly proud of providing.

But I’m here to tell you how you can go even further. You must give your clients the full protection they need in a world that is hostile to the accumulation and preservation of wealth. The IRS is an enemy. The probate judge is an enemy. All too many brokers and planners are enemies. Since every TEN HOT FUNDS TO BUY NOW article kills a few billion more of the investing public’s brain cells, the press is often an enemy. And even the mutual fund industry can be an enemy.

In 1994, the scapegoat of the year was Heiko Thieme of American Heritage Fund, who was down 30%. Yes, he bought some lousy stocks, and maybe his research needed a little toning up. But let’s get real. This is penny‑ante stuff. All told, Mr. Thieme may have lost $50 million of his customers’ money last year.

But industry‑wide, mutual fund expenses are running at just under $30 billion a year. That’s $80 million a day, folks. If expenses are just one‑third too high‑‑and trust me, they are‑‑the fund industry is overcharging the public by $27 million a day. Management fees alone are running at $14 billion a year. 12b‑1 fees chew up another $6 billion.

Am I being too hard on the fund companies? Doesn’t it cost money to hire hordes of Harvard MBAs, to put Bloomberg terminals on every desk, to answer all those phones? Of course it does. But I urge you, before you buy a fund, to see if the parent company of the fund’s adviser is publicly traded.

What you’ll see will astound you. At the low end, Pimco Advisers earned an 11% net profit margin in 1994. Eaton Vance earned 14% net. T. Rowe Price Associates earned 16% net; Alliance Capital Management, 22%; John Nuveen, 26%; Franklin Resources, 30%. The median net margin on Forbes’ annual list of the 500 U.S. companies with the biggest profits was 8% for 1994. Think about it: Fund managers are making up to four times as much money as the most profitable companies in the rest of the American economy.

Just where do you think that money comes from? It comes out of your clients’ pockets. In 1956, when Forbes published our first annual mutual funds survey, the average expense ratio on stock funds was 80 basis points. Today, by our count, it’s 120. That’s a 50% increase in less than 40 years. (And I’ve excluded 12b‑1s to make the calculation comparable.)

Now what are the two great technological innovations since 1956? Telecommunications and computers. I am told they play a rather important role in the mutual fund business, so let’s price them.

In 1956, a five‑minute telephone call from New York to California cost $3.80. Today, at the maximum rate, that call would cost a midsized business 98 cents‑‑a 74% decline. Back then, calculations on an IBM model 650 computer, which I imagine was about half the size of a Studebaker sedan, cost $242.29 per instruction per second. Today one instruction per second on a Pentium‑powered PC costs twelve 10,000ths of a penny. In other words, the cost of computing power has fallen by 20 million times.

Spread these fantastic cost reductions over $2 1/2 trillion in mutual fund assets and ask yourself: Where are the economies of scale?

Where are they?

Where?

The answer is clear: They are accruing to the wrong people. Instead of the shareholders of the funds, it’s the shareholders of the fund companies who are reaping the benefits.

Is it really harder than it used to be to run a fund cheaply? Foreign & Colonial Investment Trust, the world’s oldest fund, began life in London in 1868 with expenses capped at 2,500 pounds sterling; that totaled between 36 and 42 basis points for its first five years.

Today this superbly performing trust (the British equivalent of a closed‑end fund) has an expense ratio of 47 basis points. The expense ratio at Foreign & Colonial has barely budged in more than 125 years. Costs at U.S. stock funds have shot up 50% in four decades.

Or look at the Alliance Trust of Dundee, Scotland, another of the world’s oldest funds. In the 1890s, the Alliance Trust had a large portfolio of U.S. railroad bonds and held mortgages on vast tracts of land in the American West. Imagine how hard it was to monitor these investments a continent away, with no telephones, no fax machines, no computers, no air travel, no automobiles. On one research trip, William Mackenzie, who ran this fund a century ago, traveled 18,500 miles by rail, horseback, stagecoach and steamboat in four months, an average of 145 miles of bone-breaking travel per day.

For this his daily expense account was about 4 guineas, or just under 25 U.S. dollars at the time. Considering that Forbes’ per diem is $35 today, this seems to me like a very generous sum for a century ago. Anyone who tells you that investment research is a lot more costly than it used to be is slicing you baloney.

A little more history: Back in 1960, the sponsors of 73% of U.S. mutual funds paid for the funds’ bookkeeping; 60% paid the funds’ accounting fees; 41% paid for their postal and printing costs; 11% even paid the transfer agent bills. Today the percentage of fund sponsors that pick up these costs for their funds is close to zero. Even after covering all these costs back then, the parent companies still ran an average net profit margin of 18%. That suggests that most fund companies could cut their management fees deeply without going anywhere near the poorhouse.

