“RoboAdvisor”

As with any other field, technological advances have had a tremendous impact on the Financial Services Industry over the past 20 years.  Machines and software are capable of doing so many things more efficiently and at a lower cost.  The rules for having a successful investment experience have not changed however.  You know what they are:

1.   Build a broadly diversified portfolio with an appropriate risk         tolerance.

2.   Minimize expenses including taxes.

3.   Stay disciplined.

Technology is a fantastic tool for investment advisors, and as a result we are seeing the emergence of what I call the “RoboAdvisor.”  When it comes to building portfolios and minimizing costs, the advantage of using a RoboAdvisor is obvious.  It makes it possible for investors to get a well-structured portfolio at a much lower cost.

But what about Rule #3, the need to stay disciplined?  Every investor is unique with regard to their personality and all the dynamic variables they deal with in their life.  I doubt we will see software anytime soon that will enable a RoboAdvisor to take control of an investor’s emotions.

Advisors know that keeping clients disciplined is by far the most difficult problem they face.  It’s when the market is “tanking,” that advisors earn their fee.  It can be a challenge, but the most successful and valuable advisors are the ones who have the “people skills” to keep their clients emotions under control.

This 5-year bull market has given disciplined investors a great return but as I have mentioned before, it may also have created a false sense of confidence regarding the ability to stay disciplined.  They may believe a RoboAdvisor meets all their investment needs.  But I have my doubts.  RoboAdvisors will not be conducting any “fire drills,”as I suggested back in July, and will certainly not be there to keep you from getting burned by a lack of discipline.

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Investor Stereotypes

Stereotypes are sometimes programmed into us and they often lead to actions that are harmful to all concerned.  I have always believed that having an open mind and not judging others based on their gender, race, religion, or sexual preference is not only morally correct, but it enables us to know one another as individuals.  Although we have a long way to go, I believe that as a society we have made a lot of progress regarding relationships with those who may not be just like us.

As a financial advisor, when developing an investment strategy for a new client, I would always begin by discerning the “client profile.”  Assets, income, dependents, age, risk tolerance etc. were the variables I would use to build their investment strategy.  The client’s race, religion, gender or sexual preference was irrelevant to their needs as an investor.

But the clever folks on Wall Street seem to think that reinforcing the stereotypes that segregate us can be used to make a buck.  According to an article in the New York Times last week, “firms are creating units to serve a variety of ethnic groups, races, genders, and members of the lesbian, gay, bisexual and transgender communities.”  As if the investment needs of each group are unique.  As I read the article, the marketing folks creating these strategies, mentioned, for example, that Chinese like to gamble so they need investments with more risk and African American’s supposedly prefer real estate rather than equities.  And they believe that each individual investor may prefer to work with their own kind.  Perhaps they are right, but for me there is a huge disconnect with what should be the role of an investment advisor, and that is to help individuals have a “successful” investment experience.

As I was writing this I realized that I have my own stereotype to deal with-“Wall Street Bankers.”  I can’t get past my belief that they will always put their own profits ahead of their clients’ interest and sell investors whatever they want, even if it’s not appropriate for them.  I have an open mind but unfortunately, “Wall Street” continues to reinforce this stereotype.

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I hope you had a great Thanksgiving!  It was very special for me as my daughter, Leslie, brought a new grandson into the world.  My portfolio is now rather skewed with four boys and only one girl but it works for me.

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AND——“WE’RE OFF!”

Next week, after the mid-term elections, we have the unofficial start of the 2016 Presidential Race (although numerous Presidential hopefuls have already begun “testing the waters,” traveling the country and watching the polls very closely).  For me, it’s a great time to be writing a blog because there will be no shortage of “subject matter” for the next 24 months.

Thanks to Hillary Clinton’s, big gaffe during her interview with Charlie Rose, “businesses do not create jobs,”  we are off to a great start.  The entire race looks a lot like a NASCAR race.  All the candidates are jockeying for the “poll position” that will give them an early lead.  Just as with the racing cars, it becomes a race of attrition, with the winner being in many ways, the last man or woman standing at the end.  NASCAR drivers have pit crews to get them back in the race when they have a malfunction or they need new tires, the politicians have their “spin control doctors” to get them back in the race when they make their inevitable gaffes.

Sometimes the damage from a crash or an engine malfunction is so great, that even the best pit crews, cannot get the driver back in the race.  It’s no different with politicians.  In the last presidential race Governor Perry, during a campaign debate, could only remember 2 of the 3 departments of the federal government he wanted to close down.  With that one gaffe, he was out, but now he’s back for this race wearing glasses, hoping to look more intelligent.  Sarah Palin was a virtual “gaffe fountain” which earned her my “Jerry Springer” award.

