Efficient Market Hypothesis? Yeah, great. So how are my investments doing?

Sometimes facts can get in the way of a good story. When that story involves investment returns, the insidious nature of 'humble arithmatic' can really put the stink on your mutual funds' returns (that's stink, not stank.) At least, that's what one of the industry's giants posits. In The Relentless Rules of Humble Arithmetic, by John Bogle, of The Vanguard Group, published in the most recent issue of the CFA Insitute's Financial Analyst Journal, John delivers bigtime for both his followers and his detractors, who say he has the "uncanny ability to recognize the obvious", with a single quote:

"Gross returns in the financial markets minus the costs of financial intermediation equal the net returns actually delivered to investors."

This "obvious" observation forms the backbone for what he calls the CMH (or Cost Matters Hypothesis). He goes on to explain the CMH in relation to a long-forgotten PhD thesis by Louis Bachelier, in which the premise is that investors as a group must be average. John then takes Bachelier's theory and calls bullshit on it, but in a polite way - Bachelier held back when he should have pushed forward:

Of course, Bachelier was right. However, when he went on to conclude that "the mathematical expectation of the speculator is zero," Bachelier was wrong. He didn't go far enough. For the fact is that the mathematical expectation of the speculator and the long-term investor alike is not zero. It is zero minus the cost of playing the game, a shortfall to the stock market's return that is precisely equal to the sum total of all those advisory fees, marketing expenditures, sales loads, brokerage commisions, legal and transaction costs, custody fees, and security-processing expenses.

Yeah Bo-ii! He doesn't explicitly include investment bankers among the Wall Street hoi poloi (he's risen above), but they might as well be lumped in, somehow.