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Saturday 21 March 2009

Bill Bernstein v Joe Nocera

William Bernstein rarely writes on his Efficient Frontier website these days, more's the pity, but he’s been moved to do so by Joe Nocera’s take on the victims of Bernie Madoff: It’s time our elected officials dragged the investment industry, kicking and screaming, into the modern era.

In his 13th March piece in the New York Times Nocera opined (I quote at length):
I suppose you could argue that most of Mr. Madoff’s direct investors lacked the ability or the financial sophistication of someone like Mr. Hedges. But it shouldn’t have mattered. Isn’t the first lesson of personal finance that you should never put all your money with one person or one fund? Even if you think your money manager is “God”? Diversification has many virtues; one of them is that you won’t lose everything if one of your money managers turns out to be a crook.

“These were people with a fair amount of money, and most of them sought no professional advice,” said Bruce C. Greenwald, who teaches value investing at the Graduate School of Business at Columbia University. “It’s like trying to do your own dentistry.” Mr. Hedges said, “It is a real lesson that people cannot abdicate personal responsibility when it comes to their personal finances.”

To summarise: Madoff’s victims conspired in their own downfall.

Bill Bernstein begs to disagree:
Well, Joe, no, that is not what diversification means to me. "Diversification" does mean not putting all your eggs in one basket, but not in the sense that you imply. Diversification is spreading your bets among a very large number of securities ...

And it also certainly shouldn't mean diversifying among advisors....

Think about it, Joe. Do you "diversify" among doctors, lawyers, dentists, plumbers, or accountants? Most people do not, nor do they have to....

Bluntly put, there’s no chance that your doctor, dentist, or attorney is a high-school dropout. Your stockbroker, however, just might be....

The highly idiosyncratic strategies of many hedge funds are especially problematic. I would have few qualms about restricting the purchase of these products to only the most sophisticated institutional investors, with no individual ownership allowed through brokerage or fund-of-fund channels....

It’s time our elected officials dragged the investment industry, kicking and screaming, into the modern era. (go read it).

To paraphrase: your average investment advisor is likely to be less qualified that your average plumber. Would you trust your life savings to the guy who fiddles with your fawcet?

Bravo Bill. Bravo.

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