I quit my job on Wall Street in early 2017. After two years as a trader for one of the biggest banks in the world I was done. The feeling was liberating, exciting, and terrifying. My parents thought I was crazy. I was making triple the national salary at twenty three years old with much higher paychecks to come. I was locked in for a promotion in six months, on the fast track to be promoted further if I stayed in my seat. The career in front of me was laid out. Why did I leave?
Because a lot of what Wall Street does, does not provide any value.
2018 marked the ninth consecutive year where almost two thirds of stock pickers failed to beat their passive benchmarks. Expand the time horizon to ten years and the number grows to 85%. Fifteen years and the number reaches close to 92%.
What does this mean? It means the vast majority of clients would be better off without asset managers. Forget shopping around for a good fund, stick your money in an index fund and over fifteen years you have a ninety-two percent chance of having done the best thing.
Imagine paying for a service and getting worse results than had you done the simple do-it-yourself option. Paying for an SAT tutor with a 64% chance of doing worse than your last individual score? Never. Working with a sports coach who delivered worse athletic performance than if you trained by yourself? Pass. A mechanic who returns your car out of the shop and says “I worked on it really hard, unfortunately it actually runs worse now”.
The late John Bogle, founder of Vanguard has been bringing attention to this fact for decades, famously writing in 1999, “The mutual fund industry has been built, in a sense, on witchcraft”. The financial industry is filled with words like syndication, leverage, and not to mention dozens of financial acronyms. The truth is they aren’t as complicated as they seem. Some people hear these words and assume they need a professional. Syndicate is just a fancy word for a group, and leverage means debt.
Active management’s underperformance isn’t due to a lack of intelligence or effort. People on Wall Street are some of the most intelligent and hard working people I’ve had the pleasure of meeting. Ivy League universities send up to one third of their graduating classes to work on Wall Street. I strongly believe we, as a society, have an over-allocation of intelligent people competing in public markets attempting to find an edge. Although intelligent people working in public markets are necessary for price discovery and efficient markets, I believe we are far past that point and the inability of asset managers to beat the S&P 500 supports that belief.
In financial markets if too many people are pursuing the same strategy it’s called a “crowded trade”. Wall Street itself is a crowded trade.
Only the exceptionally skilled, or exceptionally lucky will get it right. Naval Ravikant, the famous angel investor says “I don’t believe in macroeconomics anymore, it’s too hard”. With an unlimited number of variables and the inability to properly control for them, macroeconomics still remains much more of an art than a science. The legendary investor and hedge fund manager Stanley Druckenmiller recently said of the more than seven thousand hedge funds in his industry, “there are only two or three hundred which are earning their fees”.
Working on Wall Street gave me this first hand experience. I’ve seen two macroeconomic strategists with decades of experience, working in the same firm, say completely opposite things with complete certainty. They were both wrong, and both still get paid handsomely. A rising tide lifts all boats, and this decade-long bull market is making everyone look good.
Wall Street has been operating like this forever, people ask, what makes you think it will change?
When the digital generations who grew up with the internet reach their peak investment potential, they will have the data to make an informed decision. People who are extremely comfortable with software, have never stepped foot in a branch of a bank, have no need for a personal relationship with a financial advisor, and care more about efficiency and transparency will shun the traditional investment world.
When that era comes the consolidation to the asset management industry will be significant. Firms will shutter their doors, active management positions will shrink, and the investment banks who provide trading liquidity will have to reduce their headcount. Barring some unforeseen catalyst, I expect this to be a long-term, irreversible trend. The arrival and stunning growth of bond trading platforms, which provide intermediate functions that were exclusively served by investment banks, is an example of this trend. Not the place I wanted to find myself somewhere in the middle of my career. After battling with this idea for the better part of a year I made a decision.
I stockpiled my savings, trimmed my expenses, created a budget that would carry me over the next eight months and handed in my resignation.
