Evidence-based investing is a core principle of being a good steward of your wealth. That is why Chas has selected his interview with Robin Powell for this Wealth Cast Rewind, to follow up on his previous episode on the Five Tenets of Evidence-Based Investing.
An educated investor is a great investor. That is why investing should not be dependent on hunches and guesswork. Every deal should be considered and given the proper amount of time to learn about. Speaking about this very important subject, Charles P. Boinske, CFA interviews “The Evidence-Based Investor,” Robin Powell, to talk about evidence-based investing, how he is building the case for it around the world, and why he thinks the industry has a long way to go in this aspect. He also lays down the moments in history that have pushed for evidence-based investing, tapping the capital markets, and preparing for market crashes.
The summary below has been created by a professional transcription vendor upon review of the recorded presentation. Please excuse any typos as well as portions noted to be inaudible.
I’m happy to welcome my guest Robin Powell. Robin is an award-winning journalist and campaigner for change in the global financial securities industry with his primary focus being investor education and increasing the transparency of the industry as a whole. He is a member of The Chartered Institute of Journalists and was a visiting media fellow at Duke University. In addition, Robin has written and produced highly acclaimed documentaries about investing including Index Funds: The 12-Step Recovery Program for Active Investors and Investing: The Evidence. We will discuss the current state of the industry, the topic of evidence-based investing, as well as what the future may hold for the industry.
Robin, I’m so glad that you were able to join us and talk about the important subject of evidence-based investing.
It’s a real pleasure to speak to you again, Chas. Thanks for having me on.
You’re very welcome. Why don’t we start with the basics, which is from my perspective, how do you define evidence-based investing?
It’s a strange name, isn’t it? Evidence-based investing. If you don’t know anything about it, you think, “Investing would be based on evidence. What’s it going to be based on?” You’d be amazed that most investing is based on hunches, on guesswork, on opinions, on personal relationships and working with people who you’ve worked with before. We’ve got a long way to go in the investing industry to get to anywhere near, for example, what has happened in medicine. The history of evidence-based medicine isn’t all that old. I would be reading Bill Bryson’s book, The Body, and in there, he was saying how up until about 7,500 years ago, people who were extensively trying to help patients were causing them more harm.
Thankfully, that has all changed in medicine. We’ve seen huge increases in longevity as a result. It’s much slower to take off in investing. Broadly speaking, I would define it as relying not on hunches and guesswork, but on what the academic consensus is and what the latest data tells us. By data, I don’t mean industry data. I don’t mean data provided by product providers, by third-parties like S&P, Dow Jones Indices, for example. Morningstar is another reliable source of objective information. That’s what I would call evidence-based investing.
In my own experience during my career, which started in 1984, the definition or the name ‘evidence-based investing’ didn’t even exist. In those days, a diversified portfolio was a portfolio that was twenty stocks that was considered and then paid dividends. That was considered a “widows and orphans portfolio” and very defensible. That kind of portfolio would be considered borderline irresponsible. That’s changed. How do you think that every evolution has progressed? Who or what has been the cause of it? In your view, what has accelerated that evolution around the world, but particularly in the UK?
It’s too early to say that we’re on the winning side even. Evidence-based investing has grown very quickly. It’s grown over about a 30-year period. We’ve still got a long way to go in the US, let alone the rest of the world. Here in the UK, this is still very much a minority interest. Australia is exactly the same. South Africa, where I speak to clients, they’re a long way behind the US on this. The main reason it took off in the US was the invention of the computer, which enabled the likes of Eugene Fama, the Nobel Prize-winning economist, that can’t go to business school to do his research into asset pricing. The data, the evidence became overwhelming.
In the 1970s, we had a couple of very important landmark books. One by Charley Ellis, Winning the Loser’s Game and the other by Burton Malkiel, A Random Walk Down Wall Street, which we’re told influenced Jack Bogle in setting up the first index in London. It took a long time to take off, but when people started to realize, “I’m saving a heck of a lot of money by investing in a low-cost index fund, rather than trying to chase the latest top manager,” and so on. The media plays a huge part. In the US, you’ve got some good journalists. I’m thinking of the likes of Jonathan Clements, for example, on The Wall Street Journal. He was writing about this stuff a long time ago. Jason Zweig took over from Jonathan on The Wall Street Journal. He has told it as it is. As a result, there is now a consensus, if you like, in the American media that certainly low-cost investing is the way to go.
In my experience, that’s been the case. As the thought process evolves, in the early days of my career, one of the knocks on indexing was that it was “un-American” because the idea was that if you worked hard, you could always outperform the competition through hard work. Whereas over time, that thought process changed a little bit and the thinking became more of the success of indexing is an homage to capitalism. There are so many hardworking people out there ferreting out prices and doing price discovery every day that it’s very difficult to outperform an index.
