I spent the first half of this week at the CFA Institute's annual conference. I think one of the most encouraging themes at the conference for individual investors was the awareness from within the financial industry that problems exist and need to be fixed.
CFA Institute President and CEO John Rogers made a demand to restore trust in the financial industry. Specifically, he asked for CFA charterholders to be a bolder voice for ethics, focus on financial activities that enable economic progress and share their knowledge and skills with others in the field of finance.
Though Rogers issued a direct call for action, other speakers discussed how the financial industry has erred or can be improved. James Montier, a member of GMO UK Ltd.'s asset allocation team, honed in on how the financial industry likes complexity and warned that the industry's innovations should be treated with skepticism. Mike Mayo, managing director of the banks group at CLSA, said that his peers need to understand that good ethics is good business, even though adhering to good ethics may take more effort. University of Chicago professor Eugene Fama criticized "too big to fail" policies, opining that it would have been better if banks were required to raise even more capital. Gary Brinson, president of GP Brinson Investments, told attendees that "things outside of this room" need to be fixed.
Notably, the most spirited discussion I attended was about whether high-frequency trading hurts long-term investors. Manoj Narang of Tradeworx, argued that high-frequency traders create liquidity and hold less capital than a mid-size hedge fund. Joe Saluzzi, the co-head of equity trading of Themis Trading LLC, countered that while high-frequency traders do create liquidity, they can also create a "drain during a drought." The exchange developed into a very technical discussion, with regulations blamed for fragmenting the market into many exchanges. The narrowing of spreads between the bid and the ask price was also cited as driving market makers out of business, which in turn has made it more difficult for smaller companies to go public. (The lack of an orderly market was cited as not facilitating better volume for such stocks.)
The current state of the markets and the global economies were another common topic. Mellody Hobson, the president of Ariel Investments, observed that many individual investors are still bearish. Anatole Kaletsky, the editor-at-large at The Times of London, quipped that everyone is worried about sovereign economies other than their own. Sam Zell, the chairman of Equity Group Investments, opined that Europe faces problems stemming from both its sovereign bureaucracies and its aging population.
As far as investment strategies, the discussions I heard mostly focused at the portfolio level. Eugene Fama claimed that only 3% of active managers beat the markets once expenses are factored in. (His efficient market hypothesis is a big argument against active management.) Jason Hsu of Research Affiliates claimed that higher rates of return can be achieved if indexes are weighted on the basis of fundamental criteria instead of market capitalization. Both talked about capturing a value premium as a means of boosting performance. Nobel Laureate and Princeton University professor Daniel Kahneman warned the audience that investors often think they created alpha ("excess returns"), even when they didn't.
The one sector-specific speaker I heard was Donald Coxe, a strategy adviser for BMO Financial Group, who discussed commodity stocks. He advised paying attention to the amount and duration of a company's reserves. Using gold mines as an example, he said when you buy shares in the company, you also receive a free, long-term call option on gold. He further discussed the need for patience when investing in commodity stocks.
One of the most interesting discussions unexpectedly occurred during a session titled "Celebrating 50 Years of the CFA Charter: The Evolution of a Profession." Gary Brinson cautioned that there is "no magic elixir" that will get us back to positive rates of inflation-adjusted returns. Charles Ellis, chairman of the Whitehead Institute for Biomedical Research, instructed the audience to help investors make more sensible decisions going forward. David Darst, the chief investment strategist at Morgan Stanley Smith Barney, emphasized the need to understand human behavior. Finally, in responding to a question about what she reads to stay current, Abby Joseph Cohen, the senior investment strategist for Goldman Sachs, said she just finished "The Hunger Games." Why? Because she wanted to find out what the kids were so interested in. (It's good to see a market strategist looking beyond the numbers for an understanding of what is going on.)
One trend I noticed among the attendees was the use of iPads. Though most attendees simply used smartphones and pads of paper, I saw more attendees using iPads than laptop computers-a sign of the influence Apple (AAPL) is having. (I've heard others notice a similar trend at conferences they've attended.) Another trend was the use of Twitter. Many attendees were actively tweeting throughout the conference, and it helped to both to confirm my meeting notes and to see what was being discussed in concurrent sessions. You can see the conference tweets on Twitter, even if you don't have a Twitter account.
It's difficult to share three days of presentations in a newsletter, but this gives you an overview. I spoke with some of the aforementioned speakers at, or just after, the conference, and will publish transcripts of the interviews in upcoming issues of the AAII Journal. I think you'll find the conversations interesting.
Charles Rotblut, CFA is a Vice President with the American Association of Individual Investors and editor of the AAII Journal.
Additional disclosure: AAII holds shares of AAPL in our Stock Superstars Report portfolio. Charles Rotblut, the author of this article, does not directly own shares of AAPL.