The primary message this month; Some things go well, and some go poorly. Sure, big deal, that’s life you say. However, and VERY IMPORTANT, before you can intelligently judge if something is going well or poorly you have to take the emotion out of a subject and deal with the truth. You must have an objective benchmark. These days we’re finding that the truth is being conveniently interpreted in too many corners of the world, and that makes subjective information reign supreme versus the objective data that would allow (force) better decisions to be made.
Let’s deal with an example of the ‘worst’ element first. Greece is constantly in the news these days so lets’ talk about it. we think things are going to get worse in Greece for the Greek people. However, let’s first eliminate the untruth; it is NOT because the world is being unfair, or that it is subjecting this good Mediterranean country to onerous debt terms. The truth is Greece has been poorly led and arguably represents the worst managed economy for 50 years.
Here’s a personal story. I ran a company that did business in Greece and flew there for a big meeting with vice-presidents of the national electric power company. The executives didn’t show up for an 11 am meeting in their own offices because they were more interested in a street protest that was going on. It didn’t involve them, they were just interested. Everyone embarrassingly shrugged their shoulders and said “That’s the way it is in Greece”. Well, sooner or later, there is a price to that monstrous lack of productivity and unfortunately the tipping point has now been reached. We suspect you would find it interesting to know that since Greece became independent in 1829 the country has been in default or rescheduling its debt 51% of the time?[i] The current political party (Syriza) is a populist left wing organization that says the problem is other people lent it too much money and now actually want it back, so austerity measures are being called into effect. The measures being proposed need help (in our opinion), but a national referendum is not the answer. That’s akin to asking your 16 year old son to vote whether he thinks his curfew should be 11:30 pm or 2 am? We don’t think a rational answer will result. Staying in the Euro, or leaving it, the Greek people are going to get hurt because their leaders let them down. THAT’s the truth. Everything else is noise obfuscating the matter.
For perspective, most people do not know this but Greece has roughly the same GDP as Detroit, Michigan ($240 Billion vs. $224 Billion, 2013 numbers)[ii]. Greece owes more money, but with the European market roughly the size of the United States GNP, the markets have mostly factored that in and will survive.
Juxtaposed to this one country scenario let’s talk objectively about something that is regularly in the ‘best’ category; That would be your investments in 43 countries around the world visa vi their competitive alternatives. Notwithstanding equity markets have been more or less boringly stagnant for a year, you DO HAVE THE BEST family array of investments. That’s not just conjecture to make you feel good going into the national Holiday and here’s why:
- Most funds in the world are ‘active’ (called actively managed in industry terms). The active funds fall SHORT OF their benchmark the majority of the time, and the amount they fall short is 0.99%-1.23% per annum[iii]. Really bad, but true.
- Pure index funds properly managed will MATCH THEIR BENCHMARK, minus the cost of running the fund. If you assemble a nice diversified portfolio of index funds, you will beat all those counterpart active funds 92% to 99%[iv] of the time. That’s impressive and what people need to know in order to make sure they are okay.
- Over the last 15 years, Dimensional funds (not a pure index construction, which is why we chose them for you) have BEATEN THEIR category benchmarks 75% of the time, and over 80% over the past 5 years[v]. That, my dear, is startling.
In summary, we have many big topics in the world these days (economically, politically, socially). When you talk about them, make sure you are seeking a truthful perspective FIRST and look for objective data to establish it. Too many ‘discussions’ turn into arguments where one side or the other simply is trying to rationalize their established point of view. If you would pause to consider about the history of the United States and its Constitution on this 4th of July weekend, the drafters knew what did not work in Europe and agreed on that first. Notwithstanding numerous strongly held points of view, their remarkable solutions came out of this objective setting.
We will always try to let the truth reign in our dialogues, even to the point of having ‘hard’ conversations if we think they are in your best interest.
[i] This Time Is Different; Eight Centuries of Financial Folly” (Carmen Reinhart and Kenneth Rogoff, Princeton University Press, 2009)
[ii] Brian Wesbury Blog. Chief Economist, First Trust June 16, 2015
[iii] “A Wealth Of Common Sense: Why Simplicity Trumps Complexity In Any Investment Plan” (Ben Carlson, John Wiley and Sons, May 2015)
[iv] “The Power of Passive Investing” (Richard Ferri, John Wiley and Sons, 2011)
[v] A Different Dimension (Beverly Goodman, Online Barrons, January 4, 2014)
