What's in Bernanke's Wallet?
A psycho-financial analysis of Fed chair nominee Ben Bernanke.
What can we learn about the likely policies of prospective Fed Chairman Ben Bernanke from the way he manages his own money? Plenty!
In his previous job as a Fed governor, Bernanke filed disclosure statements detailing his assets and income. The latest of these, filed in 2004 and covering 2003, is available here and serves as the basis for the discussion below. Bernanke will presumably file more up-to-date info as his confirmation proceeds.
Like most of the current Fed governors—and unlike Supreme Court nominee Harriet Miers—Bernanke is rich. Not as rich as Alan Greenspan, who is worth $4 million to $9 million, but rich, with total financial assets of $1.1 million to $5.6 million. Bernanke and his wife have socked away enough of his former $295,000 salary as head of the Princeton economics department, his six-figure textbook royalties, and her salary from Princeton Day School to amass a retirement account worth $1 million to $5 million (by far their biggest asset). Regardless of how the confirmation hearings go, the Bernankes will not eat cat food during their retirement (unless his Fed policies lead to skyrocketing inflation).
Bernanke's other financial assets consist of custodial accounts for his kids, cash-management accounts, a couple of exotic securities, a single stock, and a bunch of mutual funds. The exotic securities include Canadian bonds and U.S. Treasury STRIPS, which are bonds sliced in half so the interest and principal payments can be owned separately. Bernanke's single stock is Altria, the old Philip Morris. This stock has performed well, beating the S&P 500 for many years. Why Bernanke owns a cigarette stock and what it means, however, are mysteries.
The bulk of Bernanke's holdings outside the TIAA-CREF retirement account are plain vanilla mutual funds. Yes, there are fancy ones here and there (a Greater China fund for his son, Joel, for example), but most are the type familiar to many Americans: Merrill Lynch Large Cap Core Fund, Merrill Lynch Balanced Capital Fund, etc. What's interesting about Bernanke's fund choices is that most are actively managed instead of passively managed, meaning that Bernanke is choosing to pay portfolio managers to try to beat the market, instead of picking low-cost, passive index funds.
This is interesting because Bernanke is an academic economist, and most academics believe that the market is so efficient that stock-picking is usually a waste of time and money. (The average active fund costs its investors 1 to 2 percentage points of performance every year.) Fifty years worth of academic research supports this conclusion, and almost every analysis of mutual funds over the last 30 years has concluded that the vast majority of active funds do worse than passive benchmarks.
So, why would a financial rocket scientist pursue a dumb investment strategy? Here are four possible interpretations, in order of least to most likely:
1)Bernanke possesses less intellectual rigor than is commonly thought. Perhaps, despite decades in academia, Bernanke hasn't evaluated the active vs. passive evidence and, therefore, still accepts the common "wisdom" espoused by brokerage firms, fund companies, and CNBC. If so, this would be seriously problematic for his tenure at the Fed. One shudders at the thought that a Fed chairman might make policy decisions by flicking on the boob tube and listening to, say, Jim Cramer. Fortunately, this interpretation seems unlikely, especially given the proximity of Bernanke to Princeton colleague Burton Malkiel, who wrote A Random Walk Down Wall Street.
2)Bernanke has the brainpower necessary to find the truth but lacks the willpower and decision-making discipline necessary to put it into practice.(Also known as the difference between the ivory tower and the real world.) In this scenario, Bernanke believes that active management is a crock but won't act on this belief. Why? Perhaps Bernanke's charming financial consultant has opined that the efficient market stuff is a load of hooey: "It's the pursuit of mediocrity, Ben. Who wants to strive to be average? Certainly not you. I mean, it's downright un-American." Perhaps Bernanke finds this convincing or lacks the energy to argue. This, too, would spell disaster at the Fed.
3) Bernanke, like most people, is overconfident about his own abilities, even as he recognizes the limitations of others (i.e., even though most folks can't pick funds that beat the market, he can). The good news here would be that, if anyone has earned the right to be overconfident about his financial prowess, it's Bernanke. The bad news is that overconfidence is perhaps the most common psychological infirmity that dooms most of us to crappy performance. (Analyzing whether Bernanke's funds have beaten their benchmarks would be a waste of time because we don't know how long he has owned them, and because less than a multidecade holding period might tempt us to mistake luck for skill. As an example, Bernanke's large-cap core fund charges a mammoth fee of nearly 2 percent a year but has managed to outperform the S&P 500 by 3 percent annually over the last five years.) The implications of this overconfidence might be that Fed Chairman Bernanke would assume that he, like Maestro Greenspan, possesses the rare talent, touch, and je ne sais quoi necessary to actively steer the economy between the Scylla of slow growth and the Charybdis of inflation. Will he actually be able to do this? Hang on to your hat (and diversify your assets).