Saving Investors From Themselves

JasonZweigColumnBugJason Zweig is the personal finance columnist for The Wall Street Journal.  His columns appear in the week-end edition of the Journal and are always well worth reading.  Last week he deservedly (if tardily) won a Gerald Loeb Award, the most prestigious in business journalism. But instead of my telling you that Jason is great, I suggest you merely read his most recent column.

Res ipsa loquitur

Here’s a taste.

I was once asked, at a journalism conference, how I defined my job. I said: My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.

That’s because good advice rarely changes, while markets change constantly. The temptation to pander is almost irresistible. And while people need good advice, what they want is advice that sounds good.

The advice that sounds the best in the short run is always the most dangerous in the long run. Everyone wants the secret, the key, the roadmap to the primrose path that leads to El Dorado: the magical low-risk, high-return investment that can double your money in no time. Everyone wants to chase the returns of whatever has been hottest and to shun whatever has gone cold. Most financial journalism, like most of Wall Street itself, is dedicated to a basic principle of marketing: When the ducks quack, feed ‘em.

Read it all.  Please.  As usual, it’s terrific.  It will be the best thing you read today, this week or this month.

Congratulations, Jason.  I am proud to call you my friend.


Financial Products are Sold, Not Bought

Critics of the financial services industry (often with good reason) frequently remind consumers that financial products are typically “sold” rather than “bought” and implore them not to fall into that trap.  The concept here is that financial products are “sold” — pushed upon a consuming public that doesn’t understand them or perhaps even want or need them.  Instead, the alleged basis for their continued vibrancy and ongoing sales is that advisors get paid big bucks to sell them. 

As I have argued before, it is imperative for consumers to remember the interests of advisors they may be working with and — carefully!— to check their work and analysis.  We tend to think of the sales process as about convincing or even pressuring a mark into buying what they don’t want or need.  Too often it is that.  Far too many advisors do not look out for their clients’ best interests and all of them have an interest in gathering and gaining new clients.  But the idea that because people don’t naturally flock to buy something on their own means that it’s dangerous and bad simply doesn’t hold up. 

What is good for you and things that have enduring and intrinsic value are sometimes a tough sell.  But they are still good and good for you. On the other hand, we often crave what’s bad for us.  Parents have a tough time selling healthy food to their kids (and a tough time following their own advice).  Local symphonies are struggling  to stay afloat while Justin Beiber could support several many times over.  And  porn is a multi-billion dollar business. Sometimes the stuff we want would be better avoided and the really good stuff needs to be sold. If you don’t believe me, will you believe Steve Jobs

“A lot of times, people don’t know what they want until you show it to them.”

This doesn’t mean, of course, that businesses should not listen to their customers or that advisors should not listen to their clients.  In the financial world, not listening to clients is a huge problem.  Too much financial “advice” is about pitching what the salesman wants to sell rather than listening for and to a client’s dreams, aspirations, goals, circumstances and problems and then going about creating a way to get where they want and/or need to go.  Sometimes that advice won’t be what the client wants to hear.  Sometimes it will include an approach that the client had never considered.  Sometimes it will need to be sold.

Ultimately, a financial advisor’s job is to provide clients what they need — not just what they want.  There are plenty of “advisors” who will give their clients what they want.  Sometimes doing what’s best for them — providing them with what they truly need — takes a great sales job (and that’s not a bad thing at all).

Listen In

I was part of a BrightTALK/Morningstar conference panel on alternative investments yesterday (July 25) as part of their Investment Summit, an online event designed for financial advisors to gain insights from industry thought leaders on investing in a volatile market and to continue conversations initiated at the 2012 Morningstar Investment Conference. You may listen to a replay here.  I hope you will listen in.

Web Conference Today

I will be presenting as part of a BrightTALK/Morningstar conference panel on alternative investments at noon ET/9 am PT today (July 25) as part of their Investment Summit, an online event designed for financial advisors to gain insights from industry thought leaders on investing in a volatile market and to continue conversations initiated at the 2012 Morningstar Investment Conference. I hope you will participate. There will be a replay available.

Save the Date

I will be presenting as part of a BrighTALK/Morningstar conference panel on alternative investments next week (July 25) as part of their Investment Summit, an online event designed for financial advisors to gain insights from industry thought leaders on investing in a volatile market and to continue conversations initiated at the 2012 Morningstar Investment Conference. I hope you will participate.

The Boat in the Desert

On a very hot day  — well over 100 degrees — not too long ago my much-better-half and I were driving in the Mojave Desert here in California (I’m sure we had a good reason at the time) when we came across a truck carrying a family and towing a motorboat down the interstate.  It was a striking and memorable picture because water (even a puddle) wasn’t anywhere close by and because the boat was framed in our vision by sand and tumbleweed.  It looked something like this (except that the boat was much bigger):

I immediately thought that the image was a forlorn one.  But, as usual, my DW had a far better take.  She saw it as a powerful message of hope. 

Only someone who hoped for something better would be pulling a big ski-boat through the Mojave.  Perhaps more importantly, it suggests a plan — they were headed somewhere.  They weren’t sitting around waiting for water and refreshment what weren’t likely to come.

