“Worrying is a serious offense”

Q2.2017.2I was in Scotland recently for a wonderful holiday with my wife. We got up one morning and, quite typically, it was about 50 degrees and windy, with rain coming down sideways. In other words, it was beach weather in Scotland. Accordingly, my wife decided we would visit one of Scotland’s great beaches. (That sounded to me like visiting one of the great ski slopes at home in San Diego, but I digress.)

So off we went.

Happily, by the time we wound our way to the appropriate spot on the tiny roads of the Scottish Highlands, the rain had stopped. However, getting to our destination was going to require a three and one-half mile one-way trek across pasture, moor and dunes. But the end result was indeed a beautiful beach (above right).

Q2.2017.5My point relates to the pasture. There was a gate that allowed us to access and cross the pasture on our way to the beach, on which was posted a prominent sign (at left). The owner of the property was very clear that dogs needed to be kept on leads due to the threat of “worrying” the farm animals and that offending dogs would be shot.

Note the key final phrase: “Worrying is a serious offense.” That statement is similarly true in the investment world even though its meaning is slightly different.

When we worry about our investments, we tend to look at our statements more. When that happens, we see losses more often (only 53 percent of trading days are positive for stocks even though the S&P 500, for example, has returned in excess of 11 percent per year from inception) and thus trade too often because we are so loss averse (we feel losses roughly two to two-and-one-half times more strongly than commensurate gains). We chase performance to our detriment. The net result of this worrying is substantially lower returns.

For most of us most of the time, worrying will surely be counterproductive. It will lead to bad decisions and poor returns. So please, remember, worrying is a serious offense.

Investing Successfully is Really Hard

Research 7.17

My newest column for Research on Wealth magazine is now available. I hope that you will read it as well as the entire issue. The conclusion follows.

“Investing successfully is really hard. Even great investing is really hard to abide. But if you avoid stocks or do not find a way to abide stock market volatility, it will be really, really hard for you to meet your financial goals.”

Investing Successfully is Really Hard

I Hope This Doesn’t Describe You

The new issue of Research magazine is now available online. Its theme is evidence-based investing. I encourage you to read it in its entirety. My contribution is here and outlines some alternatives to evidence-based investing. A taste follows.

The providence-based advisor

An advisor who lacks convincing evidence will often claim that the advice he is giving comes straight from God. Sometimes the claim is implicit, sometimes explicit.

Sometimes the motivator is guilt, sometimes it alleged brotherhood. But the results are usually hellish.

I Hope This Doesn’t Describe You

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For those of you unwilling to register (it’s free), the full text is reproduced below.

 

There is a new and growing movement in our industry toward so-called evidence-based investing, which has much in common with evidence-based medicine. Given that it’s a relatively new concept — even though the best advisors have always practiced it — it might be helpful to look carefully at some possible alternatives to being an evidence-based advisor.

Here is a baker’s dozen worth of options for your thoughtful consideration. Many were adapted liberally from a piece on evidence-based medicine written by Dr. David Isaacs and Dr. Dominic Fitzgerald for the “British Medical Journal” in 1999. If I’ve missed any category, please let me know.

The eminence-based advisor

This (usually older) advisor wants you to believe that the more senior the practitioner, the less importance needs to be placed on anything so trivial as mere evidence. Apparent experience, it seems, is worth more than any amount of evidence.

These advisors have a touching faith in personal experience, which can be defined as “making the same mistakes with increasing confidence over an impressive number of years.” Such an advisor’s white hair and balding pate are often called the “halo” effect and act to trump substantive knowledge.

His (rarely her) well-appointed suite of offices featuring fine views and paneled wood are usually seen as the best available evidence of quality.

The fear-based advisor

This sort of advisor keeps on shouting from the rooftops that “the end is nigh,” over and over and over again, no matter what actually happens, in order to get you to respond. The idea is that if clients and prospects are sufficiently scared, they will run to the fear-monger for refuge. In other words, quite simply, fear sells.

The crooked advisor

This category of advisor is both self-explanatory and far bigger than generally assumed. For these advisors, prospects and clients are merely opportunities to be exploited by the best available means. They actually do care about evidence, but it’s a very different sort of monetary evidence (cha-ching).

The vehemence-based advisor

This sort of advisor sets out to substitute volume and passion of transmission for actual evidence so as to pummel, cajole and harass prospects, clients and adversaries into believing that he (rarely she) is really good.