I would say that the active fund management industry is distinctly un-American in that sense that it’s a very large, powerful, unwieldy industry, which is very uncompetitive. It was absolutely right for disruption and it has thankfully and finally being disrupted. We’re now getting your big fund managers, Vanguard or Dimensional over here. At first, there was a bit of, “Who do they think they are parking their truck on our yard?” sort of thing. Most people over here are now realizing that we should have had a Vanguard, a Dimensional of our own. I can only see those two companies growing their market share in the UK.
I’ve had a little bit of a window into primarily the German financial services industry, but also the financial services industry in the UK through presentations I’ve done in both places. Years ago, when I was in the UK talking about this, it was well understood, but it was still very early. The thinking was still being developed. I’ve been impressed by how quickly it’s been adopted it seems by practitioners in the UK in particular.
It’s funny you should say that because I remember talking to David Watson, who is one of our leading transparency campaigners here. He is now at London Business School. I was saying, “David, there is all this evidence that low-cost investing is the way to go. The active management, the returns that we’re getting are not good enough. They don’t justify what we pay for it. When do you think all this will come out?” This was years ago. He said, “In the next 2 or 3 years,” and I remember thinking, “That’s optimistic,” but I have to say that it’s been amazing. One thing has led to another. Thinking about the major events we’ve had, for example, the chief executive of The Investment Association, which is the trade industry body here in the UK for fund managers, he effectively said, “We should have a code of conduct for all our members. Everyone should sign up to this.”
One of the key points of the code of conduct is that firms should act in the client’s best interests. There was an amazing reaction from members. They did not like this at all. He lost his job. He was got rid of. That opened people’s eyes to what’s been going on. We then had a report by the Financial Conduct Authority. The FCA is our equivalent of the SEC. The initial report, the interim report was very critical of the fund industry, unfortunately, as is the nature of these things. As the industry lobby gets working on the regulator, they got it watered down. The final report was not as hard-hitting, but even still, it was very critical. The third thing, and bigger than all the others, has been the spectacular demise of Britain’s best-known fund manager, Neil Woodford. He was considered untouchable a few years ago. You read about him in the press and even the BBC, if he would be spoken about, it’s glowing terms.
He spectacularly failed when he left the fund management company. He was to set up his own. There’s a big platform here in the UK called Hargreaves Lansdown, which stuck by him and said, “No, he’s done it in the past. He’ll do it again.” He went down. It turned out he was investing in a whole load of illiquid stocks. Everyone involved in the fund and Hargreaves Lansdown did very well out of it. The only people who didn’t do well out of it are the people who invested their money in it and they haven’t got their money back yet. That has opened their eyes. We’re seeing now in the UK press much more awareness that all might not be as rosy in the active management garden as we were led to believe.
There are certainly a lot of big buildings and fat salaries that are dependent on the active management industry. It’s very hard to change your philosophy when your economic interests are intertwined with the foundation of that philosophy. That has to be true.
I read a comment by Ben Johnson, who you’ll know is the director of the index strategy at Morningstar. He’s being interviewed about how active managers have done in 2020. As you know, we’ve heard for years that active managers do better when markets fall. Did that happen in March and April 2020? No, it didn’t. They spectacularly underperformed. They did even worse than they did when the market was going up. This claim that anti-management somehow offers downside protection. Ben Johnson said, “It’s a concept that belongs in the same category as the Easter Bunny or Santa Claus.” He went on to say, “That’s the problem, we want to believe it’s true.” There are so many people with a vested interest in it being true. A lot of these people, they’re not being dishonest, only in the sense that they’re being dishonest with themselves. They can’t admit that they’re wrong.
The very nature of the issue is that it’s complex. How you determine these things, your comfort level with statistics, etc. so that you can evaluate the research and look at the results with the perspective that’s required to fully appreciate what’s going on. It makes it difficult for investors. As a result, when there’s a lot of noise, it’s a confusing environment for people. When you combine vested interests with the noise of the capital markets, it makes it almost an impenetrable wall to get through for people to see that this is an issue. It’s an issue that they can use to their advantage by being disciplined and lowering their costs, etc. I liken it to riding a bicycle. Once you ride a bicycle, you can ride a bicycle for the rest of your life. Once you see clearly how the capital markets work and how the pieces work together in a big picture sense, success becomes relatively straightforward.