Today the average fund company is more profitable, not less, while the average fund has expenses that are higher, not lower. Why? Nearly 15 years of oversized investment returns have cloaked the importance of expenses. A 2% expense ratio gets lost in an 18% compound annual return over a decade. But it’s going to stick out like a sore thumb as returns regress toward their historic norms.

And the public is going to wake up to this, and the public is going to be mad. Ladies and gentlemen, you can lead this awakening, and earn your clients’ gratitude‑‑or you can miss it, and make them wonder where you were when they needed you.

Allow me to read from the 1994 10‑K of the Pioneer Group, parent company of the Pioneer Funds: “…the investor does not pay any sales charge unless it redeems before the expiration of the minimum holding period….” Referring to your customer as an “it” is quite a Freudian slip; that typifies not how Pioneer treats its clients, but how all too many fund companies do.

Last year Putnam individually harassed shareholders who voted against a fee increase. And after MFS created a goofy share class called the Lifetime funds that failed to support themselves, the firm then charged Lifetime’s shareholders $1.7 million to cover the costs of putting the funds out of their misery. This kind of treatment will get worse before it gets better.

Even fund companies that treat their investors well don’t go all the way. Look at Fidelity, which has generally done an outstanding job of reducing expenses as its funds have blossomed. Last year alone, Fidelity reduced management fees on dozens of its funds. The expense ratio at Fidelity Growth & Income, with $11.2 billion in assets, is 82 basis points. And at Fidelity Puritan, with $13.5 billion in assets, it’s 79 basis points. So why at Magellan,with $44 billion in assets, is it 99 basis points?

As you can see, at a certain point the economies of scale just stop. Even the most conscientious fund companies appear to believe that, so long as performance is outstanding, no one really expects them to keep cutting expenses indefinitely.

That may be true, but it’s not right. It’s your job to educate your clients otherwise and to pressure the fund companies to keep passing along further economies of scale‑‑forever, no matter how big the fund gets, no matter how good the performance.

Since most funds are commodity products, since most managers fail to beat their benchmarks over the long term, you must do your part to beat expenses down‑‑or your clients will fall short of their goals.

What’s more, if you don’t do your part to reduce fund expenses, you shouldn’t be putting your clients’ money in mutual funds at all‑‑you should be putting it in mutual fund stocks! In the 1980s, the S&P 500 returned 17.5% compounded annually. But Pioneer stock returned 30%; Eaton Vance stock returned 33%; and Dreyfus stock returned 42% compounded annually. No mutual fund in existence even came close.

I would add, by the way, that in the long run it’s only by cutting their fees that fund companies can assure steady unit sales growth. Ultimately, what’s good for their customers is good for them too.

But in the short run, they don’t like my message one bit.

The mutual fund industry is not heavily dependent on the price of raw materials or labor. The marginal cost of adding new customers is far below the incremental revenue they produce. It is a hugely profitable business. Your electric utility can’t charge whatever it feels like; neither can your cable company.

But your mutual fund pretty much can. Because of its unique status as an industry that is heavily regulated on everything but price, the fund business still consists of barely 600 companies‑‑and most of them are minting money. Remember, a fee hike of just 10 basis points eats $1,000 every year out of a $1 million account. That’s real money.

But how can I‑‑an employee of Forbes, the Capitalist Tool‑-possibly have a problem with any industry that charges whatever the market will bear? Because, when it comes to fund expenses, the marketplace is not really the retail investor. The market that determines mutual fund expenses is each fund’s board of directors, who represent the shareholders in an extremely indirect democracy.

Under the Investment Company Act of 1940, at least 40% of a fund’s directors must be “disinterested” or independent. Their main job is to keep the investment adviser from mismanaging or overcharging the fund.

In a paradox that no one has ever been able to reconcile fully, they are appointed by the fund’s adviser, but are supposed to work exclusively for the fund’s shareholders. In theory, that puts the independent directors in permanent conflict with the fund sponsor.

In actuality, it’s more like a lovers’ quarrel. I asked the head of a group of excellent, low‑cost, low‑risk funds what he looks for in a director. “Well, I want someone who’ll keep me honest,” he said. “But I definitely don’t want any PITAs.” What’s a PITA? “A Pain In The Ass,” he replied.

