Pomp’s Hard Truths: Bold Claims, Failing Grades
Pomp’s financial takes fall short—oversimplifications, contradictions, and gaps in logic abound.
Two days ago, we began grading Pomp on his “10 hard truths.” To this point, he has earned 1.5 out of 5 possible points. Today, we will evaluate his final five statements and assign his final score.
6. Investing in basic indexes outperforms almost every hedge fund over the long run.
This claim is largely true–historically, hedge funds have struggled to outperform indexes, mainly attributed to high fees. A hedge fund’s hefty management fees–often around 2% of assets annually, plus performance fees–create a significant drag on returns. By contrast, low-cost index funds help keep fees minimal, allowing investors to reap the full benefits of compounding. This simple insight is what Jack Bogle–known as the Father of Passive Investing–built an entire financial empire around what everyone knows as The Vanguard Group.
Even Warren Buffett is a well-known advocate for low-cost index funds. In fact, he famously bet $500,000–later raised to $1,000,000–that a low-cost index fund would outperform any five hand-picked hedge funds over a decade. Only one challenger, Ted Seides--co-manager of Protégé Partners–took the wager. The result? Buffet’s index fund trounced the hedge funds–a lesson detailed in Berkshire’s 2016 letter to investors (PDF). Betting against Buffet rarely ends well!
While index funds’ cost advantage is clear, the deeper question is why active investing struggles to beat passive investing? So much so that even the greatest stock-picker of the century–Buffet himself–recommends index funds for most people.
We believe the answer lies in the decline of actual investors. Investing, in its purest form, is a dying art. Buffett’s eventual departure from Berkshire only exacerbates this trend. Today, many who call themselves “investors” are either:
Focused on keeping up with their peers rather than generating superior returns; or
Mistakenly believe they are value investors while missing the essence of real investing.
On that second point, it is true that many in the investment community describe themselves as value investors, but if we single out a subset of the top five “value investors,” at least according to popular press, none of them actually believes in value investing. They all recognize investing as what was rather common knowledge a century ago: an act of trading that requires deep skill, patience and an ability to identify inefficiencies and buying cheap enough before they disappear.
That said, for those unwilling to put in the hard work, a low-cost index fund remains an excellent option. Even Buffett acknowledges this:
The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.
He also offers well-deserved praise to Jack Bogle:
If a statue is ever erected to honor the person who has done the most for American investors, the hands down choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing– or, as in our bet, less than nothing– of added value.
In his early years, Jack was frequently mocked by the investment-management industry. Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me.
Where Pomp’s argument falters is not in endorsing index funds, but in its contradiction with his first “hard truth.” If the market is not efficient, then someone somewhere should be beating the market–hedge funds, individual investors or other active participants. If nobody is outperforming the market, then the market must be efficient.
To be perfectly clear, Buffett himself is not arguing that beating the market is impossible. He simply warns that only a rare breed of investors (PDF) can do it:
There are, of course, some skilled individuals who are highly likely to out-perform the S&P over long stretches. In my lifetime, though, I’ve identified– early on– only ten or so professionals that I expected would accomplish this feat.
There are no doubt many hundreds of people– perhaps thousands– whom I have never met and whose abilities would equal those of the people I’ve identified. The job, after all, is not impossible. The problem simply is that the great majority of managers who attempt to over-perform will fail. The probability is also very high that the person soliciting your funds will not be the exception who does well. Bill Ruane– a truly wonderful human being and a man whom I identified 60 years ago as almost certain to deliver superior investment returns over the long haul– said it well: “In investment management, the progression is from the innovators to the imitators to the swarming incompetents.”
So what’s the truth in this matter? Markets are not perfectly efficient, but inefficiencies tend to disappear quickly. Only a handful of people can consistently capitalize on them. The fastest lions will always feast, while the others merely survive.
If Pomp meant that markets are inefficient while also claiming that nobody outperforms indexes, then we have a contradiction. But if he was simply stressing the difficulty of beating the market, we’re inclined to grant him partial credit. For now, ¾ of a point seems reasonable.
Grade: 0.75 points
7. The more you look at your portfolio, the less likely you are to generate attractive returns.
This principle generally holds true. Warren Buffett famously advised:
If you aren't thinking about owning a stock for ten years, don't even think about owning it for ten minutes.
It’s human nature to want to check your stock prices constantly–after all, investing carries emotional weight. The reality, however, is that if you’ve put in the hard work, evaluating an investment thoroughly by calculating your margin of safety and determining your fair value estimate, your job is largely complete. At that point, the daily price action is mostly noise.
This brings us to a somewhat ironic realization: Pomp, in making this point, actually reinforces the concept of intrinsic value–whether he realizes it or not.
Intrinsic value exists independently of stock price fluctuations. A highly-valued business doesn’t suddenly become less worthwhile just because its ticker moves. Value comes from within–the fundamentals drive the long-term results, not yours nor the public’s short term emotions.
However, disconnecting from the market entirely isn’t ideal. There are two key cases where active monitoring remains crucial:
Price Movements. If you valued a stock at $100 and happily bought it at $70, what should you do when the price drops further down to $50? If nothing has changed in your valuation, the answer is clear–you should buy more because your margin of safety has increased further.
Changes in intrinsic value. Though infrequent, a company’s fundamentals can shift–sometimes significantly. Suppose a pharmaceutical company announced clinical trial results that far exceed expectations. While many will quickly react and bid up the price, those who move decisively stand to gain the most. A lion still must run faster than the slowest gazelle.
Ultimately, Pomp earns near full credit for this one; his general point holds weight, but the irony of him inadvertently championing intrinsic value slightly weakens his overall consistency.
Score: 0.75 points
8. Owning a home is almost always more expensive than renting. You should buy a primary home for non-economic reasons.
We agree that your primary home should be the one that makes you happy. Maybe your family loves it, maybe it minimizes your commute, and/or maybe it provides the space and environment to prioritize your health and well-being. Since you’ll likely spend most of your life in your home, it makes sense to choose one that genuinely improves your quality of life. If you find a home that feels right, go for it.
However, the first part of Pomp’s statement is misleading. Once again, he relies on an overly simplistic generalization–great for social media engagement, but flimsy under real-world scrutiny. Owning a home is not almost always more expensive than renting. There are cases where homeownership makes financial sense, just as there are cases where renting may be the more prudent choice.
Personal experience often shapes perception. In hindsight, my first home purchase would have been better as a rental–but that’s just one case. Many friends have bought homes and their decisions were highly rewarding.
The bottom line? Neither buying or renting is universally superior. The right choice depends on individual circumstances–financial, lifestyle and long-term goals. We don’t fanatically endorse homeownership, nor do we blindly advocate renting; it truly depends.
Grade: 0.5 points
9. A financial advisor’s job is to accumulate assets and a stockbroker’s job is to drive trading volume. Follow their incentive.
This is an interesting one and Pomp is mostly correct.
Let’s start with the stockbroker side of the argument–this essentially advocates for index funds while critiquing middlemen who add little value to the customer and profit from unnecessary trading. Warren Buffett discussed this phenomenon extensively in his 2005 letter, warning investors about excessive turnover that enriches advisors at the expense of customers. Or, as Buffett more colorfully put it:
When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.
Now, onto financial advisors–this part is more nuanced. What do financial advisors/planners do?
A financial planner helps people manage their money and achieve their long-term financial goals.
Fair enough–people need financial guidance, especially in an increasingly complex landscape. Most advisors have professional certifications such as:
Common certifications for financial planners and investment advisors include the CFP (certified financial planner), CFA (chartered financial analyst), and ChFC (chartered financial consultant).
Given the rigorous exam process, work experience requirements and specialized training, one would expect CFA charter holders to fully grasp sound investing principles. Yet… some high-profile financial experts frequently make questionable claims.
Let’s take a look at the following case study:
Ric Edelman
Ric’s credentials are impeccable:
#1 New York Times bestselling author
Twelve books on personal finance
Ranked #1 Independent Financial Advisor by Barron’s three times
Inducted into Research Magazine’s and Barron’s Financial Advisor Halls of Fame
On paper, he should be the ideal financial advisor. Yet, with that comes his bullishness on Bitcoin, and worse, him genuinely believing that one can invest in Bitcoin:
This is a once-in-a-generation chance to engage in something totally new and different that has amazing investment potential.
The problem? Defining what “investing” actually means. Ric rejects Dogecoin, believing that it is a scam, despite its 3,500% return in 2021–but if Bitcoin is investing, why isn’t XRP or Dogecoin? Where do we draw the line?
This raises two core problems:
The blurred distinction between investing and speculation. If everything is investing, then what is speculation? What qualifies as “speculative investing?” Where do we set boundaries–Bitcoin, but not XRP? Stocks, but not collectibles?
Internal inconsistency in reasoning. Nobody wants to admit they believe one can invest in anything and everything. Yet, many advisors pick arbitrary assets they consider “investments” while dismissing others. If returns are the sole criterion, then XRP, Dogecoin or Beanie Babies could all qualify. Most professionals aren’t willing to follow that logic through to its natural conclusion.
One day, in the not so distant future, all of this content will find its way into a smart AI tool that is capable of reasoning and all hell will break loose. You can count on it. All the inconsistencies will lay bare, and all these so-called experts will be unmasked. Unfortunately, the damage will have already been done with many unsuspecting Americans potentially losing substantial sums.
Let’s take a look at the next case study:
Rajat Soni
Soni lacks the Edelman-like name recognition, but he’s a vocal Bitcoin maximalist–and was nearly expelled from the CFA Institute. Some of his most controversial takes–ones you wouldn’t expect to hear from a CFA charter holder–include:
And his thoughts on XRP, despite its strong returns as of late:
This brings us to the bigger picture–if the definition of investing keeps expanding, financial institutions must either enforce their original principles or risk credibility erosion. This is why we are writing this book titled Court of Finance: Ten Principles of Investing. You can agree or disagree with us, but you won’t be able to say there are line-drawing issues or internal inconsistencies.
Pomp is nearly correct in his assessment–but the reality is even more palpable than he suggests. The CFA Institute and other financial credentialing bodies face a crossroads: Stick to their original foundations and maintain credibility or dilute their standards and fade into irrelevance.
Score: 0.75 points
10. Bitcoin is the new benchmark for a portfolio. If you can't beat it, you have to buy it.
This statement competes with #2 as one of the worst takes on the list. It’s also a timely discussion–just yesterday, the U.S. Department of Labor rescinded Biden-era guidance that previously urged caution when including crypto in 401(k) plans:
As we are running out of space, let’s break this down into three simple steps:
Step 1 - What is a portfolio?
In finance, a portfolio is a collection of investments.
Step 2 - Is Bitcoin an investment?
Bitcoin does not generate cash flows (earnings, dividends, interest, rental income, etc.), so it is not an investment.
Step 3 - Does Bitcoin belong in a portfolio?
Since Bitcoin is not an investment, it doesn’t belong in a portfolio in the conventional sense. People are free to own it on their balance sheets if they want the exposure and are comfortable with pure speculation, but they are fooling themselves if they believe they are investing. The bottom line is that Bitcoin is not a benchmark for any investment portfolio–it’s a speculative asset. If someone chooses to hold it, they should do so with full awareness that it lacks the fundamental characteristics of traditional investments.
Score: 0 points
Total Score from Part II: 2.75 points
Final Grade: 4.25/10 – A Failing Score.
In our Tuesday's post we said:
By traditional metrics, Pomp’s success is undeniable. His net worth is estimated to be between $100 and $200 million and his X profile boasts 1.7 million followers. Just yesterday, he appeared on CNBC’s Squawk Box to announce his $200 million+ SPAC deal, fresh off his launch of Silvia– an AI-powered financial assistant. So, if our critique feels like armchair quarterbacking, we won’t take offense.
That said, we care about definitions. If Silvia helps you organize your finances, great–go for it. If you’re confident in making money on PCAPU (Pomp’s SPAC), be our guest. But, If you’re seeking deep financial truths, Pomp isn’t the guy to turn to.
While Pomp touched on some good ideas, the overall framework of his thinking has significant gaps. Making money and social media influence aren’t the only measures of success–when it comes to financial principles, precision matters most.
