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Embracing the Evidence at Anheuser-Busch – Mid 1980s
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Embracing the Evidence at Anheuser-Busch – Mid 1980s
This is the latest in a series of posts from Rick. To see prior entries click here.
Although the emotional roller coaster led me to leave the brokerage firm, I definitely wasn’t ready to give up on a financial career. After sending out hundreds of resumes, I eventually saw a job posting in the Wharton alumni newsletter for a position in the Treasury group at Anheuser-Busch in St. Louis, Missouri. I sent my resume and cover letter and was surprised to find myself called in quickly for an interview. As good fortune (and solid preparation) would have it, I earned a job as a financial analyst at the world’s largest brewer at their headquarters. It was such a good fit for me that I stayed with Anheuser-Busch for 25 years, eventually working my way up to Assistant Treasurer.
During my time there, a group within our section was charged with figuring out how to “fix” Anheuser-Busch’s pension fund. It had been underperforming its benchmarks for several years, despite having a highly rated (and expensive) institutional investment consultant whose primary job was to pick the “best” U.S. and international investment managers. Per the consultant’s recommendations, the pension plan routinely cycled in new managers who had delivered great, recent, historical performance. However, it always seemed to be the case that once Anheuser-Busch invested money with the new managers, their performance failed to beat their benchmarks. Hence, the problem we needed to fix.
The head of the team studying this problem sat in the office right next to me. I was always curious about the pension committee’s work because I remained a dedicated personal investor. I still bought individual stocks, but I had learned my diversification lesson well enough to also hold some mutual funds. In addition, I kept up with Barron’s and the Wall Street Journal and would often sit in on presentations from various economists and other experts forecasting economic and market data.
I was as shocked as anyone when the team delivered its report: After an exhaustive study, this internal group recognized that no investment manager could consistently beat the market benchmarks, and it was very expensive to keep trying. What was even more surprising was that the Pension Committee agreed immediately. They fired the consultant, ditched the active investment managers, and reinvested all of the plan’s money into index funds. (And remember…a corporate pension fund doesn’t pay taxes. If an individual investor had followed the same approach, the results would be even worse after taxes!)
After the initial shock wore off, I became a little skeptical of the Pension Committee’s decision. I truly believed that my education and the time I spent researching investments must have created opportunities to earn higher expected returns than a simple index fund. So, I said to my friend in the office next door, “Hey, please show me your evidence!”
He gave me the report, and the evidence turned out to be strong…overwhelming in fact. I realized I was in the same boat as the pension plan—spending way too much time and money trying to find the right mix of investments to beat the market. I sold all my stocks and active funds and put my savings into index funds.
My whole life changed after I did that. Besides earning higher returns with this new approach, I gained back all the time I’d spent reading financial publications, listening to financial presentations, and spending my weekends poring over my portfolio’s performance. I calculated how much time I saved: 240 hours a year—the equivalent of 6 weeks annually!
Lesson Learned: No investment professional can reliably and repeatably outguess the market.
We now understand that the market reflects all known information about a stock, based on the millions of transactions that occur every second. It’s dangerous (and inaccurate unless you have illegal, inside information) to assume that you, or any other investors, know something that every other market participant doesn’t. In other words, no one is smarter than the aggregate knowledge of everyone currently invested in the market, and an investor shouldn’t pay more for fund managers who claim they can beat millions of other participants who have determined a stock’s fair price.
One must be humble to admit that you can’t beat the market. It’s especially hard for people who are very smart and successful in other areas of their lives who, often, mistakenly translate excellence and success to the wild world of investing one’s life savings. True investors must accept that their skills and knowledge in one area don’t help at all when it comes to investing. We know this because studies show again and again that most individual investors tend to earn lower returns than even what the market would indicate they should earn because of poor investment choices, bad timing of their trades, and the fees they pay.
The good news is that you don’t have to give up on investment success when you admit that you likely won’t be able to consistently outguess, or time, the market. In fact, by recognizing this fact, you’re actually taking control…of your investing, your decision-making, your life, and your emotions. You gain back all the time you used to spend thinking about investments and managing your portfolio so you can focus on the more important things in your life, like your family, your work, and having fun.
I was fortunate to realize this back in the 1980s simply because Anheuser-Busch was way ahead of the curve in adopting index funds. Today’s investors have advantages that we didn’t have back then—namely, a wide selection of evidence-based investment options that are better than plain-vanilla index funds.
In my opinion, freedom comes through adopting evidence-based investing. Freedom from worrying about getting in at the right time, while also increasing one’s odds of higher expected returns over the long term. These investment options are based on mountains of evidence about specific characteristics of groups of stocks (known as factors) that offer higher expected long-term returns. We apply these same principles for our clients at Hill Investment Group. We have developed a diversified portfolio that seeks to give investors better odds of earning higher returns than they might achieve either through index funds or actively managed funds. In addition, due to continued competition and mounting evidence of the success of such an approach, costs continue to go down.
My First Market Decline – 1969
I still have vivid memories of my first market decline when I was working as a stockbroker. For the first two years of my career, nearly everything I recommended was going up. I was proud of the value I thought I was providing to my clients and impressed with how smart I was.
