Everybody Plays the Fool (Sometimes)

Back when I was in high school, an R&B group called The Main Ingredient, fronted by Cuba Gooding, Sr., scored a big hit with Everybody Plays the Fool.

Everybody plays the fool (sometimes)
There’s no exception to the rule (listen, baby)
It may be factual, it may be cruel (I ain’t lyin’)
Everybody plays the fool

So, so true.

top10Everybody does play the fool at least sometimes, about love and money. So, in honor of April Fools’ Day, here is a helpful list of ways nearly all of us play the fool about money (sometimes). Remember, there’s no exception to the rule (listen, baby). Continue reading


The Halftime Report

Q4“To err is human,” wrote Seneca. “To persist in it is diabolical” (Errare humanum est, Perseverare diabolicum). As 2014 opened, pundits expected interest rates and stocks to go higher, with more certainty about the former than the latter. They also expected the economy finally to turn the corner after five years of sub-par performance. Now that the midway point to the year has been reached and stocks, bonds and commodities have all posted gains together for the first time since 1993, my ongoing and deeply held cynicism about forecasts and forecasters has yet again been confirmed. In other words, be leery about fighting the Fed, fade forecasts and be sure to diversify. Continue reading

The Relentless (for now) Bid

Reformed BrokerJosh 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.  Continue reading

Investment Learning from the Law

lawI went to law school on account of certain skills I possessed – some general academic talent, analytical and writing skills, the ability to marshal arguments, and very good standardized test-taking ability. But I didn’t really understand what attorneys did in any meaningful sense.  Indeed, I had never met one before enrolling in law school at Duke.

As it turned out, I became a pretty good attorney – my skill set was appropriate.  But I never liked it very much and I was better suited for this business.  I favor accommodation, collegiality and collaboration to conflict. I’m better at big picture trends and goals than I am at minute details. I prefer adding value to playing zero sum games. I have a much shorter attention span than the litigation process permits. So I now refer to myself often as a recovering attorney.

But my legal training has helped me in this business in a number of clearly definable ways. Indeed, law school provided a pretty good education for a budding investment professional. I outline five specific and interrelated investment lessons I’ve learned from my legal training and experience below.
Continue reading

Just Put the Ball in Play

On account of the success of Moneyball (both the book and the movie, nicely satirized here), baseball management is often compared to investment management, and with good reason. Moneyball focused on the 2002 season of the Oakland Athletics, a team with one of the smallest budgets in baseball.  At the time, the A’s had lost three of their star players to free agency because they could not afford to keep them.  A’s General Manager Billy Beane, armed with reams of performance and other statistical data, his interpretation of which was rejected by “traditional baseball men” (and also armed with three terrific young starting pitchers), assembled a team of seemingly undesirable players on the cheap that proceeded to win 103 games and the division title. 

Unfortunately, much of the analysis of Moneyball from an investment perspective is focused upon the idea of looking for cheap assets and outwitting the opposition in trading for those assets.  Instead, the crucial lesson of Moneyball relates to finding value via underappreciated assets (some assets are cheap for good reason) by way of a disciplined, data-driven process.  Instead of looking for players based upon subjective factors (a “five-tool guy,” for example) and who perform well according to traditional statistical measures (like RBIs and batting average, as opposed to on-base percentage and OPS, for example), Beane sought out players that he could obtain cheaply because their actual (statistically verifiable) value was greater than their generally perceived value. 

In some cases, the value difference is relatively small.  But compounded over a longer-term time horizon, small enhancements make a huge difference.  In a financial context, over 25 years, $100,000 at 5%, compounded daily, returns $349,004.42 while it returns nearly $100,000 more ($448,113.66) at 6%.

We live in a world that doesn’t appreciate value.  In the investment community, indexers are convinced that value doesn’t exist or can’t be reliably measured and most other would-be investors don’t have a good process for analyzing the data and are too focused on trading to recognize value when they see it.  While proper diversification across investments can mitigate risk and smooth returns within a portfolio, too much portfolio diversification (“protection against ignorance,” in Warren Buffett’s words) requires that value cannot be extracted. 

Similarly, behavioral finance shows how difficult it is for us to be able to ascertain value.  Our various foibles and biases make us susceptible to craving the next shiny object that comes into view and our emotions make it hard for us to trade successfully and extremely difficult to invest successfully over the longer-term.  Recency bias and confirmation bias – to name just two – conspire to inhibit our analysis and subdue investment performance.  Investing successfully is really hard.

To expand the idea (perhaps to the point of breaking), we must always resist the urge to trade – even a good trade – when investing makes more sense.  While I don’t mean to suggest that a one-off trip to Vegas for a week-end of fun can never be a good idea, too many trips like that can come between you and your goals and can thus be antithetical to a rewarding future.  My ongoing analysis of human nature suggests that we are not just subject to the whims of our emotions.  We are also meaning-makers, for whom long-term value (when achieved) can be fulfilling and empowering.  It simply (it is simple, but not easy) requires the process and the discipline to get there.  What we really need is not always what we expect or want at the time.

