Why Google’s Investment Advice is Good for All

Posted on April 26, 2012 at 9:52 PM PST by

An Open Letter to Facebook and Instragram Millionaires

A veritable horde of newly minted Facebook and Instagram millionaires has the wealth management industry frothing. By simply walking into the foyer of 555 California Street in San Francisco, the epicenter of elite firms, you will quickly witness the shift. Where just a few short years ago you found the scuffling feet of dreary wealth managers, you now witness a new, fervent energy as suited professionals dart about in search of their piece of this IPO pie. It was for moments like these that such financial experts hung their shingle by The Bay, and now, once again with billions of dollars in desperate need of management, the West Coast gold rush is on. Here is a word of advice to these nouveau riche.

Dear Young Silicon Valley Millionaire,

Congratulations for your part of a historic and remarkable accomplishment, the creation of technology that has forever changed the world and with it, your life. At this early juncture, the implications of this shift are hard to grasp, and yet on a personal level, the effects of your new wealth will reverberate into even the most remote corners of your life.

I speak to this coming change with authority, not simply as a wealth manager, but as a once successful entrepreneur and founding investor in and director of Baidu, the most successful IPO in stock market history. I too had to make the journey you now face and offer this simple and surprising guidance – listen to Google.

Yes, my advice is that you listen to Google’s advice. I know that Google is your great competitor, but in 2004 Google did something worthy of your attention. Early that year before Google’s IPO, Senior Vice President Jonathan Rosenberg realized that he was about to spawn thousands of impetuous young millionaires, and feared that they might be preyed upon by the wealth management industry. After consulting with founders Sergey Brin, Larry Page and CEO Eric Schmidt, he planned a series of in-house investment seminars to educate their soon-to-be wealthy colleagues. In the spirit of the “don’t be evil” Google ethos, management decided to invest in the preparation of their employees for the coming onslaught of Wall Street pros hawking their wares.

Google, being the best at what they do, felt that their staff deserved the best that the money management industry had to offer. In turn they brought in Nobel Laureate and Stanford University sage William Sharpe, Princeton economics professor and former dean of the Yale School of Management’s Burton Malkiel, and revolutionary Vanguard founder and white-hat “Saint Jack”, more commonly known as John Bogle.

What did these world-renowned financial minds have to say? A simple but hard to accept truth – active money management doesn’t work. Instead, put your money into low-cost, diversified index funds and get back to the real business of life and to building Google into a world-class company. Over time and after fees and taxes, you will end up with more money and a better life.

Yes, it is true. Since 2002 S&P has been measuring the performance of active managers against their passive counterparts and has reported that over a five-year period, nine out of ten actively managed equity funds underperformed their corresponding passive indexes. Add to this travesty management fees, taxes from churn and marketing expenses, and the result is that over a 30 year period an investor can see as much as 40% of their portfolio growth evaporate. Paying for nothing is one thing, but paying for this abuse is what Google might call evil.

I know the truth, that passive investing after fees and taxes beats active money management, is hard to accept. You’re young, you’ve grown up hearing the tales of tech stocks going through the roof and are anxious to leverage your intelligence and abilities to outpace the averages. But take the advice freely offered from Bill, Burt and John. Do yourself a favor and read their books. You know how to code. These guys know how to invest.

And don’t expect the folks from Goldman Sachs, Morgan Stanley, or JPMorgan Chase to understand this truth. As John Bogle once said, “It is amazing how difficult it is for a man to understand something when he is paid a small fortune to not understand it.” If you want to protect your wealth, you’re going to have to search out this information yourself, listen to more independent minds, and be tutored by academic objectivity.

It took courage to put your career behind a contrarian concept. Don’t stop now. Have the courage to take another uncommon path. Learn the facts. Reject the active money management pitch. Diversify across low cost index funds and stay the course. If you do so, you will have more than an IPO to celebrate.


Steve Beck