Focus on quality, not costs
If you focus on costs, quality goes down. If you focus on quality, costs go down. If you pay peanuts, you get monkeys.
When investing, it is good to distinguish between passive and active investing. With passive investing, the costs are lower, but that does not mean that every passive investor receives the same return. Apparently, there are still many active choices in passive investing that have a much greater influence on the return than the costs of active investing. Here, the costs are hidden in the choice of index, the way the index is followed, or in tax leakage. This is easy to make transparent by using the deviation in net return compared to the right index as the cost measure. In fact, index investors do not focus on costs, but on returns. The right way to select index investors is to focus on quality.
With active investing, the differences in returns are even greater. Even more active choices are made there. That is why it is also good there to focus not on the costs, but on the net return. A good example is private equity. Everyone agrees that the costs of private equity are much higher than those of investing in the stock market. At the same time, almost everyone agrees that greater returns can be achieved with private equity than with stock market investment. Viewed in this way, therefore, there is a positive relationship between higher costs and higher returns. However, many of the costs incurred by private equity are also incurred by listed companies, but primarily in the form of advice from expensive consultants or by leaving sub-optimal performing company divisions intact. Private equity focuses on improving the quality of the company and thereby obtaining a better return. The focus on quality reduces costs.
Active investors in the stock market are a lot more active today than they were 15 years ago. The advent of index investing has ensured that most disguised index investors have disappeared or are forced to cut costs significantly. Recent research shows that active investors who charge relatively high fees also realise better returns. The reason is simple: the market does not want to pay more for disguised index investors, but rather for active investors who add value. Those who do not perform well enough have almost no choice but to lower their costs. Quality has a price, resulting in better returns. This is not only limited to the return on the portfolio, by the way, but also in the care of a personal adviser who can guide an investor in important choices at crucial moments or in preventing major investment mistakes. Pension funds, banks, and asset managers often have people come along who can score easily by stating that investment costs can be reduced. They often think a saving of ten or twenty basis points is great, even if this is obviously at the expense of quality and therefore returns. That is usually someone else’s problem. In the end, it is all about the net return. Therefore, when investing, focus on the quality, and the costs will go down automatically. And beware of providers who reduce costs.