One of Wall Street's Good Guys Weighs In

My friend Martin Fridson, one of the smartest guys on Wall Street, offers a partial demurral to my post about private versus public enterprise:

The management fee for my Vanguard S&P 500 Index Fund is not the government's exorbitant 0.60%, but only 0.18%. And expenses are all reflected in the 0.18%. It’s a no-load fund, meaning there is no sales charge. Not clear why anyone buys anything other than a no-load index fund (not limited to S&P 500), but to each his own.

If Vanguard ran a fund purely as a custodian, which is what the government does with Social Security, the administrative cost would be far below 0.60%. Actively managed funds, which employ portfolio managers and analysts, have additional costs to recover. Of course, as we know from Investment Illusions, they may not add any value, but they do have costs.

Your larger point is certainly true--corporations waste money just as the government does. Only saving grace is that if they don't get Big Government to insulate them against market forces, and if they keep wasting money, they eventually disappear. Government, on the other hand, is like Old Man River. It can keep going forever through its power to tax.

Marty's reference to Investment Illusions is to a book he wrote several years ago (published by John Wiley)--well worth reading.

He's right about the power to tax, of course. And traditional liberals agree with traditional conservatives in being suspicious of unchecked power in any quarter, including government. My main beef is with some self-proclaimed conservatives who (unlike Marty) refuse to acknowledge that private enterprise at its worst can exhibit many of the same flaws (arrogance, wastefulness, etc.) as government at its worst.

Anyway, most individual investors would be well-advised to put their money into a no-load index fund like Vanguard rather than one of the more expensive (but usually not more profitable) managed funds that tend to get touted in magazines and on TV. That's my advice, not Marty's, but I think he would agree.