The eloquence-based advisor

Proponents of this approach are always smoooooth. They feature year-round tans (even in New York), power ties, fine suits from Barneys, and (especially) a silken tongue. Sartorial elegance and verbal eloquence are deemed powerful substitutes for mere evidence.

The novelty-based advisor

This specimen emphasizes what’s new and unique, the less transparent the better. They always have the latest and the greatest.

Black boxes and hedge funds are prominent in this space — because he (again, rarely she, as is true in most other advisor categories) is so smart, don’t cha know?

The providence-based advisor

An advisor who lacks convincing evidence will often claim that the advice he is giving comes straight from God. Sometimes the claim is implicit, sometimes explicit.

Sometimes the motivator is guilt, sometimes it alleged brotherhood. But the results are usually hellish.

The intuitive advisor

Alleged common sense is often more attractive than real evidence, especially because good investing is often counter-intuitive. Therefore, this sort of advisor will go with his gut about stocks, funds, managers, styles, timing and forecasts.

He will rarely just stand there. He’ll usually be doing something.

The diffidence-based advisor

Some advisors see a problem and look for an answer. Others merely see a problem. The diffident advisor will often do little or even nothing out of a sense of paralysis or despair.

He will do nothing, because he has no good evidence-based idea what to do. This, of course, is most often better than doing a non-evidenced series of somethings. But that’s a really low bar.

The self-righteous advisor

This advisor hoses his clients while remaining utterly convinced that they are doing what’s best for them. He’s often wrong but never in doubt.

No one should be surprised that, in this instance (as well as others), “what’s best” is often really, really good for the advisor. It doesn’t usually work out so well for the clients.

The nervous advisor

Fear of clients being upset and the potential consequences thereof are powerful stimuli for excessive and repeated portfolio changes. Counterintuitively, this sort of advisor is often quite afraid of offering reasonable expectations, because unreasonable expectations are so much more attractive. Plus, they can be counted on to tell clients and prospects what they want to hear rather than what they need to know.

The ideology-based advisor

This sort of advisor is unalterably committed to his market ideology, contrary facts and evidence notwithstanding. They know what’s True (with a capital T) and will stick with that come hell or high water (and beyond).

The publicity based advisor

This category sets out to convince clients of his bona fides via media appearances, publicity shots and name recognition rather than real client service. That’s because he had to become so well known for a reason, right?

As British journalist Robin Powell puts it, “All too often we base our investment decisions on industry marketing and advertising or on what we read and hear in the media” or on something else altogether.

Evidence-based investing is the idea that no investment advice should be given unless and until it is adequately supported by good evidence. Thus, evidence-based financial advice involves life-long, self-directed learning and faithfully caring for client needs.

It requires good information and solutions that are well supported by good (often academic) research, as well as the demonstrated ability of the proffered solutions to work in the real world over the long haul (which is why I would prefer to describe this approach as science-based investing). It means changing one’s mind, approach and strategy when the evidence demands it.

The obvious response to the question about whether one’s financial advice ought to be evidence-based is, “Duh!” Then again, advisors and investors of every sort — those with a good process, a bad process, a questionable process, an iffy process, an ad hoc process, a debatable process, a speculative process, a delusional process, or no process at all — all think that they are evidence-based practitioners already.

They may not describe it that way specifically. But they all tend to think that their process is a good one based upon good reasons. Nothing to see here. Move right along.

But the bald fact remains that all too few in the financial world practice evidence-based investing. Take a good look at the alternatives and carefully consider how evidence-based your advice and your practice really are. Test and re-test your purported evidence for errors, holes and unsupported conclusions.

Investing successfully is really hard. Adding a client component makes it harder still. Even the best advisors are going to be wrong far more often than they would like.

If you want to do right by your clients, keep checking and re-checking your work, your assumptions and your conclusions. The evidence demands no less.

Carolina Crazy

Tonight Duke University and the University of North Carolina will play a basketball game on the Duke campus (ESPN, 8pm ET) and thus renew the best rivalry in all of sports. As ESPN reports, for the 78th time, both teams will be ranked while over the last 96 meetings, each team has won 48 games and scored exactly 7,437 points.