George W. Bush made so many gaffes he engendered the term “Bushisms.”  Joe Biden stated that the middle class had been “buried over the last 4 years.”  The problem was, this declaration was made at the end of the Obama administration’s first 4 years in office.  Al Gore made the ludicrous claim that he invented the “internet.”  But he recovered nicely with a simple power point presentation that won him a Nobel Prize.

Obviously, politicians from both parties continue to give us “well documented” evidence that we are not being led by our “best and brightest.”  Watching Hillary Clinton’s pit crew try to explain what Hillary was actually saying has been entertaining but it is also sad.  Her comment was so offensive that I have serious doubts about her completing very many laps in the coming race.  Even China and Russia came to the realization over the past century that businesses are more efficient at creating jobs than the government.

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“Where Have All The Flowers Gone”

For those of you too young to remember, this is the title of a song written in 1955 by Pete Seeger and made popular by the “Kingston Trio” and “Peter, Paul, and Mary” in the 60’s.  The question raised several times in the lyrics is: “When will they ever learn?”  (If you are not familiar with the song, I suggest you go to You-Tube and watch the music video.)

Why is all this relevant?  After all, this is not the 60’s.  But in some ways the situation in the Middle East today is not all that different than it was in Southeast Asia in the 60’s. (You know the history.)  We had to stop the plague of Communism before it could spread all the way south to Australia enslaving millions along the way.  It was called the “domino theory” whereby one nation after another would fall. They had to be stopped!

Now here is where I see similarities between the 60’s in Vietnam and the Middle East today.  In Vietnam it became obvious that most Vietnamese did not want us there.  The North Vietnamese wanted to reunify their country and the Viet Cong in South Vietnam wanted the Americans out.  Realizing just how much we were despised we came up with a program to “win the hearts and minds” of the Vietnamese.  Advisors known as the “Green Berets” were trained to work with the Vietnamese and to give them the ability to defeat the communist.  Billions (in todays dollars) were spent training the South Vietnamese and equipping them with the best weapons and lots of air support.  Yet almost 10 years later we beat a hasty retreat from Vietnam as the Viet Cong closed in on the capital, Saigon.  57,000 Americans lost their lives and many more were maimed for life.  In addition, several hundred thousand Vietnamese died.

Are you starting to see any similarities?  I took part in only one “joint operation” with the South Vietnamese and it was very evident that they did not have the same level of motivation as the enemy, why would they.  Their political leaders and the U.S. were asking them to fight against Vietnamese. And worse yet, what if they lost and the Viet Cong won.  Well that is exactly what happened and they paid the price after the Americans left.

Now to the Middle East 50 years later–after 10 years of training and spending billions to build an effective Iraqi Army they seem to be totally incapable of accomplishing anything against ISIS (a group that would make Hitler proud).  Our current Chairman of the Joint Chiefs claimed this past week, that the Iraqi army may need American advisors on the ground “to be all they can be!”  I wish he had been old to enough to experience how that strategy worked out in Vietnam.  He might have a different opinion.

So—“will we ever learn?”  There is no American solution to the problems in the Muslim world.  That is a very sad fact but it is still the truth.   And the sooner we acknowledge the truth and change our strategy, the better off we will be.

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Robert Shiller: “Yes You Can Time the Market”

I have spent the last 25 years of my life teaching investors to stay disciplined and those who have listened have had a very successful investment experience. But the belief in “market timing” just won’t go away.

Last month, in the Wall Street Journal, there was an article with the above title.  It began with a lot of evidence regarding the failure of market timing and the success experienced by those investors using a long-term “buy and hold” strategy.

The article then went on to claim that there may in fact be a “model” that can enable investors to beat a “buy and hold” strategy.  Most “market timers,” “chartist,” etc. have very little credibility with investors because their failure to time the market successfully is well documented.  They begin with a model that tells them when to get in and out of the market.  (Something every investor would love to know.)  They fit their model to the past performance of the market to show how well an investor would have done, had they followed the model in the past.  But the problem is this; the past is not the future when it comes to investing.

It’s a dynamic world we live in and the pace of change is increasing rapidly.  To look at past market moves and various accounting ratios etc. to predict the future moves in the market is risky, if not dangerous.  History does not always repeat itself.

