Mea Culpas, 2019 edition

Brexit, Facebook, Endowments and Other Errors
Acknowledging mistakes increases the odds of avoiding them in the future.
Bloomberg, January 19, 2020

 

 

 

Every year for the past decade I have been making a list of what I got wrong.

The inspiration for this came more than a decade ago, courtesy of Ray Dalio’s groundbreaking work on responsibility and ownership of your words and deeds. It may sound a bit hard to swallow, but for many decades, people in finance pretended to be infallible. Credit Dalio for bringing the art of learning from errors into the light on Wall Street.

So each year, I make my list, then share it publicly. This act of contrition – admitting the errors of my ways in the light of day – allows me to own my mistakes, recognize my fallibility, and learn from the experience. I have been doing this for about a decade. It is incredibly helpful to my “process” and hopefully, you may find some usefulness in it as well.

Let’s get to the errors:

No. 1. Trading commissions: Last February, I cited a Morningstar survey that found that “fees fell 8 percent in 2017, the largest one-year decline ever reported.” It seemed, according to data on fees, that the point of diminishing returns had been reached. “The race to zero may be reaching its natural limits,” I wrote.

Boy, did Charles Schwab Corp. prove me wrong.

Although commission-free trading has been around awhile, it was either a niche product or offered as a teaser for other products. After investment giant Schwab said in October that it would offer commission-free trading, everyone from Fidelity to Vanguard to TD Ameritrade followed suit.

One caveat: There is no free lunch, and free trading means that offsetting fees may be hidden or buried in the fine print. I continue to believe that, at least in finance, cheap is better than free.

No. 2. University endowments underperform: Each October, many college endowments release their investment performance data for the past fiscal year. I wrote about the Ivy League endowments and how they had failed to beat benchmark returns.

But I made an assumption that the benchmark these endowments were being compared against was a globally diversified portfolio. I was wrong. As it turns out — buried in a footnote of the research I relied on — the benchmark used for the study was a domestic portfolio.

This is not a good comparison because the endowments invest globally. It stands to reason that they would look like laggards in a period of U.S. market outperformance versus the rest of the world. The lesson learned: The footnotes matter — a lot.

No. 3. Brexit: I have been saying that the British will eventually come to realize that Brexit is a self-destructive and needless exercise and eventually would reverse the referendum mandating that the U.K. leave the European Union. I said it herehere and here.

The election as prime minister of Boris Johnson, an opportunistic Brexiteer, pretty much means that the exit is going to be fast-tracked in a way that his predecessor, Theresa May, could never manage. There is no need to wait for it to be official: I was wrong about Brexit. The only argument left is whether the U.K. will leave the EU with or without a deal setting the terms of the departure.

No. 4. Fiduciary rule: I have long argued that the brokerage industry owes consumers a higher level of care than now on offer and that putting client interests first should be the standard. In other words, rules should require brokers to serve as fiduciaries rather than as the glorified used-car salesmen that they historically have been.

Despite opposition from the brokerage industry to any rule change, investors have been voting with their dollars and hiring financial advisers that conform to this better standard. It is all but inevitable, I wrote, that this fiduciary standard would be adopted by the industry, albeit with a nudge from the government.

But I underestimated what the deeply motivated and deep-pocketed brokerage industry can accomplish in a deeply corrupt Washington. For now, rules requiring the adoption of the fiduciary standard are on hold.

No. 5. Facebook didn’t flip the 2016 election: I made a mistake on the long-running debate about the role of a weaponized Facebook in the 2016 election, arguing that very few people change their minds based on social media. Mostly, I argued, social media is a giant echo chamber and that people aggressively avoid ideas that challenge their established opinions.

Given how close the 2016 election was — decided by a tiny share of the votes cast in three or four states — I am willing to admit that maybe Facebook content did persuade a few people to change their votes or stay home. Theoretically, this could have swung the election. And while I was predisposed to discount the role of social media in 2020, I now believe it could matter a lot.

Let’s hope the 2020 election isn’t so close that the role of social media even matters.

 

~~~

Bloomberg, January 19, 2020

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