Finally, it illustrates hope and a plan with an intentional objective.  They were headed somewhere specific to launch that boat and have some fun. 

Whether it’s with respect to investing or in life, we tend to head nowhere or, at best, toward some general, unspecific somewhere. As Lewis Carroll famously put it:

“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to,” said the Cat.
“I don’t much care where–” said Alice.
“Then it doesn’t matter which way you go,” said the Cat.
“–so long as I get SOMEWHERE,” Alice added as an explanation.
“Oh, you’re sure to do that,” said the Cat, “if you only walk long enough.”
(Alice’s Adventures in Wonderland, Chapter 6)

So, wherever you are relative to where you’d like to get, here’s to hope, a plan, and a specific set of objectives, in investing and in life.

Safety Not Guaranteed

I haven’t seen it yet, I love the conceit behind the indie film Safety Not Guaranteed, which has opened to excellent reviews.  The words of the title are found in a mysterious classified ad in a local paper seeking a partner for time travel.  The ad also states that applicants will need their own weapons and, ominously, “safety not guaranteed.”

That’s a pretty good metaphor for investing and for life in general.

We know from behavioral research that we are highly risk-averse — we feel loss more than two times as strongly as we feel comparable gain.  We crave safety.  But safety can never be completely guaranteed.

In investing, safety is never guaranteed.  Indeed, risk and reward are negatively correlated generally.  On the other had, by taking insufficient investment risk (in the sense of our potential to lose money), we  run the (somewhat different) risks of not meeting our goals, of not being able to live as well in retirement as we would like, or of not leaving the legacy we desire.  

When we come at things from a different angle, it’s easy to recognize that even if/when we have it, safety is not enough. We need more than safety and provision.  We need meaning. As Steve Jobs pointed out in his famous Stanford commencement address

“Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma – which is living with the results of other people’s thinking. Don’t let the noise of other’s opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.”

It is easy to be paralyzed by risk — to fail to make the trade, or decide not to go with the start-up, or not to have the guts to ask the girl out. These failings don’t make us or keep us safe.  Safety is never guaranteed.  Life (like investing) isn’t tame anymore than Aslan the great lion in the Narnia stories is tame. 

When Lucy inquires about Aslan (in The Lion, the Witch and the Wardrobe), “Is he—quite safe?,” Mr. Beaver offers this penetrating reply:

“Safe? …Who said anything about safe? ‘Course he isn’t safe. But he’s good.”

Investing, like life and Aslan, isn’t remotely safe — safety not guaranteed.  But it’s good (and necessary too).

No Vacancy (Chain)

Regular reader (and Kindle Kontest winner) Sachin Darji pointed me to this short piece in the current issue of Scientific American by Stony Brook Professor Ivan Chase about hermit crabs and “vacancy chains.”  It seems that when these crabs find a better shell with which to protect themselves, they will discard their old ones and take over the better one.  After that happens, another crab can “move up” to the discarded (but better) shell and the process continues indefinitely. This phenomenon is called a “vacancy chain” by scientists.  It is “an organized method of exchanging resources in which every individual benefits by claiming a more desirable possession abandoned by another individual.”

As I pointed out last week (here), we Boomers are “increasingly postponing retirement and thus crowding out opportunities for the younger generation.  Our reasons include our poor savings records, a lousy economy, an ugly stock market, home values still in the tank and even self-actualization.  And to be fair, net household wealth in the U.S. is still down more than 10% from its pre-recession peak.” As Sachin describes it, Gen X-ers have arrived on the scene like post-Gold Rush settlers only to discover that all of the land, opportunities and jobs have been taken by those who arrived before and who have no intention of making room for more.  History has not been kind to those who arrive late.

In other words, we aren’t allowing the vacancy chain to work for our kids.

To a degree, everyone is responsible for making his or her own luck and opportunities, but doing so is a whole lot easier with a tailwind than with the current headwinds. It’s tragic that our kids see so many “No Vacancy” signs when they try to occupy a better position to improve their lives and their futures.

Investment Purposes and the Padres

When I work with individual investors, I am often asked questions like, “What should I invest in?” It is good and even admirable that such a question is asked.  Investing is that important.

But there are other important questions that must be dealt with first.  These questions relate to matters of risk and risk capacity, psychology (and risk tolerance), expectations, time horizon and need. But the first question — a question sometimes even overlooked by professionals — is the objective of your investment.

Your objectives will (or should) determine nearly every action you make with respect to finance. It is imperative that you determine the reason for each investment first and foremost. What is the investment intended for? What do you wish to achieve in making such an investment? Is it for retirement, the future education needs of your children or grandchildren, the purchase of another asset (such as a home), some general fund, or another purpose? Knowing what your objectives are will help you to make appropriate choices.

I have caught myself ruminating on this question a lot since it was announced last week that three candidates have been selected in the bidding to purchase my hometown San Diego Padres.  These prospects include groups led by Peter O’Malley, former long-time owner of the hated Dodgers, whose group includes local golf star Phil Mickelson, Steve Cohen, the multi-billionaire hedge fund investor who was one of three finalists bidding for the Dodgers before their recent sale, and movie mogul Thomas Tull, whose Legendary Pictures has produced such box-office successes as “Batman Begins,” “The Hangover,” “300,” “The Dark Night” and “Inception.” Tull has partnered with Mr. Padre (and the nicest guy in San Diego based upon my encounters with him), Hall-of-Famer Tony Gwynn.

