Smith, chief executive of the money brokers Tullett Prebon, told the Guardian his support was based on similar factors. \”I\’m in favour of some form of Tobin tax. There are elements of financial services that have become over-large and have no social purpose,\” he said.
Smith suggested these areas might include the sale of sub-prime mortgages – \”Broking mortgages to people who can\’t afford to pay them has no social purpose\” – as well as those parts of the City that devised complex derivatives such as collateralised debt obligations. He also suggested that fund managers who track indices have a similar lack of purpose.
Index trackers are absolutely not a group that add no value. They are in fact the group that provide some of the best value to the individual investor: this is an outcome of the eficient markets hypothesis which everyone is so keen to trash at the moment.
Note please that the hypothesis is not that markets are efficient: note also that it is not that markets arrive at \”the correct price\”. It is simply that prices in markets reflect the information available to the participants in the market as to what prices should be.
Yes, this is near tautological which is why there\’s so much puzzlement at those who scream that the EMH is dead, dangerous, the cause of our current woes and all the rest of it.
But a side effect of this EMH is that you cannot, on the basis of anything other than luck and or statistical swings (often very much the same thing), consistently beat the market unless you have information not already known to said market. And individual investors very rarely do have such knowledge.
Which means that attempts to beat that market by such individual investors are doomed to failure. Whether you\’re trying to call it by investing directly in individual stocks or by hiring an expensive fund manager (through actively managed unit trusts for example). Indeed, the dealing costs will almost certainly guarantee that you will lose relative to the market, far from beating it.
Thus, if investing in markets is what you want to do, you\’re best off simply sticking it into an index tracker fund. You cannot beat the market because you don\’t have that extra knowledge: and the fees you will pay on an index fund are lower than on an actively managed one.
All of which leads to: far from index funds being without social purpose they are one part of the investment structure that clearly and obviously has a social purpose.
One might also point out that Terry Smith, as well as not understanding the economics here, should be looking to saving his own arse. A financial transactions tax would kill the money broking business stone dead.