The cost of an Oxford education

Imagine two students living in Australia who are about to enter university, Paul and Peter. Both achieved excellent results in their final year of school. Coincidentally, both also recently inherited $160,000 from a relative.

 

Paul and Peter both live about 15 minutes away from their local university. According to a recent report published by one of those university guides, this local university was ranked 55^th in the world for overall quality of education. When one considers how many universities there are in the world, this is certainly a high ranking.

Paul has decided to attend this university, it is close to where he lives, has good facilities and staff and offers the degree he wants to study for. Paul has chosen to study Economics and History. Paul will use approximately $30,000 of his inheritance to pay for his degree. The remaining $130,000 will be invested in one of the old blue chip ASX listed investment companies and Paul hopes to leave it there as a “nest egg”.

Peter is much more status conscious than Paul. Peter has always wanted to attend Oxford or Cambridge. He is very impressed by the old buildings, the eccentric traditions and some of the well-known past graduates of those two institutions.

Peter makes an application to Oxford as a foreign student. He has decided to study for a BA in History and Economics. After the application process concludes, Peter receives the pleasant news that his application has been successful. As it happens, the cost of Peter’s three year degree (plus living expenses and the odd airfare back home) will equal the amount of his inheritance.

Peter’s successful application to Oxford is a great talking point amongst his relatives and friends. A very bright future is envisioned for Peter. Peter won’t admit it, but he is enjoying all this attention from his friends and relatives.

While Paul’s relatives and friends are happy about his successful application to the local university, it hasn’t been met with the same adulation that has been accorded Peter.

Peter’s time at Oxford is generally pleasant, but he does get a little homesick on occasions. He misses family and friends.

Paul on the other hand has made minimal changes to his lifestyle. He still lives at home and has friends from school attending his university.

Both Paul and Peter complete their degrees at the age of 21.

Now we fast forward 39 years. Paul and Peter are both 60 and about to retire from successful careers.  Paul never did touch that inheritance. He simply collected dividends and enjoyed the capital growth. That inheritance is now worth $2m and pays approximately $80,000 in dividends each year.

Paul and Peter both earned approximately the same amount of money during their careers. Peter (despite attending Oxford) was unable to out-earn Paul. As we mentioned earlier, Paul is just as bright as Peter and also has a similar temperament and personality.

 

So now we can say that the cost of Peter’s Oxford education was in the vicinity of $2m, being the money that his peer Paul now has that he doesn’t. It’s a high price to pay for a “brand name” education.

Obviously, universities such as Oxford rely very heavily on their brand. Oxford’s more recent move into awarding MBAs is a very good example of this. Oxford has no history as a business school. It simply wished to capture a portion of the market for MBAs that it was previously missing out on.

The MBA degree at Oxford appeals to a certain clientele. The applicants tend to be people who have reasonably good jobs in the business world (but not always) and who (in all likelihood) would not have been successful undergraduate applicants but now are afforded the opportunity to obtain an Oxford qualification at a cost which is less than an undergraduate degree. It is very good marketing and I certainly applaud Oxford for it.

Harvard also uses its “brand name” to increase its earnings. The short management courses are a very good example of this. These courses are marketed to executive level people (from all disciplines). They undertake a very short course at Harvard for which they will be awarded some sort of certificate.

It amuses me no end when I see these certificates decorating the office walls of people who have attended these courses.

Once again, the vast majority of these people would not have been successful applicants to Harvard for under graduate degrees. Harvard is simply using its brand name (like Oxford) to charge very high fees for a short course (with relaxed entry criteria) that allows the applicant to say that they attended the university*.

 

* I too have been to Harvard, I visited some years back while on a trip to Boston.

 

Alan Kohler, Tim Toohey & the RBA get it wrong

On 9^th May 2011, Alan Kohler wrote the following on the Business Spectator web site:

Don’t be misled by last week’s commodities crunch, the Australian dollar is heading higher – much higher. That’s partly because of the return of the carry trade.

Kohler’s article was sent to me by a friend and it made me chuckle because it was absurd.

In that same month, I wrote an article on this blog (see The Volatile Australian Dollar), stating why I thought that both Alan Kohler and Tim Toohey (a Goldman Sachs economist, whose research Kohler’s article was based on) were completely wrong.

Now when Kohler made his characteristically bold pronouncement, the Australian dollar was trading at around $1.07 to the US dollar. But Kohler and Toohey told us it was going much higher!

In July of 2011 it reached $1.10 (as it had a few months prior), but from there it was all down hill.

With the Australian dollar now around $0.92 to the US dollar and never having traded above $1.10, we can say that Kohler and Toohey got that call completely wrong. In fact, it would not have been possible to have gotten it more wrong.

I also quoted John Taylor (CEO and founder of FX Concepts) in my May 2011 article. Taylor had the opposite opinion to Kohler and Toohey. Taylor of course was correct (as I strongly suspected he would be).

