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and by the way my definition of being properly educated is being right when the professor is wrong anybody can spit back what the professor tells you the trick is to know when he's right and when he's wrong that's the properly educated person in the investment world people involves an enormous amount of high iq people trying to be more skillful and normal you can hardly imagine another activity that gets so much attention and weird things have happened and years ago one of our local investment counseling shops a very big one just they were looking for a way to get an advantage over other investment counseling shops and they reasoned as follows we've got all these brilliant young people from horton and harvard and so forth and they work so hard trying to understand business and market trends and everything else and if we just ask each one of our most brilliant men for their single best idea then created a formula with this collection of best ideas we would outperform averages by a big amount and that seemed plausible to them because they were ill-educated that's what happens when you go to harvard and horton and and and so they tried it out and of course it failed utterly so they tried it again and it failed utterly and they tried the third time and it also failed and of course what they were looking for is the equivalent of the alchemists of centuries ago who wanted to turn led into gold they thought if you could just buy a lot of lead and wait or magic wand over and turn into gold that would be a good way to make money so this counseling shop was looking for the equivalent of turning lead into gold and of course it didn't work i could have told them but they didn't ask me the interesting thing about this situation is that this is a very intelligent group of people which come from all over the world you've got a lot of bright people from china where people tend to average out a little smarter and and the the issue is very simple there's a simple question why did that plausible idea fail just think about it for a minute you've all been to fancy educational institutions i bet you there's hardly one in the audience who knows why that thing failed that's a pretty ridiculous demonstration i'm making how can you not know that it's where the main activity of america is an obvious and important failure surely we can explain it you have to have stayed awake in your freshman college courses to answer that question but if you ask that question at the department of finance at a leading place the professors wouldn't answer it right now i'm going to leave you that question because i want you perplexed and i will go on to another issue but that's when you should be able to answer and it shows how hard it is to be rational on something very simple how hard it is how many kind of crazy ideas people have and they don't work you don't even know why they don't work even though it's perfectly obvious if you've been properly educated and by the way my definition of being properly educated is being right when the professor is wrong anybody can spit back what the professor tells you the trick is to know when he's right and when he's wrong that's the properly educated person and of course they're frequently wrong particularly in the soft sciences in fact if you look at a modern elite institution it's fair to say that a lot of the faculty are a little crazy it's so left-wing now in the humanities and it's very peculiar and that's another thing why should 90 of the college professors in the humanities be very left-wing i leave that question for you too but it happens and uh another issue of course that's happened in the world of of stock picking where all this money and effort goes into trying to be trying to be rational is that we've had a really horrible thing happen to the investment counseling class and that is these index funds have come along and they basically beat everybody and not only that the amount by which they beat everybody is roughly the amount of cost of running the operation and making the changes in investments so you have a whole profession is basically being paid for accomplishing practically nothing this is very peculiar this is not the case with bowel surgery or even the criminal defense bar and the law or something they have a whole profession where the chosen activity they've selected they can't do anything now in the old days the people in the profession always had some of this problem and they rationalized as follows we are saving our clients from the insurance salesman and the stock broker the standard stock broker for the it serves the active trader and they were saving people from the life insurance salesman and the uh the the hustling stock broker who liked acne trading and i suppose in the sense that the investing class is still saving those people from an even worse fate but it's very peculiar when a whole profession that works so hard and is so admirable and the members of which we are delighted when they marry into our families and they just can't do what the profession is really trying to do which is get better than average results how is that profession handling this terrible situation as index investing gets more and more popular and including by a lot of fancy places i give this very simple answer they're handling with denial they have a horrible problem they can't fix so they just treat it as non-existent this is a very stupid way to handle a problem now it may be good when you're thinking about your own death which you can't fix and just denial all the way to the end but but in all the practical fields of life this problem thoroughly understood is half solved or better coped with so it's wrong to have all these people in just a state of denial and doing what they always did year after year and hoping that the world will keep paying them for it even though an unmanaged index is virtually certain to do better it's a very serious problem and think of how much new york say needs a flow of money from finance think what happened to manhattan if there weren't any fees for investment management or trading spreads and so on and so it's a weird situation and of course it's it's unpleasant big investment counseling shops are some of them shrink and some go out of business and the value investors of course who many of i know because we came from that tradition the value investors who are honorable are quitting boom boom boom and they what worked for them for years stopped working and they they're honorable people they just quit and they're also rich so it makes it easy but those who aren't rich or have a hell of a problem and it costs about fifty thousand dollars to say in manhattan to send your kid to preschool non-deductible and and that's just the start of an endless recession of years of vast expense so if your game is money management you have a serious problem and i don't have any solution for for this problem i do think that index investing if everybody did it won't work but for another considerable period index investing is going to work better than active stock picking where you try and know a lot
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