Investors Got Smarter About Securities in 2014
More significantly, investors got wise to the machinations of the securities industry that has been plundering their wealth for decades. There are strong indicators that the jig may well be up for an industry that has long served its own interests while destroying the retirement dreams of Main Street investors. Here's my list of positive indicators that bode well:
Investors Are Tuning Out 'Financial News'
Just last year, CNBC saw its quarterly ratings drop to a 20-year low in the coveted 25–54 demographics. For the three months ended Sept. 30, 2013, the network's total-day viewership in that demographic plunged 24 percent to only 38,000 viewers. This was down from 50,000 viewers in the third quarter of 2012. Total viewers (including all demographics) reached only 133,000, representing a 19 percent drop from the same quarter 2012.
Many of the once-popular shows on CNBC -- like "Squawk Box," "Power Lunch," "Street Signs," "Fast Money" and Jim Cramer's infamous "Mad Money" -- had their lowest rated quarter ever in total viewers.
My first reaction to this news was, "What took you so long?" CNBC is a prime source of financial misinformation. It perpetuates the false belief that responsible investing requires constant monitoring of short-term financial developments. It features an endless parade of industry "insiders", who muse about the future of the markets, the direction of interest rates, stocks to buy and sell and which mutual fund managers are "hot" now.
CNBC derives significant revenue from the securities industry. Its programming serves the interest of that industry, which are to gather assets, encourage trading, stoke fear and anxiety and maximize fees, costs and commissions. At times, CNBC appears to be little more than a 24-hour infomercial for large brokerage firms, hedge funds and actively managed mutual funds.
Investors Wise Up to 'Insider' Predictions About Random Events
The pundits who appear on CNBC -- and make predictions about random and unpredictable events -- are little more than financial astrologers. The fact that they appear so supremely confident when they peer into their crystal balls no doubt leads some gullible investors to believe their insight is worthy of consideration. When they are wrong, they seek absolution by admitting their mistake. But then they move onto the next prediction, with little regard for the damage caused to investors who relied on their erroneous views.
One of the many examples of such behavior is Dennis Gartman, who is a regular "insider" on CNBC. Gartman claims to have the ability to predict the future direction of the market. On May 27, The Wall Street Journal reported that Gartman, who had been forecasting a market correction for some time, was "throwing in the towel on such a prediction." Gartman was quoted as stating, "Simply put, we've been wrong ... badly ... to have expected the market to correct." It's telling that he uses the royal "we" when talking about himself.
Undeterred, on Oct. 16, Gartman stated the selloff in global markets was "the start of a bear market" that looks set to take hold for "a long period." When the market shrugged off this selloff and continued its upward trajectory, Gartman told CNBC: "I went neutral on stocks, and I actually turned quite bearish for a couple of days – clearly that was wrong."
The steady stream of nonsensical "insights" and irrelevant musings by regulars on CNBC like Art Cashin, Gartman and Cramer, are now being viewed in an appropriate perspective. This kind of programming is entertainment masking itself as financial news. Investors are no longer content to be victimized by it.
Investors Are Voting With Their Money
In a blog post that must have shocked the securities industry, no less an authority than John Rekenthaler, the director of research at Morningstar, noted that 68 percent of net sales over the 12 months ended June 30 were passive (index funds, exchange-traded-funds and passively managed funds) and only 32 percent were active. Rekenthaler concluded that "the trend seems clear." He believes that active management is no longer "core."
Investors who adopt basic principles of index-based investing capture the returns of the global markets, using low-cost index funds, exchange traded funds or passively managed funds. These investors have no interest in the daily gyrations of the market, the predictions of emperors with no clothes, or the false sense of urgency and unnecessary anxiety created by "financial news" shot on the floor of the New York Stock Exchange.
These are very positive signs.
The Impact of Pathetic Hedge Fund Performance
Hedge funds are supposed to be run by the "best of the best" fund managers. The performance of these funds has been dismal. From 2004 to 2013, the HFRX Global Hedge Fund Index returned a puny 1.0% per year. It underperformed every equity and bond asset class.
Investors are not stupid. They can connect the dots. If this is the best these "masters of the universe" can do, how likely is it that your local broker can "beat the market" by engaging in stock picking, market timing or selecting an outperforming mutual fund? That is a question many investors are asking. When they get answers that make no sense, they focus on factors they can control, like their asset allocation, keeping costs low and taxes. This is terrible news for the securities industry and a major step forward for investors.
I believe this trend will continue in 2015 and beyond. If you become one of the many who now understand there is a better way to invest –– based on sound, peer-reviewed evidence –– I predict you will have a genuinely Happy New Year, and many more after that.
Daniel Solin is the director of investor advocacy for the BAM Alliance and a wealth adviser with Buckingham. He is a New York Times best-selling author of the Smartest series of books. His latest book is "The Smartest Sales Book You'll Ever Read."