Now anyone can get a call wrong and that’s ok as long as your original rationale was sound. In this case the argument made by Kohler and Toohey was not sound. And both of them should have known better (especially Toohey). It was also unfortunate for Kohler that he put misplaced faith in Toohey’s research and went on record with it.

Of course, as a business journalist, you can make all sorts of incorrect predictions safe in the knowledge that no one will hold you to account for them. But why shouldn’t we hold people who make their living writing such things to account for what they go on record as saying? In Kohler’s case, he also sells an investing newsletter and therefore should be held to much higher account than other business journalists.

Kohler and Toohey are obviously not important figures, but unfortunately for everyone who lives in this country, the Reserve Bank of Australia (RBA) is an important entity.

The market ignored a few of the unnecessary interest rate cuts made by the RBA prior to May 2013, but the cut on 2 May 2013 was not ignored. It resulted in a devaluation of the Australian dollar by approximately 10 percent against several currencies in a matter of weeks.

This is quite scary stuff and the worst part is it’s not of any benefit to the country. The only end result of further devaluation of the Australian dollar can be inflation coupled with the reduction in income to self-funded retirees (and others who derive most of their income from fixed interest investments).

Having seen the fierce and disorderly devaluation of the Australian dollar in no time at all and the spooking of the share market by the cut, one would think that the RBA will hold off on any future cuts, but I honestly believe they are stupid enough to make further interest rate cuts. They have done stupid things in the past, remember how they ramped up interest rates at the beginning of the GFC? I have no faith in their ability to properly manage economic conditions or in their forecasting ability.

Why algorithmic trading will eventually replace fund managers

The traditional fund manager who uses his or her “expertise” to select stocks for their clients will gradually become an endangered species (and they know it). This is why you have been hearing a lot of negativity from these people about high frequency/algorithmic trading in recent times. These people know that their own returns are materially inferior to that of many high frequency/algorithmic traders.

As I’ve said previously here, most fund managers (and very especially Australian fund managers) have no discernable stock picking skills. Sure, you will have those who can point to index beating records over relatively short periods of time, but show me any fund manager in Australia who has returned a compound 15-20%+ over 20 or more years – they simply don’t exist. Most of them can’t even match a low cost index fund over time.

Many of these people have reached a station in life which is out of all proportion to their actual abilities. They have been able to so this by taking passive fees on assets under management which amount to billions of dollars across the industry.

How do they attract funds? Here’s how:

1. Firstly make sure you have a few years of good performance under your belt. This will have been obtained by simply getting lucky, playing popular (but temporary) trends, or with the assistance of a raging bull market (or all three);
2. If you can, appear in the media as an “expert” – the media classes anyone who is employed in the investment industry and who is breathing as an “expert”;
3. It always helps to have some charisma and to come across confidently;
4. Market your returns to investors who are too naïve to see through you and too lazy to care about the management of their own money;

 There you have it. Now you can sit back and charge 1-2% on assets for lousy performance. This can amount to millions of dollars and if you fail later on, don’t worry, you will get to keep all of your ill-gotten gains which were made when times were good.

Remember the full service stock brokers and also the old market makers? These guys use to rip us off – they literally stole our money for doing very little. Most of those guys are now out of business due to the internet and alternative market places and every day I’m thankful for that.

(Incidentally, I know many high frequency traders are involved in market making too, but their spreads are much lower than the old time market makers. The modern high frequency market makers simply cannot capture similar spreads to what the old market makers use to.)

The fund manager belongs in the same category as the old time stock brokers and market makers. Nearly all of them over-charge their clients. If you do not take responsibility for your own investments (including superannuation), you can be sure that someone is enjoying a very pleasant life style at your expense.

But why is algorithmic trading superior?

1. Algorithmic strategies can be accurately tested on vast amounts of data (often in seconds or minutes);
2. Algorithmic strategies can be executed by computers, removing human emotion from trading decisions;
3. Algorithmic strategies are consistent in what they do (unlike many humans);
4. Algorithms can detect patterns that are imperceptible to humans;
5. Algorithms can scan vast amounts of data, much more than a human ever could;
6. Algorithms can adapt to different environments, something many humans cannot do;
7. Properly conceived and successfully tested algorithms have predictive ability, something the vast majority of humans do not;
8. Advances in computing power are making algorithmic strategies cheaper and cheaper to implement as time goes by;
9. Because most algorithmic strategies are short-term, they are not as exposed to general market risk as buy and hold strategies, (e.g. regulatory risk is an all too common factor in Australia these days);
10. For all of the above reasons, algorithms have now advanced to the stage where they can trade stocks better than many humans.

This is why, over time, the traditional fund manager will go the way of the Dodo. As will the analysts at the investment banks and the economists (if you want to be rich, don’t listen to these people – they have mortgages). Algorithms can do all of their jobs much better than they can and in years to come they will.

The lazy, over-compensated fund managers will make a lot of noise and attempt to frighten people to maintain the status quo, but it will ultimately be futile.