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Investment Quiz: Who Said It?

While following the financial media often results in bad decisions for your portfolio, every so often you can find great nuggets about the right way to invest. Today, we'll see if you can identify who said some of my favorite quotes. The answers to each question are found on the subsequent page.

Take the quiz and let me know your score in the comments section. We'll have a drawing to give away a couple copies of my book The Quest for Alpha, which contains many more admissions and quotes from leading people in the fields of finance and investing. We'll pick the winners on Monday.

1. Capital gains taxes, when combined with transactions costs and fees, make indexing profoundly advantaged.

  1. Ken French, professor of finance at Dartmouth
  2. Ted Aronson, founder of institutional money manager Aronson+Johnson+Ortiz
  3. John Bogle, founder of Vanguard
  4. William Bernstein, author of The Four Pillars of Investing
Photo courtesy of Casey Serin on Flickr.
2: Ted Aronson
In an exceptionally open interview with Barron's, he admitted:
  • "I never forget that the devil sitting on my shoulder [is] low-cost passive funds. They win because they lose less."
  • "None of my clients are taxable. Because, once you introduce taxes active management probably has an insurmountable hurdle. We have been asked to run taxable money -- and declined. The costs of our active strategies are high enough without paying Uncle Sam."
  • "Capital gains taxes, when combined with transactions costs and fees, make indexing profoundly advantaged, I am sorry to say."
  • "If you crunch the numbers turnover has to come down, not low, but to super-low, like 15-20 percent, or taxes kill you. That's the real dirty secret in our business: Mutual funds are bought and sold with virtually no attention to tax efficiency."
2. The S&P 500 is a wonderful thing to put your money in. If somebody said, "I've got a fund here with a really low cost, that's tax efficient, with a 15-to-20 year record of beating almost everybody," why wouldn't you own it?
  1. Peter Lynch, legendary former manager of Fidelity Magellan
  2. Bill Miller, legendary manager of Legg Mason Value Trust
  3. Warren Buffett, CEO of Berkshire Hathaway
  4. Gus Sauter, chief investment officer of Vanguard
Photo courtesy of DonkeyHotey on Flickr.
2: Bill Miller
Miller gained his fame by beating the S&P 500 for 15 straight years. However, his Legg Mason Value Trust (LMVTX) underperformed the S&P 500 by 10 percent in 2006, 14 percent in 2007 and 18 percent in 2008. According to Yahoo finance, the fund ranks in the 99th percentile in performance over the past five years.

3. Expense ratios are the best predictors of performance -- way better than historical returns. It's tempting to look at strong past performance and assume a fund can repeat its success, but there's no guarantee it will. You'd be better off randomly picking a fund with expenses in the cheapest quartile than a fund with returns in the highest quartile and expenses in the highest quartile.

  1. Gene Fama, professor of finance at University of Chicago Booth School of Business
  2. John Bogle, founder of Vanguard
  3. Russel Kinnel, director of mutual fund research at Morningstar
  4. Rick Ferri, author of The Power of Passive Investing
Photo courtesy of jetheriot on Flickr.
3: Russel Kinnel
The quotation is from the April 2005 edition of Morningstar FundInvestor. Given the statement, one might wonder why Morningstar provides star ratings based on past performance.

4. Skepticism about past returns is crucial. The truth is, as much as you may wish you could know which funds will be hot, you can't -- and neither can the legions of advisers and publications that claim they can. That's why building a portfolio around index funds isn't really settling for average. It's just refusing to believe in magic.

  1. John Bogle, founder of Vanguard
  2. Jason Zweig, columnist for The Wall Street Journal
  3. Bill Schultheis, author of The Coffeehouse Investor
  4. Bethany McLean, former columnist for Fortune
Photo courtesy of Loren Javier on Flickr.
4: Bethany McLean
This quote came from an article McLean wrote for Fortune's March 15, 1999 edition. Of course, this is the same publication that touts the latest and greatest fund manager.

5. The very likely takeaway may be that it's too hard to pick managers -- these great mythic figures don't walk the earth.

  1. Jonathan Clements, former columnist for The Wall Street Journal
  2. Burton Malkiel, author of A Random Walk Down Wall Street
  3. Don Phillips, president of fund research for Morningstar
  4. Peter Bernstein, first editor of the Journal of Portfolio Management
Photo courtesy of vectorportal.com on Flickr.

