AN ELABORATE FRAUD.

As Ankush says, it's pretty impressive that Portfolio published this Michael Lewis article calling a large proportion of their readership con men and fools. It's also a very, very good article:

At the end of the 20th century and the beginning of the 21st, how did so many take up financial careers on Wall Street that were of such little social value? Just now, the markets are roiling, money managers and investment banks are reporting disappointing returns, and people are beginning to wonder if they chose the wrong guy in Greenwich, Connecticut, to take 2 percent of their assets and 20 percent of profits. But what if the problem isn’t the guy in Greenwich but the idea that makes him possible: the belief that the best way to invest capital is to hand it to an expert? As a group, professional money managers control more than 90 percent of the U.S. stock market. By definition, the money they invest yields returns equal to those of the market as a whole, minus whatever fees investors pay them for their services. This simple math, you might think, would lead investors to pay professional money managers less and less. Instead, they pay them more and more. Twenty-five years ago, the most successful among them took home a few million dollars a year; in 2006, more than 100 money managers made more than $100 million, and a handful made more than $1 billion. A vast industry of stockbrokers, financial planners, and investment advisers skims a fortune for themselves off the top in exchange for passing their clients’ money on to people who, as a group, cannot possibly outperform the market...Wall Street, with its army of brokers, analysts, and advisers funneling trillions of dollars into mutual funds, hedge funds, and private equity funds, is an elaborate fraud.

The basic insight here is a simple one: Markets are efficient. All the professionals are operating off of essentially similar information. They will, in the aggregate, all perform similarly, take a chunk of your cash for doing so. Meanwhile, as the article points out, a tremendous part of their job is selling you on the experience of having your money managed -- making you think their services are worthwhile. Since stocks do, largely, go up, most investors won't notice performance a bit more sluggish than the average, and even fewer will notice if they aren't outperforming the average. Making money can feel binary -- you're either doing it, or you're not, and if you are, you're happy.Examples of this are all over. The tech boom, in which the professionals made the same mistakes as the day traders. The mortgage crisis, in which Citigroup, with their thousands of analysts and billions of dollars in computing power bought in to an utterly rotten lending model that now threatens to destroy their company. Or, to take an example from the article, ln 1996, SmartMoney had a cover story on the "Seven Best Mutual Funds for 1996." Their selections underperformed the market by 6.7 percent. In 1997, Smartmoney got seven mew mutual fund whizzes to offer recommendations. They underperformed the market by 3.4 percent. In 1998, the next group only came in 2.2 percent below the market. So why do we do it? I'm not much (read: any) of an investor, so I won't spend much time speculating. Part of it, of course, is the excitement, and the hope -- even if we don't conceive of it this way -- that we'll be the outlier, that little data point that makes a million bucks. We've got a better chance of doing it here than in the lottery. But I'd suggest that another part of the answer could be found in this article on, of all things, strip clubs.