Michael Lewis’ piece in Condé Nast Portfolio bashing stockbrokers is getting a lot of play, and for good reason. It’s a fantastic piece, and it’s really gutsy of Portfolio to publish it, given that it more or less declares that anyone who reads Portfolio, or the Wall Street Journal, or who watches CNBC, is a complete and utter fool. This is Lewis’ explanation of why money managers are useless, which even someone as financially illiterate as myself can understand:
One day, someone may look back and ask: At the end of the 20th century and the beginning of the 21st, how did so many take up financial careers on Wall Street that were of such little social value? Just now, the markets are roiling, money managers and investment banks are reporting disappointing returns, and people are beginning to wonder if they chose the wrong guy in Greenwich, Connecticut, to take 2 percent of their assets and 20 percent of profits. But what if the problem isn’t the guy in Greenwich but the idea that makes him possible: the belief that the best way to invest capital is to hand it to an expert? As a group, professional money managers control more than 90 percent of the U.S. stock market. By definition, the money they invest yields returns equal to those of the market as a whole, minus whatever fees investors pay them for their services. This simple math, you might think, would lead investors to pay professional money managers less and less. Instead, they pay them more and more. Twenty-five years ago, the most successful among them took home a few million dollars a year; in 2006, more than 100 money managers made more than $100 million, and a handful made more than $1 billion. A vast industry of stockbrokers, financial planners, and investment advisers skims a fortune for themselves off the top in exchange for passing their clients’ money on to people who, as a group, cannot possibly outperform the market.
But I think the more narrative portion of the piece, which follows Blaine Lourd, a stockbroker who gradually realizes just how badly he’s screwing over his clients, is even more compelling, as it gets to the essential immorality of the enterprise:
The traders in New York would accumulate a block of shares, driving the price up, and then get brokers like Blaine to unload the shares quickly at the higher price—whereupon the price would, often as not, fall. “Seven months in at Lehman, I was one of the top rookie producers,” Blaine says, “but every stock I bought went down.” His ability to be wrong about the direction of an individual stock was uncanny, even to him. At first, he didn’t understand why his customers didn’t fire him, but soon he came to take their inertia for granted. “It was amazing, the gullibility of the investor,” he says. “When you got a new customer, all you needed to do was get three trades out of him. Because one of them is going to work. But you have to get the second one done before the first one goes bad.”
It wasn’t exactly the career he’d hoped for. Once, he confessed to his boss his misgivings about the performance of his customers’ portfolios. His boss told him point-blank, “Blaine, you’re confused about your job.” A fellow broker added, “Your job is to turn your clients’ net worth into your own.” Blaine wrote that down in his journal.
In other words, stockbrokers are con artists plus social prestige. Charming.