A lot of what goes on when we have a period of extreme volatility and let’s face it, March 2020 was horrendous, wasn’t it? Even for you and I who don’t look at the stock markets, even I was looking at it and thinking, “How much lower can it go?” I wouldn’t say this to people that it is possible to be worried about the situation, about your family and your health, about the economy and where all this is going to end up and whether you’re going to have a job at the end of it. You can do all that, but you can still also acknowledge that there is nothing that you or I can do about it. The rational thing to do is to sit tight. To sell when markets have already fallen is a bad idea, unless you have realized that you can’t handle it. In that case, you’ve been badly advised in the past. You had the wrong asset allocation to start with. Generally speaking, the thing to do is to sit there.
I’ll be honest, and I’m sure you would say the same thing, I am absolutely amazed that the markets are where they are at the moment. That’s only my personal opinion and probably the opinion of most. I posted something on Twitter about the worst crash in the UK was in ‘72 to ‘74. I don’t think it was quite so bad Stateside. It was horrendous. I remember talking to someone who was a trader at the time who said it was genuinely talk of the FTSE 100 going down to zero. It went on for two years. What I wrote was at times like this, when markets are at or near all-time highs, and amazingly, that’s where we find us at the moment. The S&P 500 is only in a couple of hundred points or something off its all-time high, which is incredible.
We have to remind ourselves that stock market crashes happen and they can be absolutely horrendous. We need to make sure that we are prepared, that our portfolio is prepared and we are prepared mentally and emotionally for what might happen. I’m not speaking with any knowledge of what will happen or what could happen. All this talk about the uncertainty, there’s no more uncertainty now than there was 6 or 12 months ago. It’s that we’ve had a heck of a fright. Time and again, the evidence has proved right that the best thing to do is to stay calm and keep putting money into the stock market. Maybe when markets have gone down, if you can put a little bit more in every month, then do so, but more or less, carry on exactly as you will.
The discipline of rebalancing and watching your taxes and keeping your costs low as is important in all markets, but is especially important in this environment. It’s totally understandable from my perspective that people would have a heightened level of sensitivity to what happened in March and April 2020 because it was certainly severe in terms of the market. It was also caused by a threat to people’s health. That’s different than the normal situation. When you combine those two things, it created some acute anxiety, and it still does. It’s totally understandable. In a normal environment, at least in my experience, when you go through a bear market, you can be a little bit more detached about it even though it’s personally affecting you because of the values of the portfolio fluctuating. In this case, it’s harder to do that because you have the added layer of stress. You had two sources of stress, your health and your financial markets.
Those two things did not add, one plus one does not equal two. It equaled to seven on a stress scale. It was this geometric increase in stress. It’s very understandable from my perspective that people would be unusually sensitive to what happened in March 2020. I would agree with you. What happened in subsequent to that is it is a surprise to most people. The fact that the markets recovered as quickly as they did would be a pleasant surprise to most people. Probably in your view too, it supports the idea of having a strategy that you can stick with that. You understand that it’s well implemented. That may require some adjustment if your life circumstances change. People’s life changes and it requires them to revisit their allocation or their investment strategy. For the majority of people, I would agree with you. Being disciplined in executing the strategy in all times, whether that’s good or bad, is the best recipe for success.
There were many advisors over here on social media saying, “I’ve gone to cash. I’ve recommended all my clients go to cash.” People like me and other evidence-based investors and advisors who were saying, “Keep calm,” they were calling us irresponsible, saying you’re encouraging them to throw more good money after bad and all the rest of it. Those advisors, they all have a very strong case against them from their clients for having not acted in their best interest. They should know better than that. I would be very surprised if even 10% of those advisors caught the rebound because the rebound happened so quickly. The market is down five one day, then up ten or whatever it was the next day. There’s no way that those advisors got them out at the right time and back in again at the right time. It defies belief.
In your career as interviewing folks around the world in terms of evidence-based investing and doing the research and helping society to build the case for evidence-based investing, you’ve had the opportunity to interview and have conversations with some important financial experts. When you think back on those interviews, where do you think you got your extra charge to keep going forward? Who inspired you in those conversations the most?
I suppose you’d expect me to say this. I did an interview at Vanguard with Jack Bogle. I was lucky enough to interview him a couple of times. He was the most extraordinary character. It’s funny at that time, not very many people, or certainly from outside of the US, had interviewed him about Vanguard and Index A and so on. A lot of advisors over here were saying, “How did you persuade him to talk to you?” He is the most charming, humble lovable guy who genuinely wanted to do the right thing for consumers. He was a very astute businessman as well, but once he realized that I’d done my research and that I wanted to find out about the work that he was doing, he was very welcoming. He said, “We’re all set, Robin. You come over and we will have a chat.” That was inspiring.