You won’t find a lot of PITAs in fund boardrooms, let me tell you. Look at the board of the funds run by Alliance Capital Management. Ruth Block earned $157,000 last year as an independent director. Until 1990, she was a senior vice president at the Equitable, which just so happens to own 59% of Alliance Capital Management. From 1968 to December 1994, David Dievler was a top executive at Alliance and a predecessor firm‑-and an interested director of the Alliance Funds. He retired at the end of last year and poof! now he’s a disinterested director. Let’s think this through: When Alliance Capital’s fees go up, the shareholders in the Alliance funds are worse off. But Alliance Capital Management, where Mr. Dievler used to work, is better off‑-and so is the Equitable, where Ms. Block used to work. Do you think Ms. Block and Mr. Dievler will bang their fists on the table every time Alliance proposes a fee increase?

At Third Avenue Value Fund, run by the gifted Marty Whitman, one independent director is Donald Rappaport, who used to be president of Whitman’s Equity Strategies Fund. After he left Whitman’s firm in 1991, he became an independent director. How independent? You tell me: The board unanimously approved a 27% effective management fee increase at Third Avenue in February. The new fee does not even have breakpoints that reduce expenses as assets grow.

At the Nicholas‑Applegate Funds, one independent director is Fred Applegate. He co-founded Nicholas‑Applegate Capital Management, which runs the funds, in 1984. He sold his stake in the firm in 1992, so now he gets to be independent. He also gets paid $14,000 a year to duke it out at board meetings with his former business partners.

At the Prudential Funds, one independent director is Delayne Gold. The aptly named Ms. Gold, who earned $185,000 last year, used to be Prudential’s spokeswoman and formerly ran its mutual-fund business.

It’s a pretty cozy circle. As one truly independent director told me, “About an hour into their first meeting, the new independent directors always start saying ‘we’ should do this and ‘we’ should do that. So I take them aside and tell them, ‘“We” isn’t the fund adviser. The only “we” around here is the shareholders.’ And you know what? By the afternoon, they’re saying it again!”

You might also ask why some directors have black marks on their resumes. At the Calvert Funds, one independent is John Guffey, who co‑founded the Calvert Group, which manages the funds. Not only does that throw his independence into question, but Mr. Guffey was also a director of Community Bankers Mutual Fund, which last September became the first money‑market fund in history to liquidate after breaking the buck. Under Mr. Guffey’s watch, it put 40% of its assets into structured notes that went kerflooey; its investors lost 4% of their money.

At the Sentinel Funds, one independent is Robert Mathias, the former U.S. Congressman and Olympic decathlon champion. He used to be an independent director at the ISI Funds of Oakland, Calif. In 1986, henchmen of convicted felon John Peter Galanis made a bid to take over the ISI Funds. The directors accepted the bid; then, right under the directors’ noses, the new managers sank millions of dollars into trashy companies affiliated with Galanis. When did the directors get wise? When they got a call from a newspaper reporter. Now Mr. Mathias earns $18,500 to stand guard for Sentinel’s shareholders. Mind you, it’s hard to imagine any kind of scandal at Sentinel, one of the safest fund groups around. But on the spectrum of watchdogs, Mr. Mathias does fall a bit to the left of a Doberman pinscher.

Let’s look at how the independent directors negotiate fees. In 1993 the directors of the American Capital Government Securities Fund endorsed a 9% hike in the management fee on the grounds that it had “consistently been a strong performer” over the previous five years, ranking second out of 15 peers. A year later, American Capital asked the directors to approve fee hikes at four stock funds. Did the directors again insist on five years of strong performance? Nah; this time three years of “good” performance was enough. What was “good,” you ask? One fund was “slightly above to slightly below the median”; another was ”below the median to slightly above the median.” That may not sound so “good” to you and me, but it was good and plenty for the directors. They gave the thumbs‑up to fee hikes of 10% to 27% on all four funds, even the one on which American Capital already had a 48.2% pretax profit margin. (That’s right; just over half of every fee dollar was not making it to the bottom line.)

Now look at the Alliance Fund in 1993. Then with $845 million in assets, this fund had long been a weak performer, lagging the market by 3 points annually over the decade ended December 1992. The old fee schedule included a “performance component” that raised the firm’s fees whenever the fund beat the market. That hadn’t happened very often. But then the fund gained 15% in 1992‑-twice the market’s return‑‑and suddenly Alliance Capital Management decided that a new fee structure was “appropriate to reasonably compensate the manager for the level and quality of [its] services.” As reasonable compensation for nearly 12 months of hot performance, Alliance proposed an effective doubling of its fees. The new fees, unlike the old, would not drop until the fund grew past $1 billion in assets. Perhaps eliminating the breakpoint sounded greedy, so Alliance offered to scrap the performance fee. Why, just in the fourth quarter of 1992, Alliance told the directors, the performance kicker had added $88,000 to its fees. How magnanimous of Alliance to give up this windfall, right? Not really. The performance fee also penalized Alliance Capital whenever the fund lagged the market; in 1991 alone, that had cut its take by $363,000.

