Another ex Wall Streeter Leaves The Dark Side

The NYT reports on Gordon Murray a former high level executive at several major firms who has devoted himself while suffering from a terminal illness to disabusing investors of everything he preached as an institutional bond salesman. He has associated himself with Dimesional Fund Advisors, one of the pioneers of passive (index) investing with a special emphasis on tilting towards small and value.And he has proposed a short and to the point book explaining this approach.

Having made the transition "the dark side" after working in institutional sales from not such a high level of management on Wall Street and at an earlier stage in my career I can certainly identify with this:

Mr. Murray felt compelled to write it is itself a remarkable story of an almost willful ignorance of the futility of active money management — and how he finally stumbled upon a better way of investing. Mr. Murray now stands as one the highest-ranking Wall Street veterans to take back much of what he and his colleagues worked for during their careers.

And needless to say I find only minor quibbles with the following key points from his book

The book asks readers to make just five decisions.

First, will you go it alone? The two authors suggest hiring an adviser who earns fees only from you and not from mutual funds or insurance companies, which is how Mr. Goldie now runs his business.
Second, divide your money among stocks and bonds, big and small, and value and growth. The pair notes that a less volatile portfolio may earn more over time than one with higher volatility and identical average returns. “If you don’t have big drops, the portfolio can compound at a greater rate,” Mr. Goldie said.
Then, further subdivide between foreign and domestic. Keep in mind that putting anything less than about half of your stock money in foreign securities is a bet in and of itself, given that American stocks’ share of the overall global equities market keeps falling.
Fourth, decide whether you will be investing in active or passively managed mutual funds. No one can predict the future with any regularity, the pair note, so why would you think that active managers can beat their respective indexes over time?
Finally, rebalance, by selling your winners and buying more of the losers. Most people can’t bring themselves to do this, even though it improves returns over the long run.
This is not new, nor is it rocket science. But Mr. Murray spent 25 years on Wall Street without having any idea how to invest like a grown-up. So it’s no surprise that most of America still doesn’t either. 

The book (which I quickly downloaded to my kindle) is a good straightforward explanation of the rational for a widely diversified passive portfolio with a tilt towards small and value stocks.And it is a very quick read. For most investors who will ultimately choose to work with advisors it certainly gives enough information to be an informed consumer.

A do it yourselfer would be well advised to add to his knowledge through other material as well.The best place to turn are the works of William Bernstein starting with The Four Pillars of Investing which the author describes as portfolio theory for poets.

Those looking for more information and a more entertaining read might turn to a work by a well known Wall Street refugee who left the Street after being banned from the industry, Henry Blodgett's Wall Street Self Defense Manual