Two things are on our mind this month, but in the end they together make a common theme that we think you’ll both appreciate and benefit in knowing.
We are at the time of year when students are matriculating from various institutions and grades. The 8th graders have Promotions, and High School seniors are completing their historical rite of passage, but let me focus on College graduates. In 2015 the country saw about 20 million people enrolled in higher education[i] (2-year Degreed programs and up). That’s a lot of skill-boosted manpower coming into the country’s workforce down the road and speaks good things about our future.
However, what is not good news (in our humble opinion) is that in a survey taken after the graduating seniors increasing “safe-zone”, “micro-aggression-free” academy of higher learning is completed we learn that over 50% of them view capitalism negatively[ii]. The overall youth mindset is equating capitalism with greed, and therefore an undesirable character in our lives. It would appear that these institutions have emphasized the bad things that capitalism represents, of which there certainly are many, and ignored the good aspects it naturally spawns (jobs, new products). We think the decrying of business greed is also a particularly appealing populist cry in society these days, which reinforces the younger adults’ concern about capitalism as a basic economic construct.
We think we have done great harm to our country’s youth by not having someone stand up and say “Hey…what about all these jobs created, and new industries based on Schumpeter’s theory of creative destruction where only the great ideas survive?” It’s grown to a point where young people think business is somehow dirty or unworthy of their efforts. To be sure, capitalism involves competition, and the weak will not survive. We must accept that as a fact, or we’ll be confiscating taxpayer dollars to sustain bad business (there actually is no other alternative to that chosen path). As a free society, in a USA economy that is 70% driven by consumers, we punish companies who don’t deliver great products / services by not buying their product. It’s not a joke to say that if we didn’t act that way we’d still be riding horses, and certainly not seeking directions to the hay barn on i-Phones. We have plenty, plenty of problems with how some businesses operate, and we need laws to correct these abuses, but we must be VERY careful not to throw out the baby with the bathwater. We have image repair work to do. Though the attached editorial comes from a hedge fund guy, in the normal tough guy language of that industry, it begins to lay out how the argument might be framed to our youth.
Secondly, let us bring in the great state of Illinois and its pension obligations. They are having some ‘issues’ as you might know, such as making promises to pay pensioners that were as unrealistic as their actuarial assumptions on how much their $16 Billion portfolio would earn each year. With buckets of money that large, let’s be frank; You can get whoever you want in the world to manage your money as you pay each of them $5 – $10 million per year. But on the performance of that large pension pool, let me provide you with three extracts from a recent article written by the Chairman of the Illinois State Board of Investment[iii];
- “Over the past three years, it (the pension fund) has paid hedge-fund managers more than $180 million in fees.”
- “…even excluding compensation, the performance generated by these managers was worse than that of a balanced index fund.”
- “Once the Board’s actions are fully implemented…70% of the money previously invested in stocks and bonds will be in funds that employ indexing…”
Now, you astutely ask, how do these two seemingly distinct subjects of college mindsets and pension funds relate to each other? Because they are one and the same! The index funds’ performance reflect the intense competition in the money manager arena, with the end result being one that John Bogle (of Vanguard founding fame) noticed 50 years ago in HIS doctoral thesis at Princeton University: Money management guys telling you that they have an inside track don’t, in fact, have an inside track. Competition has leveled the deck so that consumers receive a better deal (same or higher returns, less risk, etc.) and achieve results that $16,000,000,000 house accounts would be happy to achieve. You personally have a little bit better constructed funds at Wellspring than straight index funds, but still the end message is the same; Competition has created wealth for its owners (risk = return, so many go broke), but most of the real value generated by companies goes to the consumers of the products and services that they bring forth.
[i] Fast Facts (National Center for Education Statistics, May 25, 2016))
[ii] “Dear Grads, You Need a P&L” (Andy Kessler, Wall Street Journal Opinion Page, May 23, 2016)
[iii] “Fees That Sickly Public-Pension Funds Can’t Afford” (Marc Levine, Wall Street Journal, May 13, 2016)