This point was driven home to me anew recently by the terrific movie, 50/50, written by Will Reiser about his ordeal with cancer.  As Sean Burns noted in Philadelphia Weekly, Reiser’s best friend was the kind of slovenly loudmouth that you’d usually find played in the movies by Seth Rogen, except that his best friend really was Seth Rogen.  Rogen’s fundamental, unexpected decency and supportive love grows more quietly moving as the film progresses.  Rogen was undervalued generally and his love and support provided great value to Reiser. 

As the cliché goes, nobody lies on his deathbed wishing he’d spent more time at the office.  We appreciate meaning and value more in the sometimes harsh reality of the rear-view mirror rather than in our mystical (and usually erroneous) projections into an unknown future.

All of which brings me back to baseball.  In today’s Grantland, Rany Jazayerli makes a persuasive case in his article, The MLB Prospect Bubble, that while teams once got great value by trading for minor league prospects, the landscape has changed such that prospects now tend to be over-valued. Note in particular his analysis of a recent trade involving Jarrod Parker (the prospect) and Trevor Cahill (the solid major leaguer), suggesting that in this instance Billy Beane got too cute by at least half:

Parker will probably rank somewhere around no. 30 when the Top Prospect lists are unveiled next spring. It will mark the fifth straight season that Parker ranked in the top 50 on Baseball America‘s list, which is itself a dubious distinction. But here’s the thing — in 2009, Cahill ranked no. 11. Cahill was judged to be a better prospect in his time than Parker is now, and Cahill has spent the last three seasons living up to expectations. How is it, then, that the A’s were willing to trade six years of Trevor Cahill for six years of Jarrod Parker?

It’s true that Parker’s ceiling is higher than Cahill’s, but if Parker were guaranteed to reach his ceiling, he wouldn’t be a prospect — he’d be a major league pitcher, probably an All-Star. Increasingly, teams have decided that they’d rather bet on that ceiling than take the guaranteed return.

Read that last line again: “Increasingly, teams have decided that they’d rather bet on that ceiling than take the guaranteed return.”

That’s a (a-hem) trade the I see all the time in the money management world because, after all, chicks dig the long-ball (oh the delightful irony): 


And it’s too bad.  Most investors would be well-served most of the time by resisting the urge to (over)swing for the fences in order simply to put the ball in play.  Reasonable returns together with loss mitigation is a powerful combination.  We should look for them, indeed value them, far more often.

Your “Elevator Speech”

Every money manager or investment adviser ought to have a good “elevator speech” — a quick, succinct summation of what you do and how (in business parlance) you add value.  The elevator speech, so named because it should last no longer than the average elevator ride, is far too important not to be carefully crafted and reviewed in light of how it’s working.  It even works as an attention-grabbing opening to a longer presentation.

Your elevator speech must also be tailored to the times and the markets.  During secular bull markets, the emphasis should be placed first on growth and return; during secular bear markets, the emphasis might shift to risk management, capital preservation, or even to specialized services such as retirement income planning or goal-based financial management. 

You wouldn’t think of not letting your general sales and marketing materials go stale, so why wouldn’t you tweak your elevator speech when conditions warrant?

In my experience, the “greatest generation” asked two primary questions about those with whom they were considering doing business: 

  • Do I like her (or him)?
  • Do I trust him (or her)?

As baby boomers become more and more of the target audience for financial services, an additional question is now being asked:

  • Does s/he know what /he is doing? 

In our current information rich environment, general platitudes about performance and service will increasingly be insufficient for the savvy prospect (and, since the savvy prospect is more likely to have substantial assets to manage, the savvy prospect should be a primary target).  The internet being what it is (for good and for ill), it is unreasonable to expect general claims about how good you are to go unchallenged.  With markets today being especially difficult and volatile, those challenges are likely to be more pronounced.  Making money in this environment is tough; acquiring money to manage is tough too.

As pointed out by The Wall Street Journal yesterday, few money managers outperform over a significant length of time. 

Over the past 15 years, only 42% of large-cap stock funds have beaten the S&P 500 (according to Morningstar and not accounting for survivorship bias).  Moreover, persistence is a problem too.  Just 12% of the large-cap funds that landed in the top 25% during 2001-2006 period also landed in the top 25% over the subsequent five years, according to S&P. And over the five years ended September 30, 2011, only 6% of all U.S. stock funds held onto a top-half ranking for five straight 12-month periods.

That should mean that your elevator speech must be crafted to deal with what the savvy prospect may know about how tough our job is.  Because if we’re going to be paid, we need to be prepared to earn our money.  That requires that we have a ready explanation for how we are different from the norm — in terms of performance, risk management and service (both the kind that is responsive, communicative and helpful and the kind that helps clients stick to a good plan when animal spirits attack).

Does your elevator speech include such elements?  I doubt it.  But it should.