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DON’T Sell in May and DON’T Go Away

06/01/2014

There has long bee considerable argument within the investment community as to whether active management outperforms passive management.  In other words, is it worth it to pay higher expenses for an active mutual fund with a manager who buys and sells stocks frequently, when you could reduce your expenses by investing in a static or passive exchange-traded-fund that mimics, say, the S&P 500 or the Dow?  Like most answers, it depends.

Last year, passive investors beat active investors.  So far this year, it has reversed.  In particular, hedge funds were beaten by passive investors last year, but that has reversed itself this year.  Of course, I don’t pretend to understand the myriad reasons for that change, but there is one curious coincidence that nags at me.

Ben Bernanke is a personal hero of mine!  I think he did many courageous and innovative things to control The Great Recession.  However, as a pharmacist’s son from a small town in South Carolina, he was not born wealthy.  As a college professor, he never became wealthy.  As Fed Chairman, he only made $200 thousand a year, which was chump-change for the work he did.

Now, as the former Fed Chairman who left office in January, he charges as much as $250 thousand to have dinner with him, where he is free to give his opinion about monetary policy, just like any other American.  There are numerous unconfirmed reports that most of these dinners are with hedge fund managers.

Other reports suggest that he is not saying anything new, but he is saying it more directly and clearly without “Fed-speak.”  It is well-known that he is close to the current Fed Chairman, Janet Yellen.  I suspect if Mr. Bernanke leaned over his foie gras, reaching for his crystal glass of Chardonnay, looked me in the eye and said “Don’t fight the Fed,” I suspect I would also get very bullish very quickly.  I might even conclude that “sell in May and go away” would be very bad advice this year.  (The S&P was up over 2% in May.)

Mr. Bernanke is not the first Fed Chairman to do this.  Alan Greenspan also became wealthy after leaving office.  But, that doesn’t change the optics — something is not right about this.  Even though he reportedly gives away a large portion of his fees to charity, it still leaves a bad taste in my mouth . . . even worse than the taste of foie gras.

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