By 1969, the Dow Jones Industrial Average was getting close to an all-time high of 1,000. Then it started to decline and just kept going down. It eventually dropped almost 40%.
The situation hit me hard. I felt so bad about the losses my clients were experiencing that I couldn’t sleep and had stomach problems. To make things worse, a lot of my early clients were friends of my parents. When I would go home for a visit, I would call ahead and ask my parents to move their car out of the garage so I could park there and close the door behind me. I didn’t want my parents’ neighbors to know I was home because I couldn’t face questions about why their stocks were doing so poorly. I really didn’t know what to say because I didn’t have an answer. It was during this period that I spent one afternoon hiding out in the movie theater watching a Clint Eastwood triple feature!
Eventually, I went to my manager and asked for advice: What can I do? What should I say? He was surprised by my questions and responded bluntly with, “Keep trading stocks.” That was my job, after all. We were brokers, not financial advisors. We were paid to trade stocks because trading created revenue for our firm whether the stocks went up or down in our clients’ accounts.
Then he added something that turned out to be good advice for me. He said that if the market decline was bothering me that much, I should quit my job and go work in a bank trust department. He was right. I wasn’t interested in selling stocks to help a firm make money whether or not my clients won or lost..I left my brokerage job shortly thereafter.
Obviously, I’ve experienced many more market downturns since that fateful time…because that’s simply what the market does. We just can’t accurately predict when. In fact, there have been 10 times when the market declined more than 20% in the past 50 years—with the two most recent happening in 2007-2009 (down 55%) with the financial crisis and in March 2020 (down 35% in 21 days) with the COVID-19 pandemic.
Lesson Learned: Expect that the market will decline and ignore it when it does.
History shows that market declines are inevitable—higher equity returns wouldn’t be possible without the risk of occasional downturns. Also, market declines are temporary. When you remember these two facts, you’re less likely to let your emotions get in the way of your long-term investing strategy. After all, a loss isn’t a loss until you sell your position.
Of course, ignoring market downturns is easier said than done. I admit that I still feel anxious during these periods, and I know that many investors experience the same sleeplessness and pit-in-the-stomach sensations I felt back in 1969. Today, though, I’m not afraid to face my clients when the markets are bad.
Instead, I like to initiate calls during these rough periods just to ask how they’re feeling and to give them better advice than I could have 50 years ago. Instead of recommending new stock trades, I tell them to do nothing – except the occasional rebalance. This downturn, like others before it, will pass.
Also, I’ve learned, and communicated to all that will listen…especially our clients…to focus on what you can control. The market is not controllable. Your investing philosophy, asset allocation, and personal spending and savings are in your control. Focus your attention, energy, and actions there. And leave the rest to us.
Lessons From Rick Hill: My First Job as a Stockbroker—1967
My excitement about investing led me to pursue a role as a stockbroker in Philadelphia right after I completed my MBA. Back in the late 1960s, almost no one bought mutual funds. As a broker, I made recommendations to my clients about which stocks to buy. Then, the trend was to bet big on the next ‘winner’ – not too dissimilar from today’s speculation around cryptocurrency.
As a young broker, I had worked hard to save $3,000. I was ready to invest my money the same way I invested my client’s money. I looked over the recommended stocks list, researched, and narrowed my options down to two companies. One was a mobile home company, and the other was an airline that delivered oil drilling equipment to Alaska’s north slope.
Both stocks were selling at $30 a share. With my $3,000, I could buy a full lot (100 shares) of either one. The airline stock had a more exciting story, so I bought that one.
I watched both stocks closely over the next several months. Unfortunately, the airline stock took a severe nosedive, falling to $3 a share, a whopping 90% loss, while the mobile home stock doubled to $60 a share. After many agonizing days, weeks, and months, I sold my airline investment for $300, suffering a loss of $2,700.
With my annual salary of $9,000, my finances took a significant hit. I just blew up my nest egg! I kicked myself for not buying the mobile home stock and earning $6,000 – a net difference of $5,700! That much money could have changed my life. I could have bought a nice car, taken a European vacation, or used the money for other exciting adventures. Regret reigned supreme. Mainly I questioned why I didn’t split my investment by buying 50 shares of each company – at least then I would have spread out my risk.
Lesson Learned: Diversification can help you get better results with less stress.
Diversification is a way to spread your risk, increasing the chances of your exposure to potential winners; a way to own the haystack rather than searching for the needles. Also, different countries and sectors perform differently at different times – it’s almost impossible to predict when each will have its day in the sun. If you are deeply diversified, you increase your chance of owning the winners, and at the right time.
Back then, I would have told you I was investing. With the wisdom that comes with age, I now know that I was gambling. Why? I put all my eggs in one basket by betting on one company. Also, even though the insight helped me learn my lesson, I would never call buying two stocks proper diversification. Today, our clients have access to expertly-designed mutual funds that make it easy to own around 13,000 stocks from around the globe. A strategy that is much better than betting on one airline!
I was lucky to learn early on that – both financially and emotionally – diversification deserves a key place in any long-term investment strategy. No one can accurately predict which investments will win and which will lose, and take it from me, you can drive yourself crazy watching to see whether your bets are going to pay off.
Don’t want to wait for the next lesson, set up a time to talk here.