Taxi drivers blame their driving on the business structure. Minibus owners are hard taskmasters, who set high revenue targets for those who rent their vehicles. Only once these targets are met do drivers start earning, which means they need to compete aggressively for passengers.
This justification does not hold up. On any given day, a finite number of passengers will use a taxi. The revenue available to the taxi industry that day is also finite; competing for the available fares is thus a zero sum game. For one taxi driver to earn more, another must earn less. Everyone driving aggressively will not increase everyone’s revenue.
Nor does it provide an advantage. Without formal bus stops or time tables, passengers appear at random. Weaving through traffic may secure the passenger just ahead … or miss the one just behind. When a driver has an above-average day, it is almost entirely down to luck rather than skill.
While this driving culture does not add to industry revenues, it adds enormously to industry costs, in terms of accidents, repairs and maintenance, wear and tear, insurance premiums and fuel consumption. Plus there is the immeasurable loss to society from related injuries and fatalities. All the time won by shooting red lights doesn’t compensate for the time lost by those who never make it across.
A management consultant taking a big picture view would recommend that all taxis drive defensively as the lower costs would make the entire industry more profitable. It might even attract new customers who presently avoid this type of transport.
Similar principles apply to investing. Active fund managers weave through the market believing that their maneuvering and stock selection will deliver an above-average outcome. But the market return is finite, so for one fund manager to outperform, another must underperform. Individual managers are highly skilled but this skill is replicated throughout the industry so it offers no competitive edge. Mostly, it is luck or the chosen investment style (growth, momentum, value, small cap) that wins that day.
For clients, active investing is an expensive crapshoot. Relative to the ‘defensive’ alternative – passive or index investing – they pay for fund managers, frequent trading, advice and distribution. And then there is the danger of a big accident – choosing a manager who recklessly assumes too much investment risk in pursuit of a performance fee, or a personal conviction.
This frantic activity does not improve the market return which, long term, depends on actual rather than predicted economic performance. This is not within the control of asset managers. It does, however, make it far less profitable for investors, who lose much of the available wealth to service providers.
A management consultant taking a big picture view would recommend that all retirement savers invest defensively – using index funds – as the lower cost would make it more profitable for all.
In the United States, this message has hit home (with some 40% of mutual fund assets now invested in index funds) but in South Africa, not so much. The vast majority of savers still believe that the high energy/high cost model of active investing delivers a better outcome for all. It cannot and it will not.
Minibus taxis and active fund management: two industries that will take you for a ride. You should be wary of both.