The directors put their feet down. That higher management fee would simply have to include more breakpoints. But getting rid of the performance kicker sounded nice. They settled on a deal that raised Alliance’s effective fees by a measly 53%. Look at what really happened: The performance fee had been costing Alliance money for years. Then, for one year, it finally cost the fund some money instead. So Alliance killed the fee and called it self-sacrifice. And the directors bought this ridiculous reasoning.

Or look at Putnam High Yield Advantage Fund. Last year, Putnam asked for a 27% effective fee increase on this fund. Yes, it was already earning a 41% net profit margin on it. But, the firm told the directors, it had also “reduced” its fees at “certain” other funds as part of a systematic fee restructuring.

Kemper used identical logic to beg for a 12% increase in the management fee on Kemper Municipal Bond Fund last year; thanks to cuts at some of its other funds, Kemper’s overall fee revenue would be flat. At the time, Putnam ran about 75 funds; Kemper ran about 20. What comfort is it to the Putnam High Yield Advantage shareholder to learn that her fees are going up 27% but “certain” other Putnam funds cut theirs? Does a Kemper Municipal Bond Fund shareholder get the warm fuzzies from knowing that if he had just gone out and bought every single one of Kemper’s funds, his fees would have stayed flat? The logic is just plain preposterous, but the directors endorsed it.

Management fees are determined in what can only be described as an informal price‑fixing arrangement. It is perfectly legal; it is also shameful. The fund adviser shows the board a “peer group” of similar funds. If a given fund’s fees are below the median of this group, bang! the adviser asks for an increase. If performance is good, the adviser uses that to justify the increase. If performance is bad, the adviser says it needs more money to improve the results! And even after we raise our fees, the adviser says, the expenses on this fund (or even the average of all our funds’ expenses) will not be above average.

Amen, says the board, Amen.

Note what’s happening here. Each fund adviser is looking at everyone else’s funds. As soon as their fees get higher than his, he goes to his board and begs, with his tin cup in his hand, for still another increase so he can sustain those 25% profit margins. Each member of the peer group is helping all the others to keep the tide of expenses relentlessly rising.

Folks, did Sam Walton do this? Did he prowl around Sears and K-mart pricing their merchandise, then go back and raise his prices to match theirs? Or did he undercut them? That’s called competition. What the fund industry does is a lot closer to collusion.

Today many fund companies are run by entrepreneurs in their fifties and sixties. These people will increasingly be selling their companies to banks, insurance companies, and LBO firms that want those 25% net margins for themselves. Fund companies are valued on multiples of cash flow. Higher management fees mean higher cash flow and higher valuations for fund companies.

In October 1991, the directors approved management fee hikes of about 50% at Templeton’s Growth, Foreign, World and Smaller Companies Growth funds. In December, they went into effect. Just eight months later, Sir John Templeton sold his company to Franklin for $842 million. Those fee increases raised Franklin’s purchase price by at least $85 million.

I want you to remember this the next time somebody tries to tell you that expense ratios are a mere matter of basis points: the shareholders in the funds were made at least $85 million poorer. The shareholders in the fund management company were made at least $85 million richer.

Similarly, last year the Berger Funds cut their 12b‑1 fees and raised their management fees. Some people say that didn’t affect the $100 million sale price for Bill Berger’s company; some say it raised it by $30 million.

I do not mean to imply that Sir John or Bill Berger sought these fee increases solely to make their companies more attractive to an acquirer. But many more fund companies will be coming on the block in the next few years, and fee hikes will be proposed at many of them for precisely that reason‑‑although the record will never show it. You must watch them like a hawk.

It’s scary how casual many fund directors are toward fee hikes. One director told us he had no recollection of why he had approved a huge fee increase only a year ago. He also said, “I really don’t know if that one ever actually went into effect. You’ll have to check on that. Why don’t you call our PR guy?” By “our” he meant the fund adviser’s PR guy. Another director told us, “The fees on that fund have not gone up in at least four years. In fact, they’ve gone down slightly.” In fact, they’ve gone up.

Ladies and gentlemen, you cannot rely on people like these to be vigilant in protecting your clients’ interests. Today you must be activists; you must be crusaders. You simply are going to have to take matters into your own hands. I do not believe the directors will ever take a stand and put a stop to the fund industry’s fee madness unless people like you make them realize that their heads are on the line.

