Blessed by the Potato

I’ve seen multiple versions of the same question chain, which starts easy enough: basically in investing isn’t performance after fees what really matters?

Yes, what you really care about at the end of the day is your performance after fees.

So then isn’t it worth paying a higher MER for Fund X when it out-performed the index last year/over the last 5 years?

And that’s where the arguments start. If you had a time machine, sure, go back and invest in Fund X. Or just buy that one stock that did the best over that time period and do even better. Or see some dinosaurs — it’s your time machine, do what you like. But starting from today and going into the uncertain future there’s no way to say whether Fund X will continue to out-perform net of fees without that time machine. You have to choose where to put your money without the benefit of knowing in advance which fund is going to earn its fees and then some. Then seeing that most actively managed funds don’t beat the benchmark, you can at least control your costs and invest in a low-cost index fund, which is going to do better than most of the other choices you could have made.

But that explanation doesn’t always resonate, so let’s try a different approach.

There’s a clever little expression that I like: on the internet, nobody knows you’re a dog.

And then there’s this interesting little human interest story: a cat won an investing contest. A mash-up of the two gets us this catchier bit of advice: in investing, nobody knows you’re a cat.

The manager your favourite mutual fund pays may pick great investments and out-perform the market, even net of fees. And that may be because your manager has great skill and discipline, and is able to continue to beat the market… or it may be because of dumb luck.

It’s extremely difficult for an outsider to tell the difference in a world where cats can beat professionals, a world where even highly paid, ostensibly skilled managers mostly under-perform. So yes, at the end of the day all that really matters is performance after fees, but without a time machine the best chance for getting that is to minimize your fees.