The sale price is expected to be significant in light of the recent sale of the Dodgers for an amount in excess of $2 billion and the team’s new $1.2 billion television broadcast deal with Fox that includes a share in a new regional sports network, even though my cable company (Time Warner Cable) hasn’t yet seen fit to make it available to me as part of my premium — and very expensive — cable package.

Based solely upon local chatter, Tull seems to be the early fan favorite, in no small measure due to Gwynn’s involvement. As for me, I have no opinion on the matter, at least until I get an understanding of each investor’s investment objective in buying the Padres.  Any prospective purchaser out to maximize investment return will not have my support.

Let me explain.

The current business model for Major League Baseball makes no sense.  Unlike (for example) the NFL, baseball has very limited revenue sharing, which means that the Padres cannot hope to compete financially or consistently with “big-boy” teams like the Dodgers and Yankees.  It’s great that the Padres’ new TV contract is worth $1.2 billion, but the Dodgers’ will be worth more like $4 billion.  The Padres can hope to contend by being smart, building a strong farm system to capture good talent early (before it becomes unaffordable), focusing on unique attributes (pitcher-friendly Petco Park, for example), and being lucky (unlike this season, with 13 Padres on the disabled list), as luck always plays a part in athletic success. But they simply cannot expect to contend all the time, despite my hopes to the contrary. Their margin for error is much too small (they can’t buy their way out of mistakes).

Many fans don’t understand this reality or forget it in the midst of a disappointing season.  But it is unreasonable to expect a sports team owner, even a very rich owner, to keep losing lots of money.  Moreover, the local public has a fair amount of distrust for current ownership on account of the perception in many circles that more was promised in the way of investment into the team in order to obtain public financing for Petco Park than was ultimately delivered. While I believe the current management is on the right track (despite this season’s results), new ownership is surely needed.

However, since the Pittsburgh Pirates have already demonstrated that losing can be very profitable, I want to be certain of a prospective new owner’s intentions before I offer my support (not that it’s needed or even desired).  As David Berri, president of the North American Association of Sports Economists, notes, “Teams have a choice. They can seek to maximize winning, what the Yankees do, or you can be the Pirates and make as much money as you can in your market. The Pirates aren’t trying to win.”

Since there is a clear limit to the revenue small-market teams can produce (despite the increasing value of TV deals), spending more to win can significantly impair profitability. Stanford Economist Roger Noll explains: “Probably the Pirates would be less profitable if they tried to improve the team substantially.”

Clubs higher up the food chain have more revenue opportunities — more upside potential — making winning both easier and more profitable. Simply put, I don’t want the owner of the Padres looking to maximize profit on his investment. I want a commitment to trying to win and trying to win consistently. I don’t expect the Padres owner to lose money and to keep losing money in order to win, but I don’t want profit maximization either.

Looked at within the context of investment objectives, not seeking to maximize profit is not as counterintuitive as some might think.  Other, perfectly appropriate investment objectives can support good baseball in San Diego (which I define as being consistently competitive with occasional opportunities to win a World Series, the most for which I think we can reasonably hope).  These include ego (think Dallas Mavericks owner Mark Cuban). Mark has plenty of money and is more than willing to part with some of it in the interest of winning so as to support his ego (which I do not disparage and which this picture exemplifies beautifully). Both Cohen and Tull could fit into this category.

Another investment objective I could get behind is legacy. No matter how much money one makes or even how much money one gives away, the connection between sports teams and their communities provides unique opportunities for owners to make (or redeem) and leave a lasting legacy.  Bob Kraft has demonstrated that a sports team can balance to goals of winning and financial success; be is and will, I suspect, always be beloved in New England for what he has done with and for the Patriots.  The Irsay family was reviled in Baltimore for backing up the moving trucks in the middle of the night, but has built an extremely positive legacy in Indianapolis with the Colts (at least in part due to the differences between former owner and father Robert and his son Jim, the current owner). 

Such a legacy can be extremely valuable, if not monetarily.  O’Malley might fit well into this category, since he has been extremely critical of subsequent Dodgers owners. I’m concerned, however, that he won’t have the capital necessary to compete, as his family said they sold the Dodgers nearly 15 years ago because they could no longer afford the baseball business. Any financial pressure would provide an incentive to maximize profit, even if/when doing so is a detriment to good baseball.  Of course, the investment business and the movie business are both highly volatile, so we will have to bear some risk with any of the current ownership prospects.

I am convinced that the Padres need new ownership.  The current owner wants to sell.  Some people with serious money want to buy.  I am thus cautiously optimistic about the future of good baseball in San Diego.  But I wish all potential candidates to buy the team would make their investment objectives clear as I want and expect a serious commitment to good baseball in San Diego. 

Even more, I wish there were a way that we could hold them to the assurances I fully expect they would make.