Of course, you can vote with your feet by selling a fund that raises its prices. But long before you vote with your feet, you must vote with your mouth too. Before you buy a fund, order the latest statement of additional information and check how much each director earned last year. You will see numbers as high as $400,000, by the way.

Then I urge you to send a letter to each of the fund’s directors (you’ll find their addresses in the latest proxy). Tell them you may be investing several hundred thousand dollars of your clients’ money in their fund. Tell them you know how much they make and that you expect them to earn that rich compensation by treating your clients’ money as if it were their own. Tell them you will view any fee increases as grounds for their dismissal. Tell them you have their home telephone numbers, and tell them you will call them when they make you mad. With a good PC, this mailing should take about five minutes of your time.

Next, I want you to treat proxy statements like grenades. If there’s a proposed fee increase, do not just vote against it. Vote against every single director. Write and call the directors and tell them they have betrayed their shareholders. These people are trying to take away yet more of your clients’ hard‑earned money. Don’t let them. I submit to you that if you do not fight back, you are breaching your fiduciary duty to your clients. Yes, it is more work for you. But it is vital work, and you must do it. You must fight back.

The Investment Company Act of 1940, which governs the fund industry in this country, is the closest thing to a perfect document since the U.S. Constitution. The mutual fund isthe greatest contribution to financial democracy ever devised. But the fund industry is still far from what it needs to be. While hundreds of funds deliver good returns at low risk and low cost, thousands of funds do not. Too many funds are far too expensive. They are confusing. They are redundant. They take unnecessary risks, mainly because they are too expensive.

With returns doomed to shrink across the board in the years to come, it’s no longer enough to screen funds by performance. You must focus on costs as well. I urge you to reverse the traditional order in which people evaluate funds‑‑what was its performance? how risky is it? how much does it cost?‑‑and follow this order instead: How much does it cost? How risky is it? What was its performance? That will not prevent you from buying great performers, but it will prevent you from overpaying for them.

All in all, what will separate the best financial advisers from the mediocre ones over the next decade is activism. If you just take what the fund companies give you, you’re doomed to mediocrity. But if you fight back, you will fulfill your duties as financial citizens. You will help decrease management fees, reduce risk, and improve performance for everyone. I intend to keep Forbes on the frontlines of fighting to make the world safe for mutual-fund investors, and I hope you will join me.

Thank you.

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Further reading

The active-management industry is starting to resemble an endangered species because its leaders too often forgot a fundamental business principle: You get the clients you deserve.

In a speech I gave in December 1999 — yes, almost 17 years ago! — I pointed out that investment firms that traded too much, slammed their investors with gratuitous tax bills, hyped their unsustainable performance, ran portfolios that acted like index funds but charged fees like hedge funds, and kept cramming new investors into their portfolios like teenagers in a Volkswagen-stuffing contest would end up getting exactly the clients they deserved.

And so they did.

As I pointed out in the speech, treating clients properly wouldn’t even be difficult:

…clients do not want to be put on a pedestal. They simply want to be treated the same way their investment managers would want to be treated if they were the clients.

Perhaps if asset-management firms had honored that wish more often, investors wouldn’t be fleeing in droves for index funds.

You can read the full speech here: clientsyoudeserve.

Source: CFA Institute conference proceedings: Ethical Issues for Today’s Firm (Dec. 7-8, 1999), http://www.cfapubs.org/doi/abs/10.2469/cp.v2000.n2.3001

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A few weeks ago, I got to chat with Patrick O’Shaughnessy of The Investor’s Field Guide about my favorite books, the best investing writers, the state of financial advice, how I first became interested in investing, and above all the importance of serendipity.

I hope you enjoy it.

Click here to listen to the podcast.

Source: Investors’ Field Guide, aired Sept. 27, 2016

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I hope you enjoy it.

Click here to listen to the podcast.

Source: EconTalk, aired June 1, 2016

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Enjoy.

Click here to listen to the podcast.

Source: Hsu Untied podcast, aired Apr. 14, 2016

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Enjoy.

Click here to listen.

Source: The Brian Lehrer Show, WNYC public radio, aired Apr. 7, 2016

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Finding out whether you can make fun of an idea, I argue, is one of the best ways to learn whether you should take it seriously.

Click here to watch the video.

Here are the slides I used in the talk.

Source: Talks at Google, YouTube

https://www.youtube.com/watch?v=OIZ-mPbYPIc

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Enjoy.

Click here to listen to the podcast.

Source: Motley Fool Money podcast

http://www.fool.com/podcasts/motley-fool-money/2016-03-25-spring-cleaning

https://itunes.apple.com/us/podcast/motley-fool-money/id306106212?mt=2

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