3: Don Phillips

Phillips made this admission in an interview with The Wall Street Journal.

6. Funds of [hedge] funds are a cancer on the institutional-investor world. They facilitate the flow of ignorant capital.


  1. David Swensen, chief investment officer of Yale University
  2. Jason Zweig, columnist for The Wall Street Journal
  3. Gene Fama, professor of finance at University of Chicago Booth School of Business
  4. Warren Buffett, CEO of Berkshire Hathaway
Photo courtesy of Robert Whitehead on Flickr.

1: David Swensen

In his book Unconventional Success, Swensen had this to say about hedge funds: "In the hedge fund world, superior active management constitutes a rare commodity. Assuming that active managers of hedge funds achieve success levels similar to active managers of traditional marketable securities, investors in hedge funds face dramatically higher levels of prospective failure due to the materially higher levels of fees."

7. Individual investors and money managers persist in their belief that they are endowed with more and better information than others, and that they can profit by picking stocks. While sobering experiences sometimes help those who delude themselves, the tendency to overconfidence is apparently just one of the limitations of the human mind.


  1. Richard Thaler, professor of behavioral finance at the University of Chicago Booth School of Business
  2. Daniel Kahneman, professor of psychology at Princeton University
  3. Nassim Nicholas Taleb, author of The Black Swan
  4. Robert Shiller, professor of economics at Yale University
Photo courtesy of Liz Henry on Flickr.

1: Richard Thaler

Thaler was one of the founders of Fuller Asset Management, a money management firm with the goal of exploiting behavioral mistakes which lead to mispricings. As I presented in The Quest for Alpha, for the ten years 2000-09, Fuller and Thaler's two behavioral funds returned an average of 2.9 percent per year compared to 7.4 percent for the two similar passive asset class funds from Dimensional Fund Advisors. In a 2004 interview Thaler conceded that most of his retirement assets were in index funds. "It's not easy to beat the market, and most people don't.

8. The problem with macro [economic] forecasting is that no one can do it.


  1. Paul Samuelson, winner of the Nobel Prize in Economics
  2. John Kenneth Galbraith, first economist to have works included in the Library of America series
  3. Michael Evans, founder of Chase Econometrics
  4. Warren Buffett, CEO of Berkshire Hathaway
Photo courtesy of Edric Pascual on Flickr.
3: Michael Evans
Chase Econometrics eventually became part of IHS Global Insight. The firm's Web site declares: "Fifty years of global business acumen, analytical expertise and functional knowledge have made us the foremost source for critical information and insight." The firm probably collects tens of millions of dollars for providing insights on what Evans admitted no one can do.

9. God made global strategists so that weathermen would look good.

  1. Nassim Nicholas Taleb, author of The Black Swan
  2. Gene Fama, professor of finance at University of Chicago Booth School of Business
  3. Barton Biggs, former chief global strategist for Morgan Stanley
  4. Mark Haines, former CNBC anchor
Photo courtesy of niiicedave on Flickr.
3: Barton Biggs
Biggs was named by Institutional Investor magazine to its All-America Research Team 10 times, and he was voted the top global strategist and first in global asset allocation from 1996 to 2000 by the magazine's Investor Global Research Team poll.

Biggs appeared on the cover of the July 19, 1993 issue of Forbes wearing a bear costume, warning investors: "Except for that nasty jolt in October 1987, most investors under 40 have never experienced a bear market.

He argued that the U.S. market was near its top and was due for a fall that could range from 20 to 50 percent. "If the DJIA registers one of its average cyclical declines ... it could have a precipitous drop...to somewhere between 2,800 and 2,275. We are due for a secular bear market... the decline could be 50 percent." He added: "While the United States has had a tremendous bull market, the European markets have been sluggish or worse. It doesn't take a genius to see that this relationship is due for a change."

It took almost seven years before the bear market Biggs called for finally arrived. During this period, the U.S. experienced its greatest bull market ever (one that Mr. Biggs's clients presumably missed out on). In addition, despite his claim that "it doesn't take a genius to see that this relationship is due for a change," the U.S market far outperformed the European and emerging-country markets -- markets in which Mr. Biggs was advising his clients to invest -- by margins of about two to one.

Photo courtesy of sskennel on Flickr.
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