Category Archives: Investors

I wasn’t planning to write about discipline and diversification again but an article in Bloomberg Businessweek over the weekend caught my eye.  The article (Investor, Heal Thyself) is about CalPERS, America’s largest public pension fund, and how the fund’s total value is back to pre-recession levels.  And how was this accomplished?   According to Joseph Dear, CalPERS Chief Investment Officer, it was “discipline.”  “We believed the markets were going to come back and we held our allocation.”

Give Joseph and his staff the credit they deserve for staying focused on the long-term.  And according to this article, their returns were almost as good as the S&P 500.  So I was thinking, “How many investment professionals does it take to earn the returns of the S&P 500?”  Maybe one part-timer!

Good investment professionals (and you know CalPERS can afford the best) know how important it is to remain disciplined.  What they also know is the benefit of simple “passive strategies.”  But unfortunately for them, it’s a job killer.  Don’t expect that to change any time soon.

But you don’t have to worry about that.  You can get the benefits of both discipline and passive management without anyone losing their job.  (Well maybe your broker/financial consultant.)

It always amazes me how difficult it is to convince people, even while showing them overwhelming evidence supporting this simple strategy.  Years ago an advisor attending one of our London conferences gave me a quote from Leo Tolstoy that helps explain the challenge.  I am passing it along to you.

“I know that most men, including those at ease with problems of the greatest complexity, can seldom accept even the simplest and most obvious truths if it would oblige them to admit the falsity of conclusions with which they have delighted in explaining to colleagues, proudly taught to others, and which they have woven, thread by thread, into the fabric of their lives.”

I call it the “foolish ego!”  But isn’t it nice to know you can do just as well, if not better, than CalPERS with your investment portfolio just by getting your ego and the egos of others out of the process.

Note:  A great quote from Tolstoy that would never survive in our Twitter World.

But the lessons learned can be very expensive.  As you could see from my last post, the performance of the stock market over the past five years created a huge opportunity for investors.  Sadly for many people the opportunity was missed as the market “took them to school.”  Perhaps this time the lesson has been learned, that discipline is fundamental to successful investing.

This is not the first time, (nor will it be the last), when the “market” gives us all the chance to learn.  When I began my practice in the late 80’s I had the “crash of 87,” (and recovery) as a clear example of the need for discipline.  Near the end of the Century, the bursting of the “tech bubble” drove home the message that you must stay well diversified.

And now we have the best example (lesson) yet, showing us not only the need to be disciplined but that investing requires a long-term perspective.  A lot of investors and advisors may not have memories regarding the “crash of 87” and even the huge losses in tech stocks 12 years ago seems to have been a lesson “not learned” by many.  But the current lesson is hard to ignore.

I promised to provide a simple example for the under 55 gang showing how costly this last lesson may have been.  Two investors:

Both investors had $1,000,000 at the beginning of 2008 and both were planning on investing $50,000 at the end of each coming year.

With the “market” down 38.5% by the end of the year, Investor A decided to get out of the market and move to cash and like so many others, waited to get back in the market at the end of 2012.  Investor A continued to save $50,000 a year and kept all the money safe in “cash.”

Investor B stayed in the market and continued to put $50,000 in the “market” at the end of each year.

Here are the results as of the end of 2012:

$400,000.00!  THAT’S PAINFUL!  You can do you own analysis but you will obviously come to the same conclusion.  Investing is about sticking to the fundamentals and not making mistakes.

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Yes—and so was yesterday, and the day before that, and the day before that, and so on—you get the idea.  If you have money you will not need over the next five years, you believe in capitalism and you are saving for your future, you should invest now.  And more importantly, you should have been investing all along the way.  Looking at the performance of the stock market over the past 5 years you immediately see what I am talking about.

Using the S&P 500 to measure stock market performance look at the performance over the past 5 years.  Now, guess when far too many investors choose to sell or buy.  (Referring to these people as investors is a bit of a stretch for me.)  If you were smart, investing (saving) on a periodic basis, you can see how well you would have done.

Last year there were more redemptions than purchases of equity mutual funds even though the S&P 500 was up more than 13%.  Looking back, there were not a lot of bullish forecasts from the so-called “experts.”  But now we are seeing numerous articles declaring that “now is the time to get back in the market.”  As a result, we are seeing record purchases of equity mutual funds this month.  When investors declare they are waiting for “things to be clearer” it’s like betting on your favorite team when they are up by 3 touchdowns at halftime.  The only difference is that if you were coaching the team, you would not get to carry that 3 touchdown lead in to the second half.  You would be starting with zero points on the board.  Makes no sense to me, but that is exactly the behavior we see all to often with people saving for their future.

My advice, it’s time to take responsibility for yourself and stop listening to all the peddlers of financial products.  Their self-interest is not aligned with yours, and the sooner you realize that the more successful you will be as an “investor.”

Next I will tell you why this market over the past 10 years created a huge opportunity for the under 55 crowd.  You may have missed it, but with a little courage and common sense you won’t be left behind next time.

Among professionals in the Financial Services Industry, Doctors are known for their lack of success as investors.  While Doctors are probably brighter than the average investor, their lack of success is attributable to the non-existent courses regarding personal finance as part of their curriculum.  My friend and former client, Dr. Michael Chapman, led the Orthopedic Department at the U.C. Davis School of Medicine, and before his retirement he often spoke of the need for such an addition to their curriculum.  Michael would often ask me to hold an informal class on the fundamentals of investing for those in residency at the School.

Educational institutions training professionals in other fields have had gaping holes in their curriculum as well.  But unlike the Doctor making bad investments, the lack of a complete curriculum for Business School students has created an environment that has all of us living on the edge of a financial cliff.

And the class not required–“Ethics and Responsibility 101.”  Unless you’ve been away on a 20-year wilderness safari or have an insatiable appetite for reality TV, you have witnessed (and been the victim of) ill-conceived business models, illegal scams, and irresponsible speculation with OPM.

And sadly, it’s all driven by some of the best and brightest graduates from our leading Business Schools.  Whatever role bankers played in the near collapse of the financial system in 2008, it would appear that nothing much has changed four years later.

Just this past year alone, we have had startling examples of the irresponsible (and perhaps dishonest) behavior of some of the most talented bankers in the world.  Whether it’s Robert Diamond manipulating LIBOR; Jamie Dimon investing in derivative based products without any understanding of how they worked; or Jon Corzine misplacing several hundred million dollars of clients’ money, the culture continues to manifest as bad behavior.  I wonder what revelations are yet to come.

I have written about the Wall Street culture in the past.  “Never accept responsibility when things go wrong if you can find a good scapegoat.”  “Ethics don’t matter if the actions are legal.”  “Everyone else is getting rich doing it so why not me?”  “We make the rules, not those rubes down in D.C.”  “Who needs regulation, we know what we are doing.”

I have to agree that they know what they are doing, and the rewards they reap are huge.  But what are the consequences for the rest of us.  Since the repeal of Glass-Steagall in 1999 we have seen one financial crisis after the other, and while bankers do not bear all the blame, they have played a major role.  Since 1999, the annual return from the S&P 500 has been around 2%.  During the prior 13-year period the annual return was 18%.  Hmmmm—has to be some connection.

“Trust” is an asset that must be earned.  Whatever trust bankers may have had in the past, it has all been squandered.  Banks play a huge role in our economy, but we are going to have to treat them like children who need rules before they can be trusted.

To be continued–