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The Unintended Consequence of Online Brokers'
Advertising: Michael Lewis
By Michael Lewis
(Michael Lewis, the author of ``Liar's Poker'' and
``The New
New Thing,'' a forthcoming book about Silicon Valley, is a
columnist for Bloomberg News. His opinions don't
necessarily
represent those of Bloomberg News.)
New York, Sept. 22 (Bloomberg) -- Online stock brokers are
boosting their ad budgets by 60 percent over the next
year, to
more than a billion dollars, according to Lehman Brothers
Holdings Inc.
You may have thought that you could not see more television
commercials than you already do featuring freaks posing as
ordinary Americans who have got rich playing the market
in their
spare time. You thought wrong.
Charles Schwab Corp., E*Trade Group Inc., and Ameritrade
Holding Corp., et al., will spend more money trying to
persuade
U.S. investors to fire their stockbrokers than Burger
King and
McDonald's will invest in their campaigns to sell
hamburgers.
The Internet brokers probably believe they are selling only
their new services. In fact, they may be helping to
sell the
American investor on a radical idea: that investment
advice isn't
worth paying for.
Twenty-six years ago, when Burton Malkiel published ``A
Random Walk Down Wall Street,'' he also popularized the
theory
that the stock market was a game of pure chance rather
than one
of skill -- more like roulette than archery. Malkiel
argued that
the market was perfectly efficient -- that it always
incorporated
all known information.
A Coin Toss
``Random Walk'' theory implied that even the most fantastic
market triumphs -- say, outperforming the Dow Jones
Industrial
Average for 30 years straight -- was no more miraculous
than
winning 30 consecutive coin flipping contests, in which the
object of the game is to flip heads and not tails.
Even Malkiel has since conceded that the markets are
probably not perfectly efficient. But you don't have to
believe
that the market is perfectly efficient to believe that most
investment advice is not worth paying for. You just have to
believe that it is almost perfectly efficient. There
may be room
in the stock market for financial expertise, but that
room is
very small.
The evidence on this point is so compelling that it should
have put a lot of brokers and money managers out of
business.
Investors would have long ago wired even more of their
money into
index funds.
Instead, there has been a long and mostly tedious debate
about market efficiency. Professors in finance departments
continue to argue that the market is mostly a game of
chance.
Market pros continue to insist that it is mostly a game
of skill.
The profs appeal to the head, the pros to the gut; and
when the
money culture is feeling good about itself the gut
often wins.
Wishful Thinking
No matter how many studies you produce that show you'd be
better off throwing darts at the Wall Street Journal
than putting
your money in a managed mutual fund, or following the
advice of a
stockbroker, people will want to believe there is
someone out
there who can turn a little money into a lot.
Only now something has changed. Investors are being
bombarded with a different sort of propaganda than the
usual Wall
Street fare. For the first time, there are powerful
financial
companies that stand to make a lot of money by
questioning the
value of investment advice.
Of course the online brokers are no more fond of efficient
markets theory than the old fashioned stockbrokers.
Their ads
make fun of investment advisers (``If your stock broker
is so
smart, why is he still working?'') but they stop short
of asking
the obvious, next question: Why should online investors
hope to
do any better?
Internet brokers disabuse investors of one stupid idea --
that their stockbroker is going to make them rich --
and replaces
it with an even stupider one --that they can make
themselves
rich. In this great bull market, a lot of people are
probably
trading for their own account even more foolishly than the
average stockbroker would advise them to do.
A Public Service
Still, so far as I know, this is the first time people
inside the market have challenged established
interests. And
their challenge, because it contains so much truth,
really is
seditious. The billion dollar ad campaigns lay a
foundation for a
more intelligent public understanding of the way
markets work.
The current passion for do-it-yourself investing will
obviously hold up as long as the bull market persists. The
interesting moment comes when the market falls, and the
millions
of people who came to believe in their own financial
genius are
left high and dry. Will they return to their brokers
and say ``I
was wrong, I really did need your advice?'' Or will
they call the
nearest index fund? My own guess is that Burton Malkiel
will have
his day.
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