Financial Bloodletting: Don’t Let this Happen to You

Without data, you are just another person with an opinion.

W.E. Demming

Follow The Data 🧪

Science is the practice of observing something, recording those observations, then using the data collected to make informed decisions; it is an ever-evolving field of study. The never-ending pursuit for improved understanding. 

As time passes, many theories or ‘facts’ that were once revered are disproven and consigned to history. 

As a species, it is vital that we never stop probing, testing and questioning the status quo. 

If something is disproven, then it is only sensible to follow the data and move on. 

Fluidity is essential. 

Unfortunately, we (humans) rather like things to stay the same. We enjoy the comfort of consistency. The safety of the status quo. The reassurance of remaining in place. 

The Curious Case of Bloodletting 🩸

Bloodletting, the process of draining a patient’s blood to heal them, was an activity that persisted for over 2,000 years. 

Physicians from antiquity through to the 20th century were draining the blood from their patients for an array of aliments. 

During the Middle Ages it was standard practice and the first course of action for many doctors of the time. 

For some reason, no one was paying attention to the patients becoming weaker and often dying from losing too much blood. 

Did you know, it’s suspected that George Washington died due to bloodletting? He woke up one morning with a sore throat and phlegmy chest, so his physician drained c.40% of his blood from him! 

After losing that much blood, it didn’t take long for him to die. 

Whilst bloodletting had declined in popularity by the 18th century, the practice persisted into the 20th century – with some prominent figures continuing to advocate for the treatment. 

Even after it was found to be an ineffective, and often dangerous treatment, the practice took over 100 years to dwindle from daily existence.  

We, as humans, are stubborn creatures of comfort. 

Mix these natural tendencies in a pot with the need to earn money, and you can quickly see why disproven practices persist. 

As the saying goes, “it is difficult to get someone to understand something, when their income depends upon them not understanding it”.

And it isn’t just the need to earn that allows such things to persist. An important factor is when the belief is intrinsically entwined with someone’s identity. 

If you have made your name as a bloodletting doctor, then your self-worth will be tied to that practice, and you will likely be blind to any of the data suggesting it’s ineffectiveness. 

Modern Day Bloodletting 💸

Active investment management is the modern equivalent of bloodletting.

‘Financial bloodletting’. 

The patient (client) is treated with ‘financial bloodletting’ (active fund) as a remedy for their alignment (their cash not outpacing inflation), before being partially drained by the physician (fund manager). 

High charges, coupled with underperformance, leads to the patient becoming weakened by the very thing that was meant to help them. 

There are millions of retail investors who are unwittingly being overcharged for underperformance 😡

They are yet to discover that they have signed up for prolonged ‘financial bloodletting’. 

All the while the fund manager becomes wealthier from the practice. They’ve mastered the art of draining their patients to the verge of death, without killing them off.

Just as the parasite doesn’t want to kill their host, the active manager wants to keep their prey alive, whilst extracting the highest viable amount of capital. 

There is a wealth of investment data out there, which is being continually dissected and analysed, that shows the probability of success from active fund management. 

Dear patient, I’m afraid the chances of success are slim.

An active manager has little hope of sustained outperformance in the long term. 

The probabilities are not in their favour. 

Whilst the practice of ‘financial bloodletting’ might not kill you, it could leave you without sufficient income in retirement. 

Do not allow yourself to be bled dry. Other, more humane, investment methods exist. 

The Data 🧮

Don’t just take my word for it, here’s some of the data:

*Orange = bad for active fund managers…

*Lots of orange = very bad for active fund managers!

Active Funds vs. Respective Benchmarks – 15 years

Active Funds vs. Respective Benchmarks – 20 years

To reiterate:

Without data, you are just another person with an opinion.

W.E. Demming

Self-Inflicted ‘Financial Bloodletting’ 🫣

Now that I’ve sufficiently bashed up active managers (with their own performance data), it is important to note that you are also able to perform ‘financial bloodletting’ on yourself – here’s a few ways that spring to mind:

• Choosing funds and platforms with high charges 😭
• Trading too often 😰
• Spending too much 😱
• Not saving enough 🙃
• Being under-diversified 🫢
• The majority of crypto purchases 🤬

Please do not be the mastermind of your own financial downfall!

Further Resources

• The Death of Alpha
• SPIVA Year-End 2021 Scorecards
• Morningstar’s Active/Passive Barometer

If you want to go DEEP, check this out:

• New Evidence on Mutual Fund Performance: A Comparison of Alternative Bootstrap Methods

Thanks for reading 🙏

Tom Redmayne

Associate Financial Planner/Slayer of Active Managers

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