The Relentless (for now) Bid

Josh Brown has an interesting piece up this morning in which he outlines the dramatic shift within the investment industry from commission-based (suitability standard) selling to fee-based (fiduciary standard) management and uses that data as an explanation for the tremendous underlying bid seen in the equity markets of late. “It’s amazing that almost no one has connected these dots before.”

It’s not that I entirely disagree with Josh here (and we don’t disagree often). He is on to something noteworthy. But it’s a story I’ve heard before. Those dots have been connected, with a less-than-stellar outcome. 

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Worth Reading

Today I offer four fantastic articles for your careful examination, perhaps over the week-end. All are worth your time and attention. 

I’ve seen complexity fail over multiple investment cycles in these types of portfolios, but as Keynes told us, “Worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally.” Somehow simplicity has become the exception while complexity is now the rule.

I believe that meeting long-term spending needs for institutional portfolios and controlling risk can be accomplished through simplicity.  That’s not to say that it’s easy, just less complex.  A complicated portfolio relies on the hope of being smarter than your investing peers and the markets while taking on added risks.  We all know hope is not an investment strategy.

Confessions of an Institutional Investor (via Josh Brown)

The world of investing is infinitely complex. It feels like we need complex strategies to generate returns. The problem is that as Adams says complicated systems are more likely to lead to “opportunities for failure.” We cannot control what the markets do. We can however control our own actions. For the vast majority of investors a simple system that we can follow over time will in all likelihood lead to better outcomes.

Simplify your investing to avoid ‘opportunities for failure’ (from Tadas Viskanta)

How many people here think that this bull market, wonderful as it is, is built on a foundation of robust and impressive macroeconomic growth and policy choices that are laying a foundation for impressive growth in the years that lie ahead? And how many think that it’s [built on the Federal Reserve’s] printing press? I prefer to play in markets that are priced attractively, priced to offer strong, long-term returns, not ones that are expensive.

Where should you put your money now? From Rob Arnott and others (via Fortune)

Modern day investment management resembles, sadly, another old profession – and I’m not thinking of the oldest one, although there may be parallels there as well. Rather, I’m thinking of ancient alchemy with its near constant promises to turn lead into gold, just as investment managers repeatedly offer to transform low returns into high returns. This raises the question as to why investors/people keep falling for the stories offered up by investment managers/alchemists.

No Silver Bullets in Investing (just old snake oil in new bottles) (from the wonderful James Montier)

Something Wicked This Way Comes

As my firm’s Chief Investment Officer, it’s my role (among other things) to provide thought leadership for the organization and its representatives – to outline and explain best practices and approaches with respect to the markets and investing.  Most fundamentally, if metaphorically, my job means standing up and pointing in the right direction.

I have been thinking a lot lately about how to do that more effectively, and the issue was highlighted for me anew yesterday during the outstanding Big Picture Conference here in New York City, hosted by Barry Ritholtz and Josh Brown. As part of the conference, Josh hosted a panel of Chief Investment Strategists: Dan Greenhaus of BTIG, Art Hogan of Lazard and Jeff Kleintop of LPL. All three were intelligent, engaging and very well-informed. Dan’s bio says he “is charged with evaluating both domestic and global macro trends as well as formulating top down investment strategies for clients.” That’s consistent with the way the role is typically conceived. As he put it on the panel, his job is to tell his clients what’s going to happen next. Of course, strategists do what they do for a much wider audience than that, as all are providing opinions regularly across media platforms, including television and radio financial news. They’re out to build their firm’s brand, and their own brand too.

Josh led the three of them on a brisk tour of the world markets.  They talked about macro risks and opportunities – what they think the immediate future has in store. And they were very good at it, impressively weaving together stories, themes and data into a powerful package of possibilities. It was wonderfully entertaining and even plausible. Some bits of it may even turn out to be accurate.

But my thumbs kept twitching (“pricking” in the Bard’s turn of phrase) throughout. Josh hinted at the inherent problem with the approach each took, suggesting that such moment-by-moment commentary and reaction is effectively meaningless.  I’d take Josh’s point one step further and call it wicked.

What Trade Hurts the Most People?

