I never trusted all the fancy systems and the results didn’t seem worth it.

People decide on investments the same way they buy clothes and decide on restaurants. Everyone objectively knows that jeans bought from Wal-Mart vs. Barneys are the same quality in the sense of durability, fabric, ability to protect your butt from the elements, etc (heck many luxury brands come off the same factory lines in China as their generic counterparts). But people willingly pay for the brand because when they walk down the street, having a specific insignia on your pocket indicates that you’re rich enough to throw away several hundred dollars on something as inconsequential as jeans.

Financial products are the same. In ancient times (say the 50s/60s) dabbling in the stock market was a sign of wealth and savvy, since (as you’ve rightly pointed out many times, Yves), stocks were considered extremely speculative and only safe for people who could afford big losses. Plus it wasn’t worth the cost of all the research on companies you had to do (or hiring of advisers to do the same) unless you had a lot of money to invest.

Mutual funds were akin to the downmarket brands of the fashion labels, in that they could allow investors who previously didn’t have the wherewithal (both financial and knowledge-wise) to invest in stock markets to now be a part of the equity markets just like the rich guys. Thus, in the 70s/80s/90s, even if you didn’t know a thing about P/E ratios and dividend yields, etc., etc., you could pontificate around the water cooler about “your” stocks while your peers were still stuck in boring money markets and CDs. Thus, mutual funds boomed by marketing the “brand” of being an equity investor (implying you were rich and financially savvy) to a much larger pool of people than the narrow confines of the truly wealthy.

As any marketing specialist will tell you though, the problem with marketing an upper class product to the lower classes is that eventually, the brand becomes seen as lower class, at which point, you have to start competing on commodity factors (e.g. price, quality, etc.) rather than cachet and brand value. That’s what’s happened to the mutual fund industry, as owning mutual funds and playing stocks have become a middle class and even lower class pursuit. Hence, returns are converging on the benchmark indices, and people are starting to pay attention to expense ratios and the such.

So what’s a poor millionaire to do? Be forced to suffer the indignity of putting his money in the same yeoman’s fidelity mutual fund in which his servant parks his IRA? Never!

Enter the hedge funds. An entirely new brand. One limited to rich people by law (how many couture labels can say that?!). I’ve always been of the opinion that the requirement that only high net worth individuals could invest in hedge funds was a blessing in disguise for the industry. It meant that saying you owned a hedge fund automatically implied you were a high net worth individual. Same with private equity (which are just LBO shops by another name, and these days, are neither private, nor have much equity). People who willingly pay several hundred dollars for jeans will willingly pay 2/20 for the ability to advertise their net worth and prevent the hoi polloi from doing the same.

Thus, I assert that choosing an investment vehicle is not an economic decision, but a brand decision. For most Americans who can’t even balance their checkbooks, the idea that they can understand principles such as compound interest, yields, or (god-forbid) reversion to the mean, is doing them too much credit. They don’t know the difference between one mutual fund or the other anyway. So they pick based on which one makes them “feel” like a savvy and rich investor.

Hedge funds have so far done a masterful job of promoting this myth. Who cares that they don’t report their holdings nor their investment strategies? How many people actually read their mutual fund prospectuses?

The main goal of investing in a hedge fund is to advertise to the people around you that you have enough money to invest in a hedge fund. And that you’re hip enough to realize that mutual funds are sooo last year. And you’ll be happy to pay through the teeth for that privilege.

Frontline did an investigative report that renders an devastating indictment on 401(k) plans…

http://www.pbs.org/wgbh/pages/frontline/retirement/view/

One economist they interviewed calls them the “next big financial crisis” facing America. Another says the “yield disparity” inherent in 401(k) plans is a “financial cancer” that will “destroy the opportunity for ordinary workers to retire in dignity.”

1) 401(k) should be structured like the Canadian RRSP or the Chilean Individual pension Plans. That is, anyone can invest a certain amount tax-free per year in any vehicle they wish. No more “Here, you got 10 mutual funds to invest in and that is that, Buster!”. Employers who wish to contribute just send the monies to registered clearing houses and have no direct or indirect control over the choices of vehicles. Right there, 75% of the MF industry would get a much neeeded kick in the pants.

2) Performances should be reported before all fees and after each and every fee then after all fees are accounted for. A mandatory graph would show projected losses generated by said fees at 10, 15, 20 and 30 years, and included in ANY prospectus. Come on laser brain, show Daddy-O how well you REALLY perform.

3) Every trade performed during last 3 days before end of quarter should be disclosed on every mutual fund web site. Wanna do some window dressing? Sure thing, just add a bit of Windex with that please, pretty please?

I wounder what Buffett would make of such and agenda? *evil grin*