| Topic Name: |
Are the pros obsolete? |
| Message Name: |
mixing arguments |
| Date Posted: |
11/01/2000 |
| In Reply To: |
1. I believe that the sole reason for a broker to maintain an analysis department should be to generate trading proposals where over time the winning trades will generate profits that are greater than losses from loosing trades. I also believe that a professional broker should trade proprietary capital and publicise their results, clarifying that while this is no guarantee for future performance, it rather nicely resolves the question of a broker - client relationship based on mutual and not one-sided interest and commitment. And if the pros do not just market their capability but actually live it, why not go beyond advisory fees and simply charge a percentage of the profits, thereby increasing the potential for their own profitability?
2. One would simply have to agree on a general performance benchmark, and indexes comprising an economies most highly valuated companies are rather straightforward.
An index fund will generally beat mutual funds during longer uptrends, whereas during larger reversals the mutual funds will outperform or at least show smaller losses than the index funds because the active management will limit losses.
Here the main advantage for going with the pros seems to lie in limiting your downside exposure. While this is extremely important it does not per se answer the question if you need a pro to do that for you.
3. I absolutely agree that investing is not easy to do and that one needs a lot of expertise. Either devote the time to build it up yourself, or if you do not have the time or inclination then go with a pro, but just make sure to carefully select a broker whose claims have a basis in fact and are not just based on their desire to grow their own revenues at your expense.
4. A seven figure salary is never small as such, but has to be seen relative to potential gains to be made in the markets, and relative to the discrepancy between some of the claims versus actual performance of some brokers. |
| Message: |
You're mixing arguments here. There's one argument to be made for or against retail brokers and another for or against professional money managers.
as to your arguments:
1. Because brokers are there for clients who are not going to maximize your returns. Full-service brokerage clients are generally people who want to avoid risk and go with safe investments. True, the retail brokers often try to get them to try riskier investments. But many clients desire minimum-risk investments, limiting profits greatly.
Also, a partnership such as you describe (with the broker taking a percentage of the profits) has several legal difficulties.
2. Shifting from retail brokers to active professional managers, we get into the argument of whether professional managers are superior to individuals. My answer is: yes. Let's take two major pieces of evidence: the research reports produced in major sellside and buyside shops vs. the arguments in the public newsgroups and websites as Valididea, etc. While much professional research leaves much to be desired, almost all of the arguments and discussion in such public forums is imbecilic. I've never seen (in my admittedly minimal time on these forums)a market-sizing discussion, a complete discussion of valuation, an in-depth analysis of a firm's marketing strategy or of competing products, etc. Basic issues. At the top end of sellside/buyside research, analysts do things that most individuals apparently have never even conceived - most sellside analysts run their own market surveys, discuss implementations of products with customers, model extensively a factories' economics, etc.
3. Of course. We are in full agreement.
4. We're not talking about brokers in point 4 but about sellside/buyside analysts. You stated that analysts are poorly compensated. Again, is 7-figures poor compensation? You also stated that analysts are fresh from school and/or inexperienced. This is simply not true. Almost every full sellside analyst I know has 5+ years of experience. One was a executive at a very large high-tech corporation for 11 years. Another was an IT consultant and then worked at a VC fund for 5 years. Another was at a very large software maker for 7 years. Yet another worked first as a chip designer, then in finance for a semi-cap equip maker, then worked in investment banking for several years. Another was a senior analyst at a marketing research firm for 10 years on top of experience in several high-tech firms. All these people had advanced degrees from fine institutions. AND all of them spent at least two years working as junior analysts to very experienced senior analysts before themselves being allowed to cover major firms.
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