PRINCETON, N.J. | Malkiel is a Princeton University economist and the author of the 1973 investing classic A Random Walk Down Wall Street, which argued that it’s almost impossible for active money managers to beat market indexes over the long term. The 12th edition has just been published, and Malkiel feels vindicated by more than four decades of data and the rise of low-cost index funds. Yet, at age 86, he also still takes the occasional flyer on individual stocks.
What’s new in this edition?
Some early chapters give histories of financial bubbles, and there is a new section on what I call the bitcoin bubble. All the data has been taken up to date. Standard & Poor’s has done annual reports called SPIVA (S&P Indices Versus Active) since 2002, and 15 years of data show that more than 90% of active money managers are underperforming the index.
What about so-called smart beta strategies that incorporate mathematical factors to try to generate above-market returns?
There are several factors—some of the classic ones are value, small-cap, profitability and momentum. Most single-factor smart beta funds have not been smart investments. The value factor, which is much loved by academics and people like Warren Buffett, has not been a good strategy over the past five years or even the past decade. I’m still negative on 95% of the smart beta funds out there, but some multifactor funds—probably because of the low correlation among the factors—have tended to improve performance by giving you a little more stable portfolio.
So how should individual investors choose a fund?
The one thing I am absolutely sure of is that the lower the expense I pay to the purveyor of the investment product, the more return there will be for me.
Are fees the overriding factor affecting returns?
Absolutely. Morningstar did a study in which they asked: Do five-star funds do better than one-star funds? And they found no relationship whatsoever. But then they looked at the expense ratios, and that’s where they got the highest correlation.
How low can fees go?
Well, down to zero, obviously. Fidelity is now advertising a zero fee, although you have to become a Fidelity customer. Also remember that index funds make a lot of money by lending shares, so find out if that’s going back to investors.
Do you worry about too much passive money flooding the market through index funds?
Some people say there aren’t going to be any active investors to make the market efficient. We’ve got too much active management, not too little. I wouldn’t worry if the market was 90% indexed.
You’re a fan of robo-advisers.
I’m the chief investment officer of one of them, called Wealthfront, and we have more than $10 billion (U.S.) under management. I think this is the beginning of a revolution in investment advice. Advice is very expensive—advisers can tack on 2% or 3%. The robo-advisers I work with charge just 1%.
Should human advisers worry about getting disrupted?
How do you invest your own money?
All my retirement money is safely invested in broad index funds. But I also own some individual stocks too, because investing is fun.
What have you bought lately?
I’m not recommending this for anybody, but I bought some shares recently of an IPO for Yeti. It makes coolers that I’ve used—you go on a picnic, and you need to keep soft drinks and beer cool.
Six years ago, we asked about the best stock you ever owned. You said you bought $5,000 worth of IBM shares in the 1950s. But IBM hasn’t done well lately, has it?
It seems to have missed out on the cloud revolution. About the same time Warren Buffett got disgusted with it and sold, so did I. But I made a lot of money on it.
So what is now your best purchase ever?
I worked for a little consulting firm in Princeton in the 1960s and got paid in stock. Then Lockheed Martin bought it. So I’ve got a lot of Lockheed Martin stock, and I’m holding on.
Where is the market headed over the next five to 10 years?
I don’t think anybody knows. But I’d make two points. First, North American stock markets are not cheap. At current valuations, it’s very likely investors will be looking at single-digit returns over the next decade. Second, European markets are cheaper than North American markets, and emerging markets are cheaper than European markets. So make darned sure you are very broadly diversified.
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