Is your financial advisor a better investor than you?
Plus: Meta Chief AI Scientist, Food Competition and the Recession that Never Came
Is your financial advisor a better investor than you?
Financial advisors can provide value in numerous ways, but they succumb to the same behavioral biases as everyone else. Research has shown that most advisors perform in-line with the average investor.
From the paper “A Misguided View of Financial Advisors”:
A common view of retail finance is that conflicts of interest contribute to the high cost of advice. Using detailed data on financial advisors and their clients, however, we show that most advisors invest personally just as they advise their clients. Advisors trade frequently, chase returns, prefer expensive, actively managed funds, and under-diversify. Advisors’ net returns of −3% per year are similar to their clients’ net returns. Advisors do not strategically hold expensive portfolios only to convince clients to do the same; they continue to do so after they leave the industry.
For this (and many other) reason, investors should never look to their advisor as a means to outperform the market. Instead, focus on where advisors can truly add value: portfolio construction, behavior management, expense optimization, tax planning and estate management.
Quote of the day: Where is the recession?
David Kelly, Chief Global Strategist, JP Morgan Asset Management shares his view:
…we are in a slow-motion slowdown rather than recession and this environment could yet be supportive of financial markets. While bond yields have fallen recently, they remain well above their averages over the past decade and fixed income, in general, should provide both income and diversification as the threat of inflation fades. U.S. equities remain much cheaper than at the start of 2022, while a falling dollar should add to the returns on international equities. That being said, it doesn’t take much to tip a slow-motion slowdown into an outright recession and, for this reason, investors would be well advised to adopt a well-diversified and cautious approach in the spring of 2023.
Inflation path: Wages chase food prices
As headline inflation slowly declines, economists are debating whether it’s possible for inflation to permanently return to around 2% or whether we are in a new inflation regime.
The disinflation camp points to high debt levels and unfavourable (i.e. higher dependency ratios) demographics as reasons to expect inflation to keep falling. I would add the impending productivity boom from AI-integration into everyday business tools (e.g. Word, Excel, Outlook, Gmail, video production, etc.) will be hugely deflationary.
At the same time, we are approaching 10 billion humans on this planet sucking up finite resources, the least discretionary being food.
The world doesn’t appear to be imminently short of food, but competition for supply is growing. A notable trend illustrating the growing competition for food is China’s increasing dependence on imports.
According to the Council on Foreign Relations:
Despite its domestic production, China has been a net importer of agricultural products since 2004. Today, it imports more of these products—including soybeans, corn, wheat, rice, and dairy products—than any other country. Between 2000 and 2020, the country’s food self-sufficiency ratio decreased from 93.6 percent to 65.8 percent.
The greatest calamity a nation can face - the the biggest threat to the peace - is a food shortage. People rebel and governments collapse when food is unavailable or too expensive.
Humanity is always 3 missed meals from anarchy.
I’m sure you’ve noticed your grocery bill rising recently (among other things). Those who can least afford it either do without or demand higher wages. Governments prefer the latter, so as the competition for food supply rises so do wages (either directly via a higher codified minimum or indirectly via subsidies and transfer payments).
So while big elements of the economy are disinflationary, an inflationary food-price-wage spiral is taking root.
I don’t know how this balances out over time, but it has the potential to flip the paradigm that has existed since the 1980s during which real wage gains came second to shareholder gains.
One possible outcome is white-collar wage disinflation (driven by productivity gains) is paired with blue-collar wage inflation (driven by higher food prices), reduces wealth inequality. Reality isn’t this definitive but this is a spark of an idea worth exploring further.
Gamification of wealth creation a wealth ERODING trend
Robinhood is planning to offer 24hr trading. This might be great if you’re a professional trader. However, if you’re a professional trader you’re probably not using Robinhood. This means this policy generally affects retail investors.
24hr trading sounds like an expansion of access - a good thing, right?
No. There is no need for an average person to trade this frequently.
There’s a saying: a portfolio is like a bar of soap - the more you touch it the smaller it gets.
This occurs because most active trading is driven by emotions, speculation and wild guesses. I’m not saying traders can’t make money. I’m saying most people who trade frequently don’t make money.
Over the past few years, there’s a trend for online brokers to encourage clients to remain active. Many earn income on activity as opposed to assets. Incentives are misaligned.
Preet Banerjee provides a great deep-dive into extended hour/24 hour trading:
The bright side of AI: An interview with Meta Chief AI Scientist Yann Le Cun
Yann LeCun is VP & Chief AI Scientist at Meta and Silver Professor at NYU affiliated with the Courant Institute of Mathematical Sciences & the Center for Data Science. He was the founding Director of FAIR and of the NYU Center for Data Science. After a postdoc in Toronto he joined AT&T Bell Labs in 1988, and AT&T Labs in 1996 as Head of Image Processing Research. He joined NYU as a professor in 2003 and Meta/Facebook in 2013. He is the recipient of the 2018 ACM Turing Award for “conceptual and engineering breakthroughs that have made deep neural networks a critical component of computing”.
His key points from this 54 minute interview on 20VC :
AI won’t dominate humanity
No economist believes all jobs will be replaced by AI
LLM model size matters less
Why open models beat closed models