Let me save you some time...

Joshua M. Brown
Citywire Berlin

November 6th, 2014

The Reformed Broker Blog

October 2014:
1.1 million page views
150,000 unique visitors

The Books!
Backstage Wall Street

Clash of the
Financial Pundits

McGraw-Hill, 2012

McGraw-Hill, 2014

An inside look at the

brokerage industry
and how investors are
sold products and
services.

An inside look at
the financial media
and the experts
whose opinions it
s built around.

My Firm
Ritholtz Wealth Management

Established New York City, Sept 2013

Registered Investment Advisor (RIA)

$180 million AUM, 150 clients

Financial Planning, Asset Management

Handsome

Referee

???

Needs to use the

mens room

Hungover

Sleeping

Angry

NYSE Mascot

Also sleeping

Possibly British

The state of the investing industry,

circa 2014
Maximum Participation,
Minimum Enthusiasm

Stock Selection:
Passive over Active,
the rise of smart beta

Hedge Funds: Fee

pressure fuels the
liquid alt explosion

Tactical, market-timing:
No thank you.

Bond Selection: Active,

Unconstrained over
Passive

Commodities, International
Stocks: No way, Jose.

The Retail Investor is Back!

(sort of)
American households
are back near maximum
participation levels in
equities and corporate
bonds.

Previous peaks
coincided with bear
markets and crashes.

Modern American
retirement practically
demands participation

In dollar terms...
US Households
Total Financial
Assets: $67 trillion

US Households
Corporate Equities:
$13.3 trillion ($7.7
trillion in mutual
funds)

Got to be in it to win it...

Gallup Poll: US investors estimate of 2013 stock market gains

Only 7% of Americans
are aware that the stock
market went up 30%
last year.

One third believed that

stocks were flat or went
down last year.

The Rise of Index Investing

Investor attitudes driving a preference for passivity:
In a crash, Im going
to get crushed anyway,
so why hire a
manager?

Very few managers can beat the

index, how can I possibly select
them?

Taxes, internal fees, trading costs and

other frictions reduce the benefits of
outperformance.

Only the super-rich get

access to the best managers
so what chance do I have?

Even those few managers

who can beat the index
cannot do so reliably, there is
no way to predict persistence
of performance.

Smart Beta
Smart Beta = Dumb Beta + Smart Marketing
- James Montier, GMO

Source: No Silver Bullets in Investing (just old snake oil in new bottles), GMO 12/2013

Estimates place the AUM of smart beta strategies at between $300 and $400 billion.

Smart Beta Criticisms

The extra costs and trading will
erode any alpha over traditional
benchmarks.

Most products based on one of

two well-known anomalies: the
small cap premium and the
value premium

Earnings or quality screens

dont actually do anything,
theyre a marketing
gimmick.

Once everyone figures out a

factor to weight toward, the
benefits will be arbitraged
away for years to come.

Bull markets are

usually driven by
pricey growth stocks,
which smart beta
selects away from

International Equities: Why Bother?

1.

Volatility correlations are high

2.

Economic Conditions / Perceptions

3.

Globalization of US business

4.

The Recency Effect

Liquid Alts
470 liquid alternative mutual funds
$180 billion in assets
More than 50% of these funds were
launched in the last two years
Morningstar study of 81 popular liquid alt funds:
In the 30 days ending October 15th: S&P 500 down 6%, average liquid alt
fund down 4.1%. 21 of 81 had positive returns, 70 lost money.

Q&A: Joshua M. Brown

www.thereformedbroker.com
twitter.com/reformedbroker