Author Archives: jhchamot

Ukraine Crisis Hits Soccer

Amid the political tensions between Ukraine and Russia, which have also involved most Western countries on Ukraine’s side, there are many economic and social repercussions to consider. As has been discussed on this blog, the economic implications of the crisis are vast, especially when looking within Ukraine. However, this period has been very tense business-wise between Russian companies and Western countries. A very unexpected implication of the crisis, at least for me, is that with the popular German soccer team Schalke. According to an article from the Wall Street Journal, Russian state-owned gas giant OAO Gazprom pays around $20 million a year to sponsor Germany’s Schalke soccer club. The problem here is not that Gazprom will halt its sponsorship, it is in fact very content with the market results of the sponsorship. However, out of this Russian-German connection, Russian President Vladimir Putin extended an invitation for the team to visit the Kremlin.

The article notes that “new complications for German business leaders who have been trying to maintain normal ties to Russia amid the mounting crisis in Ukraine. German companies trying to take a business-as-usual stance with Russia increasingly find themselves under political pressure at home to avoid appearing to be part of Moscow’s propaganda efforts.” Earlier this week, the team seemed inclined to accept the invitation. But today the backed down and declined it. Apparently, Schalke’s chairman, Clemens Tönnies, has serious business ties with Russia; besides the sponsorship of the team, him and his partners are investing over $800 million in pork factories in Russia. His initial response in an interview was that “the team would love to see the Kremlin and is interested in Moscow…and the Russian president is interested in Schalke and invited us.” But after political outrage on the behalf of German Chancellor Angela Merkel’s allies, today Mr. Tönnies took back his comment: “there was never and there is no commitment to such a visit…this would not be appropriate in light of the current political situation.”

It’s interesting to see the repercussions of the political tensions in Ukraine. And it is unexpected to see it manifested in areas like soccer. Luckily for German soccer lovers, the team says its fans are widely unaffected by the situation. With respect to the sponsor, they say most people just see the sponsor as a source of capital, and not a national flag. Personally, I think this is the right approach to the situation. Though it is more complicated when considering the Putin himself invited the team to Russia, it is important to remember that the Russian government’s actions do not represent every Russian’s views and wishes. In general, it is unfair and economically-illogical to punish Russian businesses for the actions of its government.

Income, Life Expectancy and Social Security

We are well aware of the fact that economic status has a direct correlation to life expectancy. The rich are expected to live longer than the poor. Recently, though, the gap between rich and poor people’s  life expectancy has been widening. Especially for women, economic status is having a more significant influence over life expectancy each year. Interestingly, life expectancy for poor women has actually been decreasing by generation, indicating that it is not only growing at a slower rate than that of the rich, but that it is actually decreasing. An article from the Wall Street Journal, “The Richer You Are the Older You’ll Get”, outlines the results found from surveys conducted by the University of Michigan, and points to the complex implications this has on social security.

The data used comes from the University of Michigan’s Health and Retirement Study, a survey that tracks the health and work-life of 26,000 Americans as they age and retire. According to the data, men of all incomes are living longer. But the data shows that the life expectancy of the wealthy is growing much faster than that of the poor. Looking at the graph below,  for a man born in 1940 with income in the top 10% for his age group, if he lives to age 55 he can expect to live an additional 34.9 years. This is six years longer than a man also in the 10%, but who was born in 1920. Men who were in the poorest 10%, can expect to live another 24 years, only a year and a half longer than his 1920s counterpart. That’s a huge difference. when we are talking about life expectancy.

Screenshot (22)

However, the story is different for women. While the wealthiest women from the 1940’s are living longer, the poorest 40% have a declining life expectancy from one generation to the next. ““At the bottom of the distribution, life is not improving rapidly for women anymore,” said Mr. Bosworth. “Smoking stands out as a possibility. It’s much more common among women at lower income levels.”” This is an interesting observation, which has some logic to it (smoking kills), but it’s hard to believe that this is the sole cause. I would also add that drugs play a big role here.

Looking at the following graph, we can see how life expectancy for the poorest women is declining, while that of men is still increasing (though not as significantly at that of rich men).

Screenshot (24)

Though I can’t immediately think of any explanation for this, it is worth thinking about. Perhaps the increase in cancers affecting women has something to do with it, but it is hard to tell.