The Wall Street Journal article was of course talking about Robert Shiller’s “market timing” model.  Just last week, Shiller wrote a piece for the New York times stating how dangerous the market is today according to his model.

Shiller has a lot more credibility than most market timers because he recently won a Nobel Prize in economics and he teaches finance a Yale University.  In my opinion, that is what makes him dangerous.  Investors may believe they have found the “Lebron James of Investing” and follow his advice.

I am always skeptical when someone claims to be able to do something no one else has been able to do.  Especially when it comes to investing.  I then ask a simple question.  If Shiller’s “market timing” model works, why isn’t he a very wealthy man?  Maybe we should call this the “Jim Cramer Test.”

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The “E Booyah Virus!”

You are no doubt aware of the outbreak of the deadly Ebola Virus in Africa that has claimed the lives of over 1,000 victims and the mere presence of this Virus is causing untold economic hardship for those being quarantined to contain the Virus.  It is truly a tragedy for all concerned and we should remember them in our prayers.

The Virus I want to warn you about, I call the “E Booyah Virus.”  It’s a financial virus that has the potential to cause serious damage to your “financial health.”  In case you don’t recognize the name of this Virus, it is the infectious investment advice spewed by Jim Cramer on CNBC, in his newsletter, his investment guides and his daily emails to investors called “Daily Booyah!”

If you “Google” him, you will find that many others have looked at his advice, tracked the returns, and demonstrated that the only one, making money consistently, is Jim.  And I think that’s “Bull Yah!”  You don’t need to track all his recommendations year by year to prove that it is “Bull Yah,” you only need to look at Cramer’s own claims of success.

For the 14 years ending in 1991, he ran a hedge fund claiming an average annual return of 24% (while taking home $10 million a year as compensation.)  Let’s assume that being a smart guy, thinking about his future, he saved 10% of his compensation each year.  (That’s $1 million a year earning 24% a year.)  Fourteen years later (1991), he would have had a nest egg of over $80 million.

Now let’s assume that beginning in 1991 he consumed (spent) all future earnings from CNBC, investment guides etc. etc. Why? He already had a nest egg of $80 million set aside. He boast about his great hedge fund returns so lets assume he has been earning an average of 24% annually (the number he uses to advertise his stock picking skill) on his “nest egg.”  His “nest egg” should be worth well over a billion dollars. But Jim claims that his net worth is between $50-$100 million. The numbers just “don’t add up.”  Looks to me like he has suffered some big time losses along the way. He would have been a lot better off investing his “nest egg” in an S&P 500 index fund which would have given him a net worth in excess of $300 million.

Vaccinating yourself from the “E Booyah Virus” is easy.   Diversify, using passively managed, low cost, index type portfolios and stay disciplined. You will then be immune to the Virus.

Note 1:  Jim will sell you a copy of his current portfolio for $199.95

Note 2:  If you want to follow, I plan to start “tweeting” @wheelerwrites

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When Did We Lose Our Moral Compass?

I would love to have feedback on the words I am about to write. Our country has never had totally pure motives when dealing with other countries or even our own citizens. However, I have always been able to rationalize our actions by telling myself, at least our “code of morality” is no worse than that of any other country, but I am starting to have serious doubts and it’s very troubling.

You are no doubt familiar with the drone attack, ordered by President Obama, to take out Anwar al-Awlaki in Yemen. Al-Awlaki was an American citizen who had moved to Yemen and was advocating terrorist attacks on the U.S. and U.S. citizens. Being a threat to America, his voice was silenced once and for all with the drone attack.

When this attack was reported in the news, the debate began over whether or not the President had the Constitutional authority to order the execution of a U.S. citizen without any “due process” as required by law. That debate continues but it is likely that nothing will come of it. I am not a lawyer and feel unqualified to question the legality of the President’s action against a self-described enemy of this country. But debating the legality of this attack is missing a bigger issue regarding what our government did in Yemen.

Al-Awlaki’s 16 year-old son, an American citizen, who had moved from Denver to Yemen to live with his cousins was targeted two weeks later and killed along with four of his relatives while having dinner 250 miles away. Why? Roger Gibbs, former White House Press Secretary, suggested the boy would not have been murdered if he had a more responsible father.

For me, this is not a “constitutional issue” but a “moral issue.” Evidently the President expressed regret about what happened to the son, but no one is being held accountable. You might think that as the world’s only super power we would have the opportunity to show not just our military might, but to also show moral leadership. Unfortunately we seem to be headed in the opposite direction.

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