BY KENT KRAMER, CFP®, AIF®, Chief Investment Officer, Foster Group
Steve Jobs, Steve Wozniak and Apple; Orville Wright, Wilbur Wright and human flight; Ben Cohen, Jerry Greenfield and Cherry Garcia ice cream (my personal favorite!) — all are examples of highly successful partnerships.
As investors, we regularly choose among various partners when making our investment decisions. The question to ask regularly is, “How powerful or how helpful are my partners relative to all the partners available?”
Keep in mind, we’re not talking exclusively about partnerships in the legal sense but also about other business relationships. In 401(k) accounts, we allocate dollars among the mutual funds offered in our plan. Each of these funds is managed by a team of professionals who act as the investors’ partners.
Some individuals invest directly in stocks, bonds and other securities. These investors may be accessing partners like professional market analysts, CNBC or Bloomberg to get up-to-the-minute data prior to making their decisions.
Each year, Dimensional Fund Advisors and Standard and Poor’s, among others, put out reports on the relative success of mutual fund managers as partners for investors, comparing professional managers’ investment performance to broad investment markets. Each year, the data suggest that most investors would be better off choosing these broad investment markets as their partners, rather than the professional managers who are attempting to exceed market returns.
Markets are more powerful partners today than ever. To visualize just how much more information and power is in market prices today than in the centuries preceding, imagine a transaction before our era of public markets, characterized by freely available real-time transaction data.
In the middle ages, public marketplaces like street bazaars began to develop. Imagine that people buy and sell 50 chickens in one of these new markets in a day. More transactions create a more competitive market for chicken pricing, because buyers and sellers can ask each other what they paid for their egg layer. These 50 transactions inform what is currently the fair price for chickens. In addition to chickens, these larger marketplaces provide a centralized location for the sale of various goods.
Now, “fast-forward” to the New York Stock Exchange in the early 1900s. Instead of chickens, investors in this market are buying and selling shares of stock in hundreds of companies. Thousands of shares trade each day on the physical floor of the exchange. Brokers and dealers have ledger books to keep track of what price clients are willing to pay for a stock (the “bid”), as well as the price others are willing to sell for (the “ask”). While the entire universe of pricing data is not immediately available to everyone involved, price changes throughout the day are discovered as people on the floor interact. Local papers and brokerage companies tabulate and publish the previous day’s pricing history. In time, a “ticker tape” system reports transactions in offices around the country with minimal delay. The result is more timely information available to more people.
According to the New York Stock Exchange (NYSE), just 50 years ago, on June 13, 1968, the volume of transactions on the New York Stock Exchange reached an all-time high of 21,351,000 shares. On June 13, 2018, total volume of trading was 3,747,681,425 shares — 175 times the volume of 1968! This does not include the shares traded on other exchanges around the world.
Willing and informed buyers and sellers traded each of those 3.7 billion shares at an agreed price. The price of each share, and other details of each transaction, is available in real time to everyone with a computer all over the globe. When you consider that these prices reflect the research and points of view of the largest investment companies in the world, professional asset management teams and individuals, all investors can have greater confidence that these prices represent a highly credible estimate of the relative value of a company’s stock or anything else being traded on today’s very large, transparent and robust markets.
If information is power, today’s global markets and the prices they provide represent a potentially more powerful partner than ever. Investors can make these markets their partners through a wide variety of specifically structured asset class mutual funds and exchange traded funds.
PLEASE NOTE LIMITATIONS: Please see Important Disclosure Information and the limitations of any ranking/recognitions, at www.fostergrp.com/info-disclosure. The above discussion should be viewed in its entirety. The use of any portion thereof without reference to the remainder could result in a loss of context. Foster Group cannot be responsible for any resulting discrepancy. A copy of our current written disclosure statement as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov.