Anti-Gravity

Photo courtesy of Yannis.

Oh, how I love the sound The Sunday New York Times makes. That promising thunk as it hits the door early in the morning. This week’s edition features a thought provoking essay by Frank Bruni on a book by Sam Harris. The book in question, Waking Up, is due out next month. In it, Harris poses the question, “Do we need religion to experience spiritual transcendence?” He posits the not unreasonable argument that perhaps spiritual feelings are part of the human condition and religions merely piggy-back on what already exists. The various religions simply provide it with a narrative framework. Hey, wouldn’t it be nice if there were no religion (e.g. no religious wars/dogma/garb/superstitions…)? Fat chance. But I digress.

Our human need to cultivate spiritual experiences is one way we temporarily escape gravity, the weight of quotidian life that both comforts and constricts us. Whether through prayer, mantra, meditation, nature, creative work, art, books, music, gardening, exercise, spa days or shopping expeditions, Neflix, or playing fetch with the dog, we all long to lighten-up and be part of something bigger than ourselves.

Another form of religion is money. Many of us dream of a sudden windfall. Some of us dream of fine jewels, others of luxury cars, the more altruistic think of charities. Whatever path our fantasies take, they all lead to a similar feeling: Taking us away from the daily grind.

Money is one escape route, though it’s not the only, nor the best one. But in purely literal terms, it’s an anti-gravity whiz. With it, we can literally fly to exotic locales at a moment’s notice, or lift any body part unkindly treated by gravity’s work. It unyokes, freeing us to pursue studies, hobbies, retreats, and other heartfelt desires. And, anyone who stands in the way of our dreams can just piss off.

But maybe this craving for money, for the ‘magic number’ that will set us free is really a spiritual craving in disguise? The quest isn’t for money, it’s for transcendence.

Recent trends like the ‘renting economy‘ whereby more and more people are taking a pass on owning things, and, instead, are using social media to pay-as-they-go, is another indicator that people want to lighten-up.

Owning is gravity-making. Renting is anti-gravity. This trend is especially strong among the Millennials, perhaps as a reaction to the materialism of the Boomer generation.

Who knows, maybe lightening up will turn out to be a reliable path toward enlightenment? No need for a horsehair shirt, that’s so 15th century, just rent a Versace gown and Prada clutch as needed. Then money, as darling as it is, will not be the end, but only the means.

Kismet

Photo courtesy of Wendy

Jerry Seinfeld and Chris Rock do a funny and kinda deep riff on marriage on Comedians In Cars Getting Coffee.

Seinfeld says,”When you’re single you think, ‘I’ve really got to find the right person so my marriage works out.’ Once you really know how to do marriage, you could be with anyone…”

Rock turns to two women sitting at the nearby table and says, “Will you marry us?” and the women say, “Sure, our husbands wouldn’t care.”

“Yeah,” says Seinfeld, “our wives wouldn’t care either.”

When we contemplate getting married we look for the one. In Yiddish that person is called our bashert. It’s a romantic notion that somewhere in the big, wide world lives our Talmudic better half, someone who will complete us.

But as Seinfeld and Rock point out, being married is a skill. It’s like driving, once you’ve figured it out, you can do it with a shiny new Cadillac or a dusty old Chevy.

Could the analogy work for investing too? Do you really need to find the one portfolio manager in order to have success?

The investment industry likes to romanticize its brethren. Star stock pickers and asset managers receive glowing profiles in the business press and attract a devoted fan base. They’re courted by potential clients begging them to manage their money. But what if there is no equivalent to a bashert when it comes to investing?

A recent S&P Dow Jones Indices study reported in The New York Times, showed that active mutual fund managers underperform a series of random choices. Or, to put it another way, a blindfolded monkey throwing darts at the financial pages would have had a slightly better investment outcome than trained money managers in monkey suits. Yup.

So what does this mean?

First, get off your romantic cloud.  There’s no special someone who’s going to be your perfect portfolio manager.  Warren Buffett is as close to your money soul mate as they come and he’s not taking any customers. Everyone else is bound to disappoint you at least some of the time, just like your marriage partner does.

Second, always keep an eye on management fees. Low-cost , diversified index or mutual funds, or a low-cost portfolio manager is the way to go. Never over pay as this will erode your returns over time. (If your fancy investment firm includes a concierge service for sporting and cultural events, buy your own theatre tickets and pocket the fifty basis points.)

Third, did you know that from 1926 to 2013 US stocks averaged a 9.2 percent return? Ditto for Canadian and international stocks. Yes, the markets have been extraordinarily kind these past five years, especially for those who are at a later life stage and are cashing out. But, c’mon, 20-percent annually! That’s not sustainable. If your portfolio manager can get you a steady ten percent over the long-term, just say, “thank you” and go live your life.

As in marriage, when choosing an investment advisor it helps to have le coup d’oeil—a good eye. Then, as the song says, love the one you’re with.

Scratch & Sniff

Photo Courtesy of Jônatas Cunha

A good first impression goes a long way. It can get you a good table at a popular boîte. It can give you an edge in landing a plum job. It might even get you a hotel or airline upgrade. Not surprisingly coming on like gangbusters pays off for portfolio managers too who the reap rewards for years to come—even when their performance lags.

A recent study published in Financial Analysts Journal, (eye glazing stuff to be sure), was covered this week in The Economist. After examining the performance of 1,824 managers of American mutual funds over a 12-year period it turns out that active managers do not outperform the market.

While this isn’t exactly news, it bears repeating because investors are prone to magical thinking for which they pay dearly. Most investors, even and maybe especially those who consider themselves sophisticated, desperately want to believe that paying a premium to a star fund manager is worth it. They are wrong.

For starters, the hotshot will not be able to maintain her performance record. The study showed that there is no relationship between a manager’s performance in the first five years and the subsequent five years. Now factor in the dilutive effects of the premium fees charged by active managers. Not a pretty picture.

To get a real sense of what long-term market returns will be take a glance at the risk-free rate. This is the rate of return you would get if you bought a government-secured T-bill, for example. Now look at corporate earnings. They are hovering around two or three-percent, right?

So you get the picture: Over the long haul, say, 10-15 years, it’s highly unlikely that you’ll do better than five or six-percent if you’re willing take on some risk.

Why twist yourself into a knot for five percent?

Instead, work with a low-cost portfolio manager, (or go the DIY-route if you have the time and inclination), and buy a bunch of  common shares of medium-to-large cap, dividend-paying companies in the U.S.A and Canada, and a low-cost bond index or mutual fund. Or, if you don’t want to hold individual securities, go for an all-fund portfolio of low-cost actively managed mutual funds and some ETFs. (An all ETF portfolio is suboptimal because managers must constantly trade to track an index. This herd mentality guarantees underperformance relative to the benchmark after fees.)

When I worked in the fashion biz, there was a rumour going around that certain firms would initially use high-quality ingredients for their new perfume creations. Once the punters were hooked, the formulas would be tweaked using lower-cost substitutes. The companies rightly figured that the halo effect from the initial product would keep customers coming back for more.

That’s not unlike the investment biz. Hotshot fund managers sure smell nice at first. However, the prudent investor should perform a scratch-and-sniff test a few years later. Is the aroma still so rosy?

Busy Town

Photo Courtesy of Static 416

Here we are in the lazy, hazy days of August. Butterflies flit among the leafy branches. A flock of Canada geese skim the lake, their honks blending with the steady thrum of motorboats and the whