“Cultural Moneyballism, in this light, sacrifices exuberance for the sake of formulaic symmetry. It sacrifices diversity for the sake of familiarity. It solves finite games at the expense of infinite games. Its genius dulls the rough edges of entertainment.” – Derek Thompson
Derek Thompson is writing about sports and culture, but you could make the argument that the ‘Moneyball phenomenon’ plays out in the world of investing as well.* Finance is all about creating formulas and strategies and applying them widely.
When it comes to investing, indexing is the epitome of Moneyball applied to finance. There is limited evidence that active fund managers, after fees, have any ability to outperform appropriate chosen benchmarks. Will there be some that do outperform? Of course, and they may even have real skill. But on average, the math is against active managers.
How has that played out? The three largest money management organizations in the world are built on the foundation of indexing. Index fund management is a scale business. The larger you are, the greater the economies of scale, and that flows into lower fees. All of this is playing out with questions about the scale, scope and influence of these large money managers. Which are all legitimate issues to examine.
All that being said, that doesn’t mean the financial system has evolved some higher consciousness. The financial system will never reach that stage because people love to do people stuff. Morgan Housel writes:
“Reading old finance articles makes you feel like the ancient past was no different than today – the opposite feeling you get reading old medical commentary…there’s no financial equivalent of everyone denying germs only to eventually agree that it’s so obviously true it’s not worth debating.”
One need only look at the past few years to see that collectively we can go crazy. Whether it be the WallStreetBets phenomenon, or the unsustainable surge in venture capital investing and last, but not least, cryptocurrencies. It goes to show the financial markets still have ‘rough edges.’
Can we blame some of this on the pandemic? Sure. Will we learn something from the past few years? Maybe, a little bit. But years from now some other craze will take hold, and the whole thing will play out again.
In the meantime, we will build out better tools, less expensive investing options, and it will still be the best time in history to be an individual investor. On average, investors are better behaved. These incremental changes will make life better for investors over the long run. But zero fee index funds only get us so far.
When Jack Bogle tried to market the first index fund, it was denigrated but was inevitable. We should also look to spark innovation, new ideas and, in general, keep things weird. Weird is not only interesting, but also it also the path forward.