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Earlier this month, BlackRock Inc. (NYSE: BLK) reported fantastic earnings for the first quarter of 2018, surpassing Wall Street's expectations on nearly every metric.
Now, BlackRock is the largest money manager on the face of the earth, so any sane individual interested in keeping up with the markets - and therefore making money in them - needs to pay close attention to BlackRock's performance.
The company reported net inflows of $55 billion into its money management products. It also hiked the dividend by 15% and bought back $335 million in stocks, both of which contributed to the solid 6% gain shareholders saw from January to March.
Now, BlackRock is far too large for me even to consider owning. I only target unreasonably undervalued companies, and any company known as the world's largest "anything," let alone money manager, will always be far from undervalued.
But when BlackRock is speaking, it's a good idea to listen. The recent earnings show the company now has over $6 trillion in assets, meaning the suit-wearing foot soldiers are pretty damn good at selling their products.
And this most recent earnings report speaks volumes about how these products are falsely marketed to you...
They're marketed as investments that don't provide underwhelming returns when, in reality, that's exactly what they provide...
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How BlackRock Peddles Pathetic Index Investing as "High Performance"
Anyone who follows the money management industry knows Blackrock is a huge provider of index-fund products, and its iShares products dominate the market for index exchange-traded funds (ETFs).
Just hearing the phrase "index investing" makes my blood boil; it's a method that's a well-documented outrage of mine.
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I don't know how else to put it: I think it's downright stupid to settle for the pathetic average historical return of 3.66% a year provided by indexes when other easy strategies, such as targeting closed-end funds, can return 13.7% a year on average.
Of course, BlackRock execs always tell shareholders during earnings calls that they're doing just fine.
They talk a lot about the "growth" and "rewards" they're "delivering" for shareholders. They say their funds are among the only investments out there beating the markets.
But Blackrock's size and recognition makes it easier to push stock indexes onto naïve investors. This particular business is a massive source of profit for the firm, with iShares inflows making up 61% of total net flows during the first quarter.
And CEO Larry Fink thinks this is just the beginning.
He said on a call last year that "index and ETFs still only represent 10% of the entire equity market global capitalization... we have much more opportunities for ETFs to grow, not just on equities, but in fixed income. And I believe this is just the beginning."
More recently, he suggested buying indexes and owning them forever is the right strategy for most individual investors. He's also said that most people are horrible market timers and should stay invested no matter where markets move.
Now, I agree with him about the poor probabilities of successfully timing the market; few investors do it once, and hardly any throughout history have done it consistently.
Owning indexes forever might be good if you're 20 years old, with decades ahead of you to ride the ups and downs of the market. That way, you'd probably be set to receive the full benefit of "upward bias," the inevitable long-term rise in stock prices.
But indexing isn't such a great move for someone in their 50s or 60s, putting money in at elevated valuations. It can be downright disastrous.
A 50-year-old who put their money into the indexes and held on tight has seen their wealth grow by just 3.66% a year and had to endure two 50% declines along the way.
This is how BlackRock's Fink sells us on his products and encourages us to run our financial lives.
But this is far different than how he runs his business...
Wall Street Will Always Be Wall Street
Remember, BlackRock's address may not say "Wall Street," but it's still a major financial institution trying to make a quick buck by selling stuff to misled customers.
This much was made clear by BlackRock President Robert Kapito, who noted on the recent earnings call that "as we see cycles move toward active equities, when active equity managers can outperform the benchmark including their fees, you will expect to see some flows out of the indexed product into the active equity product, and we should be the beneficiary of that."
He continued dancing around the main point with an overlong explanation of recent government regulations: "With the changes in the DOL rules, a lot of the financial advisors have been using an index like an ETF product to create model portfolios and build those model portfolios with the least expensive products, but as the cycle starts to change, they will start to incorporate more active products in that... and we should be the beneficiary of that now more than we have been in the past."
That's confusing Wall Street jargon for "We think you should index, but just in case you don't agree, we have other stuff to sell you. After all, we have a lot of overhead and need all your money working all the time to pay the bill and meet our insane bonus requirements."
Wall Street is there to sell you stuff. That's all. It wants to sell you stuff, and it doesn't want you ever to take it back.
Even if it thinks you should index instead of use active managers, if an active manager is what it needs to sell you to keep the fees flowing, then that is what it will sell you.
Later on in the call, Fink kept the sales pitch going, moving beyond the index funds to sell other, even more illiquid BlackRock products.
He said, "We have spent - since 2012 - a long foundation in building our infrastructure business up to $18 billion. We are out fundraising now for another global alternative energy fund. We are in the process of raising long-term private capital fund. And so, I think we are going to have a lot to talk about over the next few quarters related to the opportunities and the position that BlackRock has across our illiquid platform. I would also suggest I think we are in a very good position in our illiquid [alternative investments] area, too."
Infrastructure, long-term private capital, making illiquidity pay, and alternative energy.
Where else have we heard about using these types of private equity-mindset investments to drive returns that crush the indexes no matter what the market does?
I'll give you a hint: You're reading him right now.
As individuals, we can not only do that, but also do much, much better than Wall Street if we stay away from its products and stop feeding its execs insane fees.
I may be listening to their earnings call, but I swear it's like Fink and Kapito are reading my mail.
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About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.