By: Frank Armstrong
By: Frank Armstrong, CFP, AIF
The economics, investment, and finance courses I took as a student in the 1960s are probably pretty representative of that generation’s investment education: totally inadequate and useless as a guide to forming a personal investment approach.
To appreciate how far we’ve come, let’s go back in time. Here’s how the world looked to me, a brand-new estate planner and securities salesman, in late 1973.
Practicing Investment Theory
What investment theory? There wasn’t any. Nor was there any hard data to make meaningful comparisons. As far as we knew, we were doing the same as everybody else. And the advisor with the best golf swing, smile, and charisma usually was deemed to know best.
If advisors had any investment philosophy at all, it might be summed up like this:
1. It’s easy to select stocks that will beat the market.
2. It’s easy to time the market.
3. Diversification is for dummies.
Advisors basically told their clients, “Trust us. Our home office manages billions.” In retrospect, the results were predictably mediocre. But nobody had the data to compare one advisor’s performance to another’s anyway.
Abiding by Regulation
Financial institutions were heavily regulated, each performing only one function. Banks did one thing, S&Ls did another, and insurance companies did yet something else. The lines were clearly drawn. Companies didn’t step across them.
There was no price competition. Banks and S&Ls paid interest rates determined by law. Then, newfangled money-market funds came along offering higher returns. Banks countered with toasters.
The entire securities industry was commission- and transaction-based. Only a few mutual funds existed, most of them carrying loads. There was almost no interest in these products.
Predictably, financial services suffered from high transaction costs, poor investment selection, and rampant conflicts of interest.
This was a world with no Internet. IBM was best known for its sturdy typewriters. There were no financial calculators, spreadsheets, or databases either.
Most calculations were done on mechanical wheeled devices that groaned and pounded away for 30 seconds just to add up a column of 10 numbers. The new electronic calculators cost about a week’s pay. There were no beepers, faxes, e-mail, or continuous market quotes.
Placing a call to London was difficult, Seoul next to impossible. That didn’t matter, though; it never occurred to me that I might want to do either.
CDA-Weisenberger published an annual guide that covered about a third of all mutual funds. Comparisons among funds usually were not possible, as each fund reported financial results based on its fiscal year, not the calendar year. Besides, most advisors agreed that accurate and meaningful information only complicated the sales process.
Investors meekly accepted their dependent role as consumers, never imagining that they might be empowered to make their own investment decisions.
Then Came the Revolution
We were all about to step into a tornado. I never could have imagined the pace of change. The last 30 years have brought a tremendous revolution in finance, with stunning advances on almost every front: theory, investment choices, regulation, information, and technology.
In upcoming columns, I’ll cover some of the most important advances in modern finance. And I’ll explain the practical applications and benefits of each. In my next column, I’ll discuss modern portfolio theory and how a young grad student’s chance encounter led to a thesis that forever changed how we think of investing. Watch for it on February 10.