Ah, the perennial question.... and one in which I hope to be able to answer on this website.
I started my career in New York City, working for Goldman Sachs in their asset management division, working with both equity ‘quants’ and fundamental equity analysts. The quants had built a computer-based multi-factor model that aimed to predict, via multiple stock inputs, future performance for a huge universe of stocks. They took the top-down approach crunching numbers on thousands of stocks. While I was there they performed miserably (post fee). Read that – below their market benchmark.
The fundamental equity analysts, on the other hand, were bottom-up researchers. They interviewed management, modeled the companies they followed and picked the best stocks that they thought could out-perform the market. They had two equity funds at the time – Capital Growth and Small Cap. If memory serves, both underperformed their benchmarks as well (post fee). But let's not be too hard on them - a vast majority of mutual funds regularly underperform against the broader stock market, especially after we've deducted their fees. There are a plethora of studies, articles, essays, etc detailing this very issue. I encourage you to Google search this very topic on the internet to see for yourself. Also check out the myth Mutual Funds are useful.
So now you’ve seen two examples of ‘post fee’ Wall Street returns. Let me be crystal clear, Wall Street hires extremely smart people to work at their firms. They people are rocket scientists (literally). I had the pleasure of solving, on several occasions, PC problems for Fischer Black. You know, the Black part of the Black-Scholes option pricing model? Essentially this is a very complex formula developed by Fischer Black & Myron Scholes 40 years ago that is still used today to determine option pricing. Fischer Black was easily one of the smartest people I ever had the pleasure of working with.
So it's fair to say that the folks on Wall Street are razor sharp. However, two things are at play here – (i) are they smarter than the entire global equities market?, and (ii) are they looking to make money? I can answer these two questions easily – as can any Main Streeter. No & Yes...in that order.
Only a select few investment managers have been able to outperform the market consistently over a long time-frame. There are probably 1-5 out there, globally, at the moment. One to five. Globally. Now, ask yourself a question – can you pick that special person yourself, on a global basis? I would venture to say that THAT is even harder than picking quality stocks to invest in long term.
But it gets worse. Remember the second part of that equation – they want to make money. So most underperform the market, year after year, AND they charge you for this ‘service’.
Many others have written about this ‘agency problem’ extensively so I won't belabor the point here. If there is only one take away here it is as follows: Wall Street prefer to take your money in fees than to provide you with above-market performance…because they simply cannot. Fees are your enemy to financial independence. Wall Street is your enemy to financial independence. Get out your tool kit and build your financial independence yourself!