I just came across this article (Goldman’s secret bets) and thought it illustrated a few things we all should be thinking about if we aren’t already. The article is about Goldman Sachs and, while beginning as a story about how Goldman crosses a fairly obvious ethical line when it sold questionable mortgage products and then bet against the residential housing market, the article ends up doing a very good job showing us how much of a game is being played within the banking and investment industries. Please read the article for the details, but I want to make a few quick points while offering some insight into how we at Frontier think about things.
Please understand that I’m not interested in jumping in with the mob that is forming at Goldman’s gate over their alleged culpability for the financial mess and the record profits they have made since the fallout. That group is big enough already and those issues are being looked at as I write. Instead, I’d rather we all took a look at ourselves as investors, both individual and institutional, and our willingness to feed the Goldmans of the world while they go about their business. The reason Goldman and others are able to sell a lot of these ridiculous products is because there are people willing to buy them. There are people willing to buy them because many of us tend to get too greedy, too lazy, and too trusting as we continue to believe there is a free lunch available to those who act the quickest. Yes, lack of transparency and over-complexity added to the problem, but if you don’t understand something why buy it? I hope that regardless of what new rules are in place going forward, investors have begun to realize that we have gotten away from Einstein’s good advice to “make things as simple as possible, but no simpler” and will be a bit smarter going forward.
Which brings me to our approach at Frontier. We at Frontier know all too well the shortcomings of the vast majority of investment structures available and few, if any, live up to their billing after one adjusts for costs (which includes taxes). We also know that managers who try to beat the market by chasing what they think are free lunches (or $20 bills on the ground that others haven’t found, to use that old economist cliche) are fooling themselves and their investors, and so we avoid a bottom-up approach to portfolio management. Instead, we invest our clients in extremely simple and transparent, yet amazingly powerful investment vehicles that give us broad, passive exposure to various markets and we let the markets to do the work for us. In this way, we efficiently allocate investment capital as purely and inexpensively as possible, while controlling risk in the asset allocation work we do. We see large institutions migrating to this approach too, and believe the wisdom of our portfolio process will continue on its path toward a loyal following.