Can Investors Learn A Few Things From Country Music?
Those of you who know me well know that I am from Alabama and that I still have some Southern boy in me.Those of you who know a little country music may also recognize that the title of this post is based on a Zac Brown Band song, Chicken Fried. The line in the song that inspired me to write this piece is:
"Well, it's funny how it's the little things in life that mean the mostNot where you live, the car you drive, or the price tag on your clothesThere's no dollar sign on a piece of mind; this I've come to know" It goes with the following chorus about what really matters most in life:
"Cold beer on a Friday nightA pair of jeans that fit just rightAnd the radio upWell, I've see the sun riseSee the love in my woman's eyesFeel the touch of a precious childAnd know a mother's love"Beyond my having a fondness for good country music lyrics, why is it that a wealth management guy is quoting Zac Brown?
Well, if you stay with me on this, I promise to tie it all together in the end.
I probably don't have to remind many readers that, unfortunately, the market is off to a rocky start this year. Understandably, some investors are concerned.Based on my past experience inside big investment firms, how are some investment product managers and sales professionals likely feeling?
As I have written about before
, Wall Street likes nothing more than a little fear and is off to the races marketing the latest impressively presented strategies designed to protect investors. I am getting multiple emails a day from large investment houses and asset managers selling low volatility funds, down-side protection trades and absolute return funds. The pitches all have implied promises of significant down-side protection, and some are even being sold based on attractive hypothetical returns (yes, I was smiling when I wrote “hypothetical”).The vast majority have little transparency, however, and, you guessed it, high fees that drive high profit margins.By writing this, I am not suggesting that all of the presentations are improper.What I am saying is that our industry tends to make things too complex and does not give investors enough information about how products are created (translation, the real ingredients) and about how they work, especially when you need them the most (example: many broke down during the last financial crisis). To be fair to the industry, many of these strategies, which are literally created by rocket scientists, are based on complex investment and economic theories.
What is the key word in this sentence?
The products tend to be designed based on models that strive to price how multiple investments, which themselves are priced based on multiple factors such as earnings estimates, interest rate and currency projections, and emotion, will perform in various market cycles.Whew, yes, that was a mouthful.What could possibly go wrong with complex models that rely on key words such as "estimates", "projections", "emotion", "likely", and "multiple factors"?Among the things which make me pause, is that when pressed over "a cold beer on a Friday night", I have found that my ex-rocket scientist investment friends from MIT, etc. (one literally was a Nobel Prize finalist) admit that their theories can, and likely will, break down from time to time based on market dislocations that can't be fully factored into their models.Getting back to Zac, my hope that this is starting to spark a few questions among readers as far as what is really important and what really adds value.When I founded my firm almost four years ago, I spent a lot of time asking questions about what adds the most value to clients. During conversations with many wealthy individuals and investment professionals, I was routinely reminded of the following comment from a long-time client:"Preston, I hired you to help our family develop and implement an investment plan. I am very happy with the management of our investments but do you know what I have come to realize that I really pay you for? Transparency, simplicity and peace of mind."Yes, some might think that I am a broken record on this, but as an adviser to President Kennedy is rumored to have told him when he thought he was saying the same things over and over again:"When you are at the point that you think you are going to get sick if you say it one more time, you have finally reached the point when many people hear it for the first time."Some folks seem to be hearing what the evidence points to: a keep-it-simple approach performs just as well as complex strategies.Investors are following the advice of Warren Buffet and David Swenson, the CIO of Yale*, and putting record amounts into index funds (see links to articles on Buffet and Swenson at the bottom of this post).It seems that our industry still has some listening to do, however, as it continues spending an enormous share of its time and money promoting complex products, such as multi-factor models that are designed to protect against market down-turns and defaults (if this doesn't sound familiar, go see the movie or read the book The Big Short
).To hopefully help, the following are a few “Don't” bullets points for Wall Street to consider.
Don’t Make Investing A Competitive Sport Each individual is different and can have unique goals Remember that winning in investing is reaching client specific goals, not beating the other guy who might have different objectives or an appetite for risk
Don’t Sell Crystal Balls or Be A Sheep As we all know, but don't want to admit, Wall Street predictions are often wrong (see our recent Groundhog Day or Talking Heads blogs) Resist the urge to run with the herd and easily sell what has been hot in the past or that is being currently promoted as the next great the New New Thing
Don’t Avoid Conversations About The Bad or Ugly Fully disclose the Good, the Bad and the Ugly If clients understand the pros and cons of a strategy before implementing it, then they will be less likely to change course at the wrong time when the going gets rough, which it will from time to time
Don't Forget Taxes, Especially Related to Alternative Investments and Hedge Funds Remember that a very large portion of hedge funds returns tend to come back to clients in the form of short-term capital gains If your client is the highest tax bracket, please adjust your return projections down by approximately 50% before making your pitch
Don't Underestimate the Advantage of Liquidity Individual clients are not endowments and generally have periodic liquidity needs for large purchases, gifts, and regular income Place a premium on fully liquid investments Remember that during the financial crisis many endowments found out the importance of liquidity the hard way when they did not have access to funds that they needed
Don't Sell Anything That You Don’t Fully Understand Do we really understand how complex strategies will perform over various market cycles? No additional comments really needed
As you can sense, I am a little cynical about how Wall Street sells the fear of missing out by helping to create what data suggest are relatively unproductive competitions to find and sell alpha.Rather than taking the easy way out and simply selling relative performance and relative risk metrics, let’s spend more time listening to what clients want to achieve, and implementing strategies that are designed based on their goals, not industry models.Related to this, I am not a big fan of active management but as I recently wrote in What's In A Name
, if investing in an active strategy or working with a large brand makes a client feel more comfortable, and will allow him or her to stick to a plan more easily then, regardless of the relative performance versus an index, these might be the correct choices.If we focus on adding true, long-term, goal-oriented value in a fully transparent manner, we may come in for short-term criticism, but in the end I think we'll do the most good.At Fiduciary Wealth Partners, we feel that by focusing on transparency and simplicity, our clients will benefit by being more comfortable with their investments, which in turn will increase the likelihood of them sticking to long-term plans during good times and bad (what many studies show is the key to long-term investing success).
Hopefully this will also increase peace of mind and allow all to enjoy a little more.
"Cold beer on a Friday nightA pair of jeans that fit just rightAnd the radio upWell, I've see the run riseSee the love in my woman's eyesFeel the touch of a precious childAnd know a mother's love"* Both Warren Buffett and David Swenson have repeatedly discussed the evidence in favor of index funds and consistently recommended index investing to individual investors.See the following links for more information: Warren Buffett To His Heirs: Put My Estate In Index Funds Warren Buffett's Advice to LeBron James: Index Funds Unconventional Success: A Fundamental Approach to Personal Investment – David F. Swensen