Where are the Customers' Yachts?

Some things never change. This script was written long ago, in Fred Schwed's humorous 1940 classic about Wall Street's insatiable greed. The message rings as true today as back then, when America was still smarting from Wall Street's disastrous 1929 crash. Schwed explains the origin of his title, in an "Ancient Story:"

"Once in the dear days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor. "Look, those are the bankers' and brokers' yachts. 'Where are all the customers' yachts?' asked the naïve visitor."

So now, you know how Schwed got the title for his enduring classic: "Where Are the Customers' Yachts?" I was reminded of Schwed's intriguing question by a recent photo in Fortune magazine of "Utopia," the aptly named new megayacht owned by legendary mutual fund manager Bill Miller.

Likewise, "naïve" is an apt term for investors: It was apt in 1929, apt in 1940 and is still apt today. Actually more so: Despite the flood of high-tech data sources now available to America's 95 million investors, they're becoming more vulnerable, gullible and naïve by the day.
Schwed's story perfectly captures the relentless daily transfer of billions from the pockets of Main Street's naïve customers into the pockets of Wall Street's clever insiders: More than $200 billion annually is siphoned off the top of the $10 trillion we have invested in mutual funds.

Schwed's "Ancient Story" will be replayed to the end of time. Sure, "history is a great teacher." And "those who do not learn the lessons of history are doomed to repeat them." But experience tells us that naïve customers rarely learn.

Schwed's humor has drawn many laughs since 1940. But they're nervous laughs and the humor is dark because nothing changes. Naïve customers will never own yachts. Imagine a customer "plunking down" their entire retirement nest egg to charter one short day on Utopia, the superyacht! More likely, they'll be left standing on the dock with bewildered eyes and a childlike innocence in their voices, asking once more: "Where are all the customers' yachts?"

Ask yourself this - Do your mutual fund companies return the management fees if they lose your principal? Why not? The average US mutual fund charges around 1.5%. Let me clarify that this is not a conversation about high fees being bad - personally if something is performing well and fits my investment goals, I don't care what the fees are. All that matters to me is the "net" return after fees and expenses. But if your funds have lost your principal and charged you management fees for years, why do you own them? Do you like financing the brokerage firm's yachts?

America is breeding an infinitely renewable supply of naïve customers that will forever be chasing the herd, giving away billions in unnecessary fees that help herd-driven fund managers buy more yachts. Meanwhile, insiders do get the punch line in Schwed's gallows humor ... as they sail the high seas, laughing all the way, thankful and secure in knowing that every new generation of customers will be as naïve as the last, never learning the lessons of history.