There are so many others. Charley Ellis is another lovely guy and very smart. Whenever I hear him being interviewed, he’s so polite about active fund managers. He always says he’s friends with active fund managers and so on. He could, if he wanted to, stick the boot in because he’s been saying this for 40 years. No one’s been listening to him, not enough people anyway. He’s very inspiring. Ken French up at Dartmouth College. He’s a bright guy. Eugene Fama, obviously. What an honor. I’m lucky to interview a few Nobel laureates and not as a journalist and not in the field of investing, but that interview does stick in the memory. I felt completely out of my depth and hugely honored that there was this guy willing to talk to me about his painstaking research into asset management and investing, but very memorable. The other guy I would mention is William Sharpe. We went to his home at Carmel in California and spoke to him there again. He’s been saying this stuff for years. He wrote a good short paper, as you probably know, in 1991, The Arithmetic of Active Management, which is all you need to know to understand why.
That’s brilliant when you can distill a complicated subject down into 1.5 pages or something. You certainly had the advantage that few people have had of talking to people from Bogle to Fama to Sharpe. What do you feel is your responsibility now? Do you feel like you’ve got this pool of knowledge and is it a personal thing? Is it a business thing? What’s giving you the energy to make this work and to talk to people about these subjects?
When I found out about all this, I interview these people, I did my own research and I had the a-ha moment that Rick Ferri talks about that we’ll do with evidence-based investing. It suddenly all clicks. I don’t want to describe it like a religious conversion, but I knew at that point that this is a big story and I talk about stories because I’m a journalist. I’ve done some big stories. I was in Iraq. I was one of the first journalists in Guantanamo Bay to tell that story and so on. I reported on some interesting things around the world, but it seems to me, and I still genuinely do believe, this is the biggest story I’ve ever worked on. Investing is so important. It has such an impact on everyone’s lives.
We have an industry that is getting in the way of people having their fair share of capitalism. For me, that’s what it boils down to. Millions and millions of people around the world are not getting their fair share. I’m not saying everything will be hunky-dory when they do, but they’ll have more money in their pockets. The fund industry will put less into the exchequer here in the UK, the taxman in America, but there will be more in ordinary people’s pockets. People will be able to enjoy their retirement. They’ll be able to have a retirement because at the moment, for a lot of people, it’s looking like we’re going to have to work for a very long time.
That’s certainly a noble cause, trying to educate and democratize this information in the face of a lot of walls that have a vested interest in not having it be democratized. That’s fantastic. In closing, what do you think the future holds? What are your next projects? What’s on the horizon for you that you’re excited about?
I am very involved in what we call the transparency movement here in the UK. We’ve got an organization particularly called The Transparency Task Force, which is a voluntary organization. It is working in the US as well, but it works in Australia and various other countries around the world. We’re trying to make the financial services industry more transparent so that everyone knows what’s going on. The actual performance that private equity funds and hedge funds are delivering rather than what they claim to be delivering, how much you’re paying.
It’s not the headline charge. When the industry has a responsibility to be thoroughly trained, we’ll never get 100% transparency, but when it is more transparent and people can see clearly with their own eyes what’s good value, what’s bad value, they will start to do the right thing. More and more people will come to advise firms, independent advisors. More and more people read my blog. That’s the next big battle, if you like. I remember listening to one of Jack Bogle’s last final addresses. He gave it in Philadelphia. He said, “Transparency is the next big frontier.”
We share the same view. The transparency, there are a lot of problems. I’m looking forward to see what you’re up to. Perhaps we can have another chat in the future to get an update from you as to what’s transpired over the period of time. I’m a big fan and I wish you the best of success. I want to say thank you for spending time with us.
It’s great to see your company going from strength to strength as well. I’m not at all surprised that it is.
Thank you so much for the kind words. Until next time, Robin. Cheers.
And thank you very much for joining us. Until next time, follow the evidence.
Robin Powell is an award-winning journalist and campaigner for positive change in global investing, advocating better investor education and greater transparency.
For most of his career in mainstream journalism, Robin worked in broadcast news and current affairs. For 14 years he was a news reporter and documentary maker for ITV Central, ITV News Network, and ITV Sport. He went freelance in 2005, spending seven years working mainly for Sky News and for The Politics Show on BBC1. Robin is a member of the Chartered Institute of Journalists and was a Visiting Media Fellow at Duke University in North Carolina. Married with two children, Robin lives in rural North Warwickshire, England. A former intern on Capitol Hill, Robin has supported a number of lost political causes over the years, and a few sporting ones, including Aston Villa Football Club and the England cricket team.
Original Release Date: August 12, 2020.
This podcast was originally distributed on August 12, 2020, by Independence Advisors. Independence Advisors officially merged with Modera Wealth Management on December 31, 2020. Please note that the information provided in these recorded conversations may no longer be current or may refer to events that have since passed.
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