Thanks to fast work by the Associated Press, we already know that Supreme Court nominee Samuel Alito’s family is worth between $600,000 and $1,600,000 (excluding the value of a house in New Jersey). But what AP didn’t tell us is what his investment decisions say about him.
Does he possess a wild, romantic streak like John Roberts, who takes fliers on long-shots like XM Satellite Radio? Is he so compassionate that he raids his retirement fund each year to support an ailing parent, as Harriet Miers appears to do? Does he, like Fed chairman nominee Ben Bernanke, fail to act on half-a-century’s worth of evidence suggesting that stock-picking subtracts rather than adds value—and turn his money over to expensive fund managers and brokers anyway?
The good news: In Alito, America finally has a nominee whose analytical powers appear to extend to the personal-finance realm. According to his 2003 and 2004 financial-disclosure statements, Alito is well-diversified, holding primarily cash and bond and stock funds. He doesn’t trade much, so he apparently understands what many investors don’t: In most cases, relative to a static benchmark, the more you trade the more you lose. Alito keeps most of his money at Vanguard, a low-cost fund provider, which suggests that he also understands that costs matter. (In the financial world, unlike the clothing world, Wal-Mart prices do not mean Wal-Mart-quality merchandise; rather, Wal-Mart prices often mean Saks-quality merchandise, and vice versa.) Alito even apparently understands that taxes matter: Several of his funds are tax-exempt. Many brokers, fund managers, small investors, and financial writers (stupidly) ignore taxes and focus on sexy pretax returns.
To appreciate what these decisions suggest about Alito—as well as about how he might function as a judge—it makes sense to pause here for a moment. It is not that Alito has discovered some deep, dark secret about investing: The evidence that high costs, frequent trading, and tax-blind strategies reduce expected returns is in plain view, and there is a ton of it. This evidence, however, is often obscured or ignored by a vast and cacophonous brokerage industrial complex (brokers, fund companies, amateur Buffetts, and personal-finance media) which, unlike the average investor, benefits from trading, fees, viewers, listeners, etc. The brokerage industrial complex is so good at telling us what we want to hear (If we listen to this analyst/strategist/pundit, we can beat the market! If we hire this fund manager/broker, we’ll make a mint!Index funds are boring and un-American, the pursuit of mediocrity! Higher prices mean better products—you get what you pay for!) that its strategies have been accepted as conventional wisdom.
To make his investment choices, therefore, Alito has had to ignore what most people around him believe, doubt the spellbinding stories he is being told by supposed experts, and, instead, focus on the facts. This, most of us would agree, is an extremely desirable quality in a judge. (Of course, Alito may have just hired a talented financial adviser, but even this implies an above-average ability to reject perception and act on empirical reality.) Alito also resists the excitement of trading and the violent, emotional swerves of the herd, suggesting he is conservative in a traditional way: He resists change and doesn’t make it for the sake of change.
Alas, Alito’s choices also suggest that his fact-based reasoning extends only so far. Yes, he owns many Vanguard funds, but within this category, he’s also chosen many actively managed Vanguard funds rather than cheaper index funds. This suggests a human eagerness to try to do better than “average,” as well as a typical overconfidence. (Most people can’t pick funds that beat the market, but I can!)
Lastly, Alito does own a few individual stocks: Bristol-Myers, McDonald’s, Disney, Intel, and ExxonMobil. Some pundits will suggest these holdings create conflicts of interest, but the idea that a judge’s judgment would be warped by a small stake in one of the companies whose conduct he or she is evaluating is, in most cases, ludicrous, especially when such holdings are in plain sight and the judge’s reputation is at stake. (A few years ago, Alito was criticized for not recusing himself from a case involving Vanguard.) The more interesting point is that Alito’s individual stocks do not seem to fit with the rest of his investment program, perhaps because several were received as gifts. It will be instructive, therefore, to see what he does with them.
Will Alito cling emotionally to his stocks—because they were gifts, have been in the family for a long time, have done well, are “good companies,” or any of the other common but illogical reasons that investors offer for exceptions to wise investment policy? Or will he maintain his investment discipline, selling the stocks and investing the proceeds in better-diversified funds? If he does the latter, the newest Supreme Court nominee will demonstrate not only above-average ability to separate facts from stories but also above-average self discipline—another positive quality in a judge.