November 19, 2005
I was thinking about classifications of political parties while bagging leaves today, and a way to relate it to the investment world.
Republicans: Republicans are bond investors. They think government can offer certain expected returns (services) to you. Those returns aren’t very big, but they’re dependable. The Republican theory of government is to not promise too much, but not to screw it up either. Republicans view the goal of government as taking on a task they know it can handle, performing it adequately, and no more.
Democrats: Democrast are actively-managed mutual fund guys. They say you’re way too stupid to manage your own money. The only way you can hope to get rich is to place your trust in smart people like them. There are slick marketing campaigns to make you believe that they can manage your money much better than you can. They give you confusing sheets of investment performance over time to make you think they’re going to make you rich beyond your wildest dreams, but in reality, they aren’t all that good at what they do.
Libertarians: Libertarians are index-fund guys. The key point between Libertarians and Democrats is that actively-managed mutual funds are all marketing and no performance. The S&P 500 as an aggregate outperforms 85% of actively-managed funds every year. And the systems the Democrats offer aren’t in the other 15%. Index funds are a simple system, based on performance, of understanding underlying truths about a system and setting up rules to make the most of those truths. An index fund looks at the way the market works, sets up rules of how to buy and sell individual stocks in a simple, hands-off approach, and then just sit back and watch the market work. The Libertarians are all about setting the right rules and then simply acting within those rules. Most Libertarians are Constitutionalists because they believe the rules our founders set forth are pretty close to the most efficient possible set.
Republicans want to use government as a tool, but only in certain limited cases. Democrats want government to do everything for you, because they think they’re smarter than you and can make better choices. Libertarians want to set up a basic, fair system based on sane rules, and then let everything develop from there.
People become Libertarians because they see that Democrats screw up 85% of what they touch, and see that Republicans are following the mold of Democrats, but to a smaller degree. Furthermore, they see that if they want to make the best of themselves, the bond market and actively-managed mutual funds underperform the Libertarian system.
dustbury.com linked with I have $4 in pennies on my desk
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