I’m doing some research for a side project and came across an absolute gem from Jason Zweig that appeared in John Bogle’s book Common Sense on Mutual Funds. Here’s Zweig’s take on the difference between a marketing firm and an investment firm from an industry conference in 1997:
Today, the question that you must decide as we face the future is crystal-clear: Are you primarily a marketing firm, or are you primarily an investment firm? You can be mostly one, or you can be mostly the other, but you cannot be both in equal measure.
How do a marketing firm and an investment firm differ? Let us count the ways:
- The marketing firm has a mad scientists’ lab to “incubate” new funds and kill them if they don’t work. The investment firm does not.
- The marketing firm charges a flat management fee, no matter how large its funds grow, and it keeps its expenses unacceptably high. The investment firm does not.
- The marketing firm refuses to close its funds to new investors no matter how large and unwieldy they get. The investment firm does not.
- The marketing firm hypes the track records of its tiniest funds, even though it knows their returns will shrink as the funds grow. The investment firm does not.
- The marketing firm creates new funds because they will sell, rather than because they are good investments. The investment firm does not.
- The marketing firm promotes its bond funds on their yield, it flashes “NUMBER ONE” for some time period in all its stock fund ads, and it uses mountain charts as steep as the Alps in all its promotional material. The investment firm does none of these things.
- The marketing firm pays its portfolio managers on the basis not just of their investment performance but also the assets and cash flow of the funds. The investment firm does not.
- The marketing firm is eager for its existing customers to pay any price, and bear any burden, so that an infinite number of new customers can be rounded up through the so-called mutual fund supermarkets. The investment firm sets limits.
- The marketing firm does little or nothing to warn its clients that markets do not always go up, that past performance is almost meaningless, and that the markets are riskiest precisely when they seem to be the safest. The investment firm tells its customers these things over and over and over again.
- The marketing firm simply wants to “git while the gittin’ is good.” The investment firm asks, “What would happen to every aspect of our operations if the markets fell by 67 percent tomorrow, and what would we do about it? What plans do we need in place to survive it?”
Thus, you must choose. You can be mostly a marketing firm, or you can be mostly an investment firm. But you cannot serve both masters at the same time. Whatever you give to the one priority, you must take away from the other.
The fund industry is a fiduciary business; I recognize that that’s a two-part term. Yes, you are fiduciaries; and yes, you also are businesses that seek to make and maximize profits. And that’s as it should be. In the long run, however, you cannot survive as a business unless you are a fiduciary emphatically first.
In the short term, it pays off to be primarily a marketing firm, not an investment firm. But in the long term, that’s no way to build a great business.
This is perfect. And it’s not something you’ll hear from many people in the investment industry. Bogle goes on to say that Zweig’s point was mostly lost on the attendees because they were largely mutual funds advertisers.
Most investors will be immediately drawn to the marketing firms because people typically gravitate towards certainty, confidence and the latest fads. The choice is obvious who you should be looking to partner with over the long-term (the only period that matters).
UPDATE: Here’s the full text of Zweig’s entire speech for more history and context:
Common Sense on Mutual Funds