Lastly, the article points towards the implications this has on social security. If people at the bottom are not experiencing increases in life expectancy (the graphs show predictions based on actuarial data), this means they are getting less social security benefits since they will receive it for less years. This might indicate that the retirement age should be lower. But then there is the case for those not in the lower class: for example, a wealthy man born in 1920 who retired at age 65, could expect to draw social security for 19 years. His son, born in 1940 and retired at age 67, could expect to draw benefits for 24 years. He retired at a later age, but he’s living longer. But this is obviously not true for men and women at the bottom. They would draw social security for less years, if the retirement age rises, and their longevity does not. Clearly, this poses a dilemma for setting appropriate policies as life expectancy rises (for all except women in the bottom 40%).

“Why Rich People Feel Poor”

A controversial and highly debated topic, especially between the left- and right-wing, is the taxing system in this country. Generally, the left wants to see the top-earners taxed a higher percentage of their income than low-earners. This idea is already in place in the current American system, where tax brackets designate the percentage of taxes to be payed based on the amount of income. Right-wingers argue that this redistribution of wealth is unfair and hurtful to the economy. A recent article in Bloomberg “Why Rich People Feel Poor,” essentially explains why the rich are right to complain about being taxed so highly. The author makes no effort to hide his position, which is fine, but it also makes for an interesting discussion.

The author argues that the rich get less out of the government than do low-earners, which might be true. Wealthy people do not qualify for Medicaid, which covers nursing home care for low-income individuals. However, they can receive Medicare at age 65. Besides this, however, the article points to no other examples of how the rich benefit less from tax-dollars. A hypothetical couple is presented, which earns $450,000 a year and has twins. The author draws out a savings plan that leaves much to be desired. First, savings for college are estimated to be $1,000,000; even if we are considering the most expensive university for both children, this is a cruel exaggeration. Sure, the author notes that college prices are increasing, but it is a bit unrealistic to think real prices will be so high. As it is right now, higher education in this country is ridiculously expensive. Also, he notes that long-term health care costs, outside of Medicare, are estimated to be around $220,000. Thus, this is another chunk of their paycheck that they must save.

The author suggests other reasons why we should pity the rich, but leaves out the most obvious argument to be made here: the flaw in federal spending. Below is a graph of the proposed US discretionary federal budget’s allocation for 2014.Screenshot (21)

Clearly, military spending is overwhelmingly high. In fact, the United States spends more on defense than the next 10 top-spender combined. Without getting into too much politics, it is not necessary for this country to spend so much on defense. If even a part of this was spent on education or health care, the country would be on its way to following the good example of Western Europe. If this were the case, the rich would benefit more from tax-dollars since they wouldn’t have to save so much for education and health care. So before we go feeling bad for the rich, it’s important to look at the big picture here.

Crowdfunding in New Places

Crowdfunding is a relatively new phenomenon that is quickly growing and being more widely utilized. I wrote a post about crowdfunding before, but I thought the practice was limited to small, independent projects that needed public funding from strangers. It turns out, however, that crowdfunding is being used in many different markets. Two of these are real estate and roof-top solar power. The difference between these kinds of projects and the small, independent ones that utilize crowdfunding, is that in real estate and solar power projects people are investing in the project and not simply making a donation. Investors are essentially buying a share in the project, which will provide gains from rent, electricity sales, or the sale of the project itself.

An article in the Wall Street Journal explains that new websites are being formed that allow investors to buy stakes in projects from self-storage facilities to luxury hotels. Apperantly, the demand is huge. Both sides, entrepreneurs who want to gain more access to capital and people to want to invest their capital in potentially-lucrative projects, have a real interest in participating in this crowdfunding. Developers use the capital to construct apartment buildings, hotels, storage units, etc. and investors receive a share of rental income once the property is in use. Though returns vary, most investors can expect an 8% or 9% return on investment. If the property is sold, the investor will also receive a share of any profits. However, “Jilliene Helman, co-founder and CEO of Realty Mogul, says that while returns vary and aren’t guaranteed, the company aims to provide investors with a 14% to 15% annual return, including quarterly payments and price appreciation.” The minimum amount of investment required varies by website, but (for example) Fundrise LLC of Washington, D.C., accepts investments as low as $100. Though this may be a rather extreme case, the average investment in these websites is below $10,000. Thus, it is certainly not limited to wealthy investors and provides a unique way to diversify investments (through different real estate projects).

