A Bias of Titanic Proportions

Sunday marked the 100th anniversary of the Titanic's sinking. You probably heard about it. Every major news organization covered it. Two cruise ships tossed wreaths into the ocean where the ship sank. A New York food group re-created the final meal of the ship's first-class passengers. "Something about it is intriguing," the group's chef said. It almost felt like an American holiday.

The Titanic's sinking, which claimed 1,500 lives, was a tragedy. But almost no one ever mentions a word about the 1987 sinking of the ferry boat MV Dona Paz, which killed 4,375 people. Or the capsizing of the MV Le Joola, which claimed 1,863 lives off the coast of Gambia in 2002. Using 2010 statistics as a reference, 1,500 Americans likely died in traffic accidents in the last two weeks alone. No food club will re-create their last meal 100 years from now.

Some stories capture our attention more than others that are objectively bigger and more important. I don't know if there's a name for that, but it should have one. Let's call it the Titanic bias.

The Titanic bias shows up in the financial world all the time. We spend too much time focusing on some financial stories while ignoring others that are more important.

Nothing but noise
Think about this: One thousand dollars invested in the S&P 500 in 1950 would be worth about $78,000 today if you focus on the index alone. But with dividends reinvested, your $1,000 actually grew to $622,000 -- eight times higher than the index shows.

Over the long haul, dividends provide the majority of returns. That should be the biggest story investors spend their time and energy on. Yet look what gets almost all the attention in the media: daily market swings of a few points here and there, none of which matter over the long term.

Apple (NAS: AAPL) fell a few percentage points on Monday, bringing shares back to where they were literally a few weeks prior. And the media went wild. By my count, nearly 2,000 articles referenced Apple's "plunge," many as front-page stories.

Meanwhile on Monday, Procter & Gamble (NYS: PG) raised its dividend for the 56th consecutive year, this time by a lofty 7%. Only a handful of news outlets picked up on the news; most were buried by headlines of Apple's one-day hiccup.

For those looking to build wealth, consistently growing dividends are far more important than daily market wiggles. Yet most of us are captivated by the latter. There's your Titanic bias.

Go where the money is
There's also rampant Titanic bias in the current debate over federal taxes. Most of the tax debate -- certainly the most raucous parts -- focuses on tax rates. We argue over things such as whether to let the Bush tax cuts expire, lower the corporate tax rate, or extend the payroll tax cut.

Those are all important issues. But there's a bigger tax story that often goes unnoticed: how much we spend every year on tax loopholes, deductions, and write-offs such as the mortgage interest deduction and the deductibility of health insurance.

The federal government will take in $2.5 trillion in tax revenue this year. But that's after spending more than $1 trillion on tax deductions and credits (technically called "tax expenditures" since they mimic a cash subsidy), most of which disproportionately benefit those with higher incomes. That's where the money is, folks. Letting the Bush tax cuts expire on those earning more than $250,000 a year would generate $700 billion in tax revenue over the next decade. By comparison, the deductibility of health insurance will likely cost more than $2 trillion during that period. The "Buffett rule" rejected by Congress this week would have raised $47 billion in tax revenue over the next decade. We spend that much on the deductibility of retirement savings every 3.5 months. That should be the big tax story people talk about.

Who's really overpaid
Then there's the Titanic bias that exists when we talk about CEO compensation. The media have become fascinated with overpaid CEOs. Former Home Depot (NYS: HD) CEO Bob Nardelli was obsessively criticized for taking a severance package worth nearly $200 million after the company's stock fell 40% during his tenure. His pay was the topic of dozens of front-page news stories.

Nardelli was grossly overpaid and deserved the criticism. But there are more sinister and widespread examples of corporate overpay that go largely unnoticed. Consider the compensation of money managers.

According to S&P Capital IQ, Nardelli earned $254 million at Home Depot from 2000-2006. That's 0.8% of the $32 billion in profits the company earned under his watch.

Compare that with mutual fund managers. One analysis by Yoseph West of Vuru concluded that management fees collected on equity mutual funds captured one-third of all investor profits from 2000-2010 -- and the vast majority of those funds underperformed a simple index fund. In 2011, U.S. money market funds distributed $5.2 billion in dividends, but only after collecting $4.7 billion in management fees, according to the Investment Company Institute. That's nearly half of all income. And as Reuters explained, many of those funds are run by one (highly paid) manager. Another study by David Norman, former CEO of Credit Suisse Asset Management, found that U.K. investors pay 8 billion pounds a year in hidden fees to financial advisors, capturing upward of one-third of all investor returns. Several years ago I learned that an unsuspecting family friend was being charged 1% a year by a financial advisor to park her money in a product that yielded about 1% a year. The advisor was taking just about everything for himself, in other words. And he called it "work."

Forget Nardelli. Forget the bank CEOs. The real pay scandal is the one Titanic bias shields our attention from, and it's probably affecting you, right now, whether you realize it or not.

It's a terribly complicated world. Whatever you're worried about, frustrated about, or upset about, there's probably a bigger issue out there that deserves your attention. Something about that is intriguing, you might say.

At the time this article was published

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