I knew I had to ask him about the mysteries of life
He spit between his boots and he replied
"It's faster horses, younger women,
Older whiskey, and more money"
Country music fans probably remember Tom T. Hall’s 1975 song, “Faster Horses”. In the song, Hall talks to an old cowboy “about the mysteries of life”, to which the cowboy replied, “It’s faster horses, younger women, older whiskey, and more money.”
Faster horses seemed to provide a safer inspiration for this week’s missive than the old cowboy’s second answer. The third answer also seemed interesting, but I’m more of a consumer than a connoisseur of the fire water. (While researching this article, I stumbled upon the World’s Best Whiskies 2016, if you’re looking for Christmas gift ideas.) “More money”, well, that’s why we’re here so let’s get back to horses.
Whether it is equines, trains, telegraphs, cars, airplanes, internets, or whatever comes next, going faster seems to be an innate desire of humanity. We have gotten to a point where gratification is almost instantaneous with just about everything. But has the resulting pace from the ongoing quest for “faster horses” improved the human condition, at least as far as helping us get “more money”?
It wasn’t very long ago that if you owned some stock, you probably kept the certificate in a safe deposit box. If you were curious about what is was worth, you would look in the back pages of the newspaper where all the previous day’s closing prices were listed. When it came time to buy or sell, you would call the order into your broker and then you had a week to deliver the shares or payment, usually by the US Mail.
When I was a kid, I worked for my father during the summer at his Gulf service station. At lunch, each day, he would visit his stockbroker’s office to pull up quotes on stocks he owned or was following. Other clients of the broker and office staff would discuss the markets and current events while hanging out around the quote terminal, known as a Quotron.
In the corner, the broker kept an old ticker tape machine as part of the décor. I think they held on to the relic probably because it just looked cool, but it also offered an opportunity to appreciate the benefits of “progress”. Instead of waiting around the ticker for a trade to come across, it was now possible to type in a symbol and immediately see its price. It also replaced reams of paper with the soft green glow of an early computer screen.
By the time I was working in the industry in the early 90’s, investors could call toll free phone numbers to get quotes from a broker or through automated telephone systems. Some companies even offered software for purchase that allowed clients to get their own quotes and to make trades through their computers. It was also around this time that 24-hour business channels on cable starting to appear and that brokerage firms began to require that you hold your shares or cash at the firm where you trade.
To get current events and market information, we have gone from tuning into the evening news or reading the business section of the morning paper to having instant updates delivered to us anywhere we can get a cell or WIFI signal. With the touch of the screen, we can buy or sell an entire portfolio in an instant. But are we getting “more money” with all this speed?
The evidence suggests not. Take the turbulent market period from 2008 – 2012, for example. Equity funds in the US experienced net outflows of about $535.7 billion during this period. When you think about how gloomy the news was in that period, it really isn’t that surprising that many investors went to the sidelines.
Dimensional Funds, which are found in all our Accountable Portfolios, had $34.4 billion of net inflows throughout that same period.[i] Why might that be? Well for starters, all their funds are held by institutions or customers of Registered Investment Advisers like ATX Portfolio Advisors.
When a client at a typical investment company or brokerage firm panicked after watching the talking heads declare the coming of the four horsemen in 2008, frequently all they needed was an iPhone to go to cash. Dimensional’s investors, on the other hand, had to call into their adviser to talk about what they were feeling. That certainly was a slower process than logging in and clicking “sell all”, but that momentary pause, often, allowed reason to prevail. The result was that Dimensional’s fund managers weren’t forced to sell stocks at fire sale prices just to meet liquidation demands. In fact, they were able to pick up some bargains.
Only 15% of US equity and fixed income funds that were around in the year 2000 had beaten their stated benchmarks through 2015, while 82% of Dimensional’s funds beat theirs over that same period.[ii] That suggests that deliberately going a little slower may be one reason that Dimensional’s funds have been more successful than so many of their peers, and given their investors “more money” as a reward.
If you are wondering why you don’t have more, it may be a good time to get in touch.
[i] Dimensional estimated net flow data provided by Morningstar based on Dimensional’s US-domiciled equity mutual funds. Industry net new cash flow data provided by Investment Company Institute© based on the approximately 4,600 US-domiciled equity (domestic and international) mutual funds reported on an aggregate level to the Investment Company Institute©. This includes information on Dimensional’s US-domiciled funds during this period. For illustrative purposes only.
[ii] Data from the CRSP Survivor-Bias-Free US Mutual Fund Database, provided by the Center for Research in Security Prices, University of Chicago. Sample includes funds available at the beginning of the 15-year period ending December 31, 2015. Dimensional funds exclude VA funds and those distributed exclusively through Loring Ward. Industry funds exclude index funds, sector funds, and funds with a narrow investment focus, such as real estate and gold, money market funds, municipal bond funds, asset backed security funds, and non-US bond funds. Success rates are determined by the percentage of funds that survived and outperformed a benchmark over the 15-year period, net of fees and expenses. Dimensional funds are compared to prospectus benchmarks. Industry funds are compared to the diversified benchmark index with which they were most highly correlated over the sample period.