Another interesting place where we are seeing crowdfunding is in supplying roof-top solar projects. An article in Bloomberg claims that “crowdfunding may supply the rooftop solar projects with $5 billion of investment within five years, more than 50 times the amount raised to date.” This figure would represent more than one quarter of all annual investment in that field of the solar industry. Increasingly, roof-top solar developers are looking to fund projects directly from retail investors, through websites that gather a large amount of small investors (as previously discussed). To date, crowdfunding has provided around $100 million in the solar energy industry. The article interestingly points out that this is one of few ways that individuals can back renewable energy projects, which gives long-run returns from selling electricity.

Again I will say that crowdfunding seems like a great idea. Much like buying a share in a company, it is an excellent way for individuals to invest in new things and support renewable energy projects, if they want. Experts do advise, though, to be cautious of the projects one invests in and to research those in charge. But if investors are smart about it, as they should be with any investment, there is no immediate reason to think that crowdfunding is anything other than a great innovation.

Peru: potential growth hindered by politics

Politics and Economics are often grouped together by those who don’t particularly interest themselves in these subjects. As Economics students, we know that they are two very different things. But we often forget the significance of their coexistence. The world is witnessing so many cases where poor governance inhibits economic growth. Countries like Venezuela, which has the potential to be a significantly wealthy country, are held back (and destroyed, in Venezuela’s case) by incompetent and corrupt governments. The result is not only slow/negative growth, but also the lack of ability to grow because those who have wealth are too afraid to invest it in their own country. In the United States, this is not even considered because the US is perhaps the best/safest place to invest in the world. Whether or not this is actually true, what matters is that it is in fact the general belief worldwide.

Peru is a country that falls into this trend, though not to the degree seen in Venezuela. I will say, for purposes of reliability, that I am Peruvian and know a lot of information first-hand (especially about people’s views). It should also be noted that Peru is a country very much divided by socio-economic status and race (though this is improving). The current president of Peru, Ollanta Humala, initially ran for president in 2006 as a supporter of Venezuela’s Hugo Chávez; he lost that election and in 2011 reinvented himself as a “pro-Brazilian social democrat.” When Humala won the election, people feared that he would turn the country into Chavez’s Venezuela or Castro’s Cuba. Like in those countries, his supporters were mostly lower-class. But to many people’s surprise, and relief, Humala “opted to stick with the free-market policies that have brought a decade of strong growth.”

Peru had been growing significantly before 2011:

perupercap

Gross domestic product per capita nearly tripled from 2000 to 2010.

And real GDP nearly doubled from 2002 to 2011:

perugdp

Peru became an important emerging market by 2009, and recognized for its steady growth. Though growth has slowed since 2009, last year the country experienced a 5.6% expansion. Peru’s main exports are copper, gold and silver. As has been discussed by other students on this blog, China’s slow-down has had many repercussions worldwide. The decreased demand for copper, is largely the cause for this slow-down in growth. As for inflation, economists have raised their inflation projection to 2.8 percent from 2.6 percent for this year and maintained their 2.5 percent estimate for 2015. As well as a 5.7% growth estimate for 2014.

So the economy in Peru is doing well. Investment is significant, but it largely from foreigners. Though Humala’s government has done decently on the economic side, people are very distrustful of the government (and not just the current one). In Peru, a common joke among citizens is to compare stupid, incompetent, or corrupt people to those in Congress. Basically, the government has little credibility and this is influencing those with the power to invest in Peru’s financial markets. With this growth, there is an immense amount of money flowing into pockets. While I was there in December, a family friend (a very wealthy one) explained to me that there are so many people with millions that don’t know where to invest them. Since they fear the government’s instability, corruption, and dishonesty, they don’t want to invest their money in the country. And, like you probably guessed, most invest in the United States; the current fad is to invest in real estate (mostly Miami).

Thus, Peru is growing steadily and is looking at a bright future. However, the political situation is still holding back potential growth. If Peruvians saw Peru’s market as a safe investment, there would be a considerable effect on the economy. But the fact that the country has a very long history of corrupt and unstable governments (my own grandfather led a military coup), makes it difficult for people’s fears to subside anytime soon. Before that can even be considered, though, there have to be major changes in the Peruvian government — and that doesn’t seem likely in the near future. Although Peruvians are discontent with the government system, they are accustomed to it.

Miami Real-Estate

Around the world, Miami is best known for its beaches and partying. But what many may not know, is that this city was one of the hardest-hit by the housing bubble. Not only was it negatively impacted when the housing bubble burst, but it saw some of the most rapid and significant rises in home prices in the country.