Back in my trading days, we often played What If?, a game that took a real or supposed major event and called on the players to postulate what would happen and, more importantly, what trade should be made in response. In his brilliant and acerbically funny book, Liar’s Poker, Michael Lewis describes playing What If? in light of the Chernobyl disaster and thinking “Buy oil” before being one-upped with “Buy potatoes.” It’s a terrific training exercise, requiring quick and multi-layered thinking. 

An off-shoot of What If? is to ask “What trade hurts the most people,” especially when the market seemed like a one-way street.  The idea is not that what seems highly unlikely is necessarily going to happen.  Rather, the idea is that when seemingly everyone is racing in one direction, the opposite is much more likely than appreciated and, if and when it does occur, it can do major damage for those who are 180 degrees wrong. 

When I was in New York recently, Josh Brown and I were asking that off-shoot question and agreed on the answer.  The trade that hurts the most people is the market continuing to grind higher.

Confessions of an Institutional Investor

My friend Josh Brown (The Reformed Broker) just published an interesting piece, Confessions of an Institutional Investor. Here’s a taste.

“I’ve seen complexity fail over multiple investment cycles in these types of portfolios, but as Keynes told us, ‘Worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally.’  Somehow simplicity has become the exception while complexity is now the rule.

“I believe that meeting long-term spending needs for institutional portfolios and controlling risk can be accomplished through simplicity.  That’s not to say that it’s easy, just less complex.  A complicated portfolio relies on the hope of being smarter than your investing peers and the markets while taking on added risks.  We all know hope is not an investment strategy.”

Josh concludes by asking, “What do you think?” I’m glad he asked.  What I think is linked below.

• Is the Yale Model Past It?
• The Active Management Challenge

Financial Advice: A Top Ten List

Yesterday, while I was otherwise engaged, Josh Brown threw some fuel on the active v. passive fire:

“Active investors, in the meantime, really can’t say anything. There isn’t a single empirical datapoint backing up the idea that an investor is financially better off paying someone to pick their stocks for them. There are other considerations in favor of active managers – mostly emotional ones involving elbow-rubbing, fancy lunches and alerts – but we’ll leave those aside for now.”

Putting aside the actual substantive argument (my views, including why I advocate some active management, are here and here), advisors routinely tell me that if they used index funds, their clients wouldn’t need their services, consistent with the Dilbert cartoon above.  I disagree vehemently.  Here’s my top ten list of reasons why.

Dread, Foreboding and Fear

My late mother always used to say that the anticipation of Christmas was a major part of its allure.  C.S. Lewis capitalized on that truth in The Lion, the Witch and the Wardrobe by making the White Witch’s evil spell on Narnia mean that it was “always winter, but never Christmas.”  Heinz used the power of our anticipatory feelings to its advantage in the following commercial (using Carly Simon’s classic song – you can view a rare Simon live performance of it here).  Even though it’s just ketchup, albeit very s-l-o-w ketchup, it works.

Anticipation has a negative counterpart, of course.  It’s dread – the feeling that you know something isn’t quite right, you fear it’s bad (and maybe really bad), but you still aren’t quite sure what will happen or how it will happen.  Terror seems on the way.  Horror is possible, even likely.  But, for now, all we have is a foreboding dread.

Does that feel familiar?

Thanks, Josh

Josh Brown has a fine post up today focusing on the great need for investing advice and how most of what purports to be financial media is quickly stale and not all that helpful to the great bulk of people.  I commend it.  I also appreciate the kind words Josh offers about me.  Thanks, Josh.

I have been away on a speaking trip (Tom Brakke — who also got kind words from Josh — and I both spoke today in Arizona at the same event), but will have some new material up shortly.

Financial Media Wake-Up Call: The Big Disconnect

Beware of market forecasting silly season

My latest at MarketWatch (and as I type this, it’s trending as a top story there):

Beware of market forecasting silly season

Here’s a taste:

We are now head-long into what my friend Josh Brown calls the ” silly season of forecasts .” Individuals and firms are talking about how they expect the economy and the markets to perform in 2013. Those outlooks can be helpful exercises and provide excellent food for thought. They can also be fun and entertaining.

Just don’t take them too seriously.

Side Street

Josh Brown and The Street have teamed up to create Side Street, a platform for them to highlight and feature what they think are the best blogs in the industry.  I am honored and extremely pleased to have been selected to participate.  My first Side Street posting is available here.

Thank you, Josh and to The Street for this terrific opportunity.  Long may it continue.