As a freshman, Jay Bilas (now of ESPN) lined up for a foul shot in his first rivalry game next to then All-American and future NBA All-Star Brad Daugherty (and also a current ESPN-er), who looked over at him and said, “I’m going to beat you like a rented mule.” Even so, that comment was astonishingly mild as these things go. Every Duke home game, irrespective of opponent, includes multiple iterations of a single chant cascading down from the rafters of venerable, old Cameron Indoor Stadium: “Go to hell, Carolina, go to hell! [Clap. clap].”

That’s about as close and as serious as it gets.

CraziesI first sat in Cameron as a student in 1978 and didn’t miss a home basketball game while I was enrolled at Duke. Every game was special – and wild. NBC came to Cameron to do the first national telecast from the arena on January 28, 1979 for a game against Marquette (I was there, of course) and insisted on a time-delay so the crowd could be censored if necessary. But Duke v. Carolina was and is something else entirely. The “Cameron Crazies” will be fired up tonight, of course. As legendary Hall of Fame Duke coach Mike Krzyzewski puts it, the game is a “national treasure.” Continue reading

2017 Investment Outlook

2016 brought many wild surprises. The biggest and most obvious is summed up perfectly in two words: President Trump. Donald J. Trump, despite no political or military experience, overcame long odds and became the 45th President of the United States in what many called the biggest upset in American political history.

Almost as surprising was that an avowed Socialist who had honeymooned in the Soviet Union – by choicenearly achieved a major party nomination for president. Indeed, without the fix having been put in by the Democratic establishment, he may well have won it. Across the pond, the United Kingdom shocked political experts and voted to leave the European Union.

In more prosaic matters, the Chicago Cubs won the World Series after 108 years of futility. After 111 years and 29 consecutive losses, Ireland beat World Cup champion New Zealand in rugby. LeBron James led the Cavaliers to the team’s first NBA championship and brought Cleveland its first championship of any sort in 52 years by upsetting the defending champion Golden State Warriors, who had the best regular season record in league history and who led the Finals series 3-1. In Great Britain, Leicester City came from out of nowhere to win the English Premier League championship despite preseason odds against them of an astounding 5000-to-1. And in perhaps the biggest surprise of all, the film Bridget Jones’s Baby made over $200 million.

From a markets perspective, 2016 started off dismally. In fact, it was the worst start to a year ever. Things looked so bad that many alleged experts were proclaiming doom and gloom, led by RBS urging clients to “sell everything” except high-quality bonds and warning of a “ fairly cataclysmic year ahead“ that “all looks similar to 2008.” Later, legendary bond manager Jeff Gundlach offered the same advice. “The artist Christopher Wool has a word painting, ‘Sell the house, sell the car, sell the kids.’ That’s exactly how I feel – sell everything. Nothing here looks good,” Gundlach said. “The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong.” Legendary investors Stan Druckenmiller, Bill Gross, George Soros, Jeremy Grantham and Carl Icahn (among many others1) were also prominent members of the “sell everything” club.

But they were all dead wrong. The markets in 2016 were much more mundane than most expected. By the time the calendar had turned from 2016 to 2017, from the time of the initial “sell everything” call, the S&P 500 was up more than 20 percent, emerging markets stocks were up more than 25 percent and oil was up nearly 60 percent. But before we look head to the future, we should review 2016 to make sure we understand the position we’re in.  Continue reading

Nice Press

Above the Market has gotten some very nice press of late, most of it of the “best of” variety. I am grateful for the honor and for the attention. Many other fine publications are included so I hope you’ll check out the links below.

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Hoping for a Regulatory Miracle

res-0117-coverThe newest issue of Research magazine in out and my column is now available online. I hope you’ll read the excerpt below and then give the entire piece, as well as the full issue, a careful read.

In a variety of contexts, the DOL has suggested that it doesn’t think this change to a fiduciary standard for retirement assets is all that big of a deal. And conceptually, it isn’t. It needn’t be a big deal to replace a suitability standard — whereby recommendations must be suitable but not necessarily in a client’s best interest — with a fiduciary standard.

The problem, Santa, is that the DOL, through 1,000-plus pages of regulatory requirements, set up a complex framework that must be followed whenever retirement asset investments are involved. This framework touches every aspect of the BD business and requires a complete overhaul of everything that happens therein: paperwork, systems, technology, operations, oversight and supervision, surveillance, training, compliance and more.

Every BD I’m familiar with has spent enormous amounts of time and money to try to comply with the new rule (which, again, isn’t altogether bad because advisors should be fiduciaries), but almost none of that spending relates directly to client care.

Hoping for a Regulatory Miracle