Since I have lived in Miami for many years now, I can give a personal example of just how aggressively prices changed within five years. When we bought our home in 2003, it was valued at around $300,000; with the housing bubble growing, the value of our house rose to about $700,000 by 2008. And after the bubble burst, it went down to around $400,000. Of course this relative change wasn’t equal all over the city and it varied by area and type of real estate. But this is just one example of the extent of the housing bubble.

A recent article in The Economist does a nice job of outlining the unique real estate market in Miami today. After the crash, the market has been steadily growing, and there is reason to believe that it will continue to do so in a stable and secure manner. In fact, the speed of Miami’s real estate recovery has surprised many. Condo prices are back near peak levels in areas with highest demand, and at 75%-80% everywhere else in Miami. The effect of the building boom seen before the crash, has now leveled off: the available supply of units is now around 6-9 months (range of time since the sale is made), from 40 months back in 2008. Only 3% of condos are unoccupied and the volume of sales of single-family homes are above pre-crisis levels throughout Miami-Dade County. And as far as avoiding another housing bubble, the article notes that “in a few years Miami has gone from the most- to the least-leveraged property market in America. Buyers of new condos typically have to put 50% down, half of that before building starts. Banks are loth to extend construction loans unless 60-75% of the units are already sold. In both residential and commercial projects, they require developers to put in much more equity than before.” Thankfully, the lesson was learned.

However, the interesting aspect of the Miami real-estate market is the fact that most of its demand comes from Latin Americans looking to invest (or live in) this area. Miami is sometimes called the “capital of Latin America,” and from personal experience I can say this is absolutely true. Though it varies by area within Miami, there are predominantly Hispanics throughout (myself included). Wealthy people from Brazil, Argentina, and Venezuela (among others) are flocking to Miami to get their share of paradise and/or investment opportunity. As the situation in these countries disfavor their status, more and more are looking to Miami. The area where I live, Doral, is especially unique because it is filled with Venezuelans. Doral is often referred to as Doralzuela because it is around 99% Hispanic, 40% of whom I would estimate to be from Venezuela (while the rest are from other Latin American countries). In Doral, there are now projects that are accepting payment (which is often in cash) in Bolivares, the Venezuelan currency.

The author of the article states “somebody said to me, ‘Give me three reasons why this will continue.’ My answer was: Maduro, Kirchner and De Blasio,” chuckles Marc Sarnoff, a Miami city commissioner, referring to the leaders of the capitalist-bashing regimes in Venezuela, Argentina and New York.” This is a very accurate prediction for Miami. As long as Latin Americans have reason to invest outside of their own country, or as long as they continue to join their friends and family in this wonderful city, the Miami real-estate market will continue to grow.

Graduates’ First Job

As graduation time approaches, it has become more evident that entering the workforce will be a very new experience. Of course, we have all done internships and have probably worked in an office environment before (hopefully), but a job is very different than an internship — and it’s a bit scary. An opinion article in the New York Times outlines the struggles that graduates usually experience in their first job, as well as what they do wrong. Interestingly, most things that employers criticize are exactly what our generation is stereotypically critiqued as being — maybe it’s not so stereotypical after all. This includes being arrogant, self-centered, badly-mannered, and lacking essential social skills. Within our generation, I have noticed that very little emphasis is placed on the importance of learning how to handle oneself in an office environment, and it seems to be hurting graduates’ first-job success.

There are many obvious differences between a job and an internship: much higher pay, more responsibility, more independence, possibly more hours, and the fact that it is permanent (at least in the short term) as opposed to an internship’s few-month duration. Perhaps the most intimidating aspect of a real job (though it varies) is the fact that one is no longer “learning” and don’t have such limited responsibility. True, when you first start a job you are likely to receive some guidance, but nothing compared to an intern. “Most companies operate with fewer employees and tighter budgets than ever before, so there’s not as much willingness — or time — to let novices come up to speed gradually.”

 

Another thing the article points out is that new-hires tend to go in thinking they know everything. An online study, the Student Skill Index, consisting of around 2,000 college students (18 to 24 years old) and 1,000 hiring managers, found significant differences between students’ perception of their own level of preparation and employers’ perception. For instance, a far greater number of students saw themselves as capable of prioritizing work, having organizational skills and leading a group than what the managers judged them to be capable of. Surely, this isn’t the case for everyone. But employers agree that this is a very annoying characteristic of new-hires in today’s market.

Additionally, one of the most criticized characteristic of our generation (with which I personally agree) is that graduates generally lack basic social manners and “soft skills”. “Rapid technological changes mean that some employees are much more computer-savvy but also that ideas of etiquette — what’s the problem with engaging in a conversation and rapidly texting at the same time? — may differ widely.” Whether you admit it or not, though there are some exceptions, our generation is very much dependent on technology and its facilitating of communication (like texting) is causing many people to, for example, forget how to have a professional phone conversation. And employers are noticing this, because it is one of the first things they criticize.

So, as we look forward to graduation, those of us who will be entering the work force right away should be conscious of these problems new-hires often face and the nuisance it becomes for employers. It is well-worth the time to work on social skills, research the company’s office culture, and begin by knowing that we don’t know everything but we are expected to learn quickly.

Students Protest in Dartmouth

On Tuesday, a group of students from Dartmouth apparently seized the main administration building and “disrupted college business.” They took over the President’s office and demanded to be heard. This, of course, was not a violent or dramatic undertaking, but it was certainly aggressive and bothersome to the administration. They accomplished this with an overnight sit-in in the President’s office, and demanded their action items be responded to point-by-point. Over 30 students formed part of this protest, less than 10 stayed overnight in the office, a dozen stayed outside of the administration building, while 75 joined a protest in front of the building on Wednesday afternoon. So, what exactly do these radical protesters want? Well, they have pretty radical demands.

Their 72-point manifesto consisted of the college establishing pre-set racial admission quotas and a mandatory ethnic studies curriculum for all students. Other demands are for more “womyn or people of color” faculty, having the college health plan cover sex change operations (“we demand body and gender self-determination”), censoring the library catalog for offensive terms, installing gender-neutral bathrooms in every campus facility, banning the term “illegal immigrant,” evaluating the Greek system’s role in sexual assault, and harsher punishments for those who commit sexual violence.

Of these, I would say only the last two are sensible and I would agree with. First, I have never understood the argument for racial admission quotas. Isn’t this anti-racism racism? If the idea is for race not to be a factor in admission, then admission should be race-blind. A racial admission quota indicates that admission is based on factors other than ability, accomplishments, etc. — which is exactly what denying admission because of race does. I agree, obviously, that someone should not be denied admission because of their race. But I think it should simply not be a factor in applying. That question should be eliminated from applications everywhere; if schools or employers wants to know the demographics of the school/company, they can ask once they belong to it, not when applying.

Next, I understand wanting students to learn about ethnic studies (like the race requirement we have here), but in an environment where we are supposed to be treated as adults, I think it’s a bit counter-intuitive to tell students what they have to learn about. Again, their claim for more “people of color faculty” is similar to my argument about racial admission quotas. Besides, why don’t they also want more Hispanic, Asian, Native American faculty? Additionally, demanding that the school’s health care plan cover sex change operations is pretty radical. It comes down to the fact that it is not necessary for healthy survival — though I don’t feel completely comfortable refuting this demand because I am in no position to judge what people feel when they want a sex change. Similarly, I suppose their claim for gender neutral bathrooms has to do with this, so I will not criticize it.

Also, their demand to censor the library catalog for offensive terms is an insult to history and literature. I am not saying offensive terms should be used, but they are part of history and literature, both of which humanity has learned from. Finally, the claim that the term “illegal immigrant” should be banned is an ineffective way to approach the problem. There is nothing wrong with the term, illegal immigrants have in fact illegally immigrated into the United States, but if the idea is to provide better treatment to them (with which I agree), then banning the word will not solve anything.

I wanted to write this post because I founds it a bit ridiculous of these students to be demanding these things. Of course, students should fight for change where it’s necessary, but these demands are irrational. To me, it seems like these students should stop trying to find flaws in their school’s system and try to appreciate the fact that they are studying in an Ivy League school. When they come across valid demands (like their demand for harsher sexual assault punishment) then they should be listened to.

Starbucks Changing?

Starbucks, beloved by many, has been recently looking to expand its menu in the hopes of further introducing itself into the breakfast market. By breakfast I mean breakfast sandwiches (like McDonald’s or recently Taco Bell), and not the obvious — coffee. Starbucks has long been known for serving coffee and pastries, much like any coffee shop around the world. But the company wants to grow, and is looking to further diversify its menu to do so. However, this is not being entirely welcomed by many loyal customers, who complain that the changes are taking away from the essence of the coffee shop.

An article in Bloomberg reports that the coffee chain bought the gourmet-baking company La Boulange in 2012. After doing so, Starbucks added “fancier” pastries to U.S. locations. But many customers began to complain about not having many menu favorites. In response, the company has decided to bring back banana, pumpkin, and iced-lemon load cakes — some of the most popular items from the old menus. Additionally, Starbucks will be using new La Boulange recipes and existing suppliers to create food that more closely resembles its previous fare. The whole essence of the coffee shop is to provide a higher quality product and service than fast food chains. In the article, it is described as “fancier” but not “too fancy.” Evidently, the company went “too fancy” for a while, but customers demanded the change back to its regular “fancy” self. This is all pretty silly, I know, but it does resemble the image Starbucks has. It is only “fancy,” of course, compared to fast-food chains.

And the changes don’t stop there. Starbucks is looking to expand into everything “from tea to alcohol,” in which selling more food is part of the strategy of expansion. Evidently, the company will be adding beer, wine and appetizers to thousands of locations around the U.S. over the next few years. It will also open at least 20 more Teavana tea shops this year, expanding a chain it acquired last year.

Personally, I have never been the biggest fan of Starbucks. I may enjoy the occasional latte, but it is too pricey for me to buy coffee there on a daily basis. Besides, I don’t think the coffee is that great. So I can’t give the perspective of a loyal customer in response to recent changes. However, like I say about any business, Starbucks has to decide what its market is and the image it wants to maintain. This company should choose between being a coffee shop and a restaurant, which is what it is beginning to sounds like with these proposed changes.

Passive Over Active Investing

In the investment world, there is an ongoing dispute over passive investing. Basically, the evidence shows that passive investing (through index investing) out-performs active investing. This is one of Burton G. Malkiel’s main arguments in “A Random Walk Down Wallstreet.” He famously claims that “a blindfolded monkey throwing darts at the stock listings could select a portfolio that would do just as well as one selected by the experts” (pg. 26). As Professor Kimball has also reiterated numerous times, getting rich in the stock market by carefully selecting specific stock, is simply a matter of luck. This is the basis for Malkiel’s claim that index investing is the best way to go.

First, it is important to understand exactly what index investing is. As defined by Investopedia, an index fund is “a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor’s 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover.” Index funds are known for having low costs and for being handled passively, meaning there is no active management like in active stock portfolios. Here is where financial advisors come in. The argument behind whether indexing is a better strategy is mostly alive because advisors benefit from charging high fees when managing active portfolios. They do not benefit from suggesting to clients to invest by indexing, because they gain lower fees from doing so.

And as Malkiel (as well as Professor Kimball) likes to point out, financial advisors who claim to be able to make you enormously rich in the stock market, following their pretty formulas, are full of it. Of course, there is a basic science to it: buy low, sell high. But besides this, it is pretty much up in the air. An article in Forbes does a nice job of explaining the benefits of indexing, and the lies told by advisors about it: “exhaustive academic studies covering the active versus passive debate going back many decades…ends with the same conclusion; while a handful of active managers beat their benchmarks due to skill, it wasn’t by much, and most didn’t sustain that benchmark-beating performance for long. In addition, it’s not possible to determine luck from skill or to pick skilled managers in advance.” It is interesting that the author acknowledged that skill may be a factor, but then states it is impossible to differentiate between skill and luck. Indeed some people are probably very skilled in managing active investments, but the likelihood of finding an advisor like this is so low that it is not worth the trouble. Either way, if you were to find such an advisor (like was pointed out) it is impossible to know the difference between luck and skill. Unless, of course, you are willing to trust in their luck.

The five lies outlined as being frequently used by advisors in order to sway investors away from indexing are the following:

1. Active US stock funds beat the market over the past decade.

2. Index funds will always achieve below average returns.

3. Indexing doesn’t work in inefficient markets such as small cap or international

4. Active managers perform better in bear markets

5. Warren Buffett has beaten the market and this proves indexing doesn’t work

I encourage you to read the reasoning behind recognizing these claims as lies. For the sake of longevity, I won’t get into them. But it isn’t so hard to understand the concept. And it makes sense that active investing is encouraged by those who benefit from high fees (advisors). It seems that the only reason for this argument to even be an argument, and not a fact, is that there is a clear conflict of interest with those involved. Finally, I’d like to point out that I have nothing against advisors, and I plan to go into the field myself. But I certainly think there are better ways to perform this service, that doesn’t involve deceiving clients in matters like this one.