Investment Mistakes Are the Portals of Discovery

Fancy Wall Street types often use the term “price discovery” when they are trying too hard to impress the impressionable.

“Price discovery is the mechanism by which competing buyers and sellers determine the price of a security or an asset,” according to Simon Constable.

For this process to work, certain things must happen.

“I see three factors involved in price discovery: markets, market participants and information,” says Rick Anderson, chief investment officer of Chicago-based Hull Tactical. “The interaction between the three creates the price discovery.”

In other words, competing buyers and sellers absorb new information to determine the price at which buying and selling is balanced.

In general, the greater number of active participants in the market, the faster the price discovery.

In public school teachers’ 403(b) plans, we have a market and market participants (financial salespeople and teachers). The information thing is where everything falls apart.

New information helps traders determine the best price to purchase a stock. For example, if a company’s earning power declines dramatically, the price of the stock will immediately reflect this event because of active and informed market buyers and sellers.

This mechanism is reflected in the prices of rentals in Minnesota on Airbnb listings. The Super Bowl will be played there on February 5. Rental rates have soared in some places from $59 a night to over $3,000 during Super Bowl weekend!!

Price discovery is alive and well; new information is reflected by the activity of football fans nationwide and real estate owners.

How about teachers and others who own high-fee annuities and expensive mutual funds in their retirement accounts?

The following chart illustrates the distribution of investments in the 403(b) market as of December 31st of each year. The numbers represent billions of dollars invested.


2014 2013 2012 2011 2010
Total invested $1075 $985 $843 $769 $753
Fixed annuity $464 (43%) $433 (44%) $386 (46%) $363 (47%) $349 (46%)
Variable annuity $351 (33%) $318 (32%) $265 (31%) $236 (31%) $240 (32%)
Mutual funds $260 (24%) $235 (24%) $192 (23%) $170 (22%) $163 (22%)
Public K-12 $244 (23%) $223 (23%) $191 (23%) $170 (22%) $166 (22%)
Private K-12 $75 (7%) $70 (7%) $60 (7%) $56 (7%) $55 (7%)
Higher education $493 (46%) $452 (46%) $386 (46%) $355 (46%) $348 (46%)
Healthcare $227 (21%) $206 (21%) $175 (21%) $158 (20%) $154 (20%)
Other $37 (3%) $35 (3%) $31 (4%) $30 (4%) $29 (4%)

Source: Spectrum Group


While there are low-cost options out there, why has nothing changed over the last several decades?  This flies in the face of all rules of price discovery.  New competitors and information transform market prices; just ask any retailer that competes with Amazon.

Why are the prices of investment products in public school teachers’ 403(b) and small-company 401(k) plans trapped in the 1970s?  Last I checked, not too many people are still listening to music on eight-track tapes.

The reason is the free flow of information is intentionally cut off by lies and deliberate obstruction by conflicted financial salespeople:

  • Confusing 500-word prospectuses written by company-employed lawyers hide data under a mountain of legal jargon.
  • Salespeople tell teachers, “You are not paying anything,” regarding their investment fees.
  • Certain unions and school administrators make unholy deals with insurance companies to keep the good guys from speaking with their constituents.

On an equal playing field, the life blood of Capitalism is price discovery. If this was allowed to flourish, virtually no teachers would own annuities in their retirement accounts.

The antithesis of free exists here.

Imagine in other aspects of life, if the same conditions existed.  It would look something like this:

  • Going to the supermarket and gladly paying $3 for milk when the competition offered it for $1.
  • Enthusiastically buying a Toyota Camry for $70,000 when its worth is less than half that price.
  • How about paying an upfront sales commission of 6% in addition to an already high sales tax in order to purchase a case of Bud Light?

Dilly Dilly!

No sane human would ever think of conducting these transactions.

Teachers do this every day. Purchasing over-priced investment products due to the financial equivalent of The Great Wall of China blocking the flow of information.

When information is deliberately suppressed in a free market, it creates a zero-sum game rather than prosperity for all.

Sadly, Lewis and Clark would have a difficult time discovering the costs of these egregiously expensive and unnecessary 403(b) investments.

We know exactly how to unclog the log jam. Price discovery is our specialty.

Let us help you before you waste another penny overpaying for investments you don’t need.


Sources: “What Is ‘Price Discovery” and Why Does It Matter?” by Simon Constable, The Wall Street Journal; “Talk About Scoring,” by Richard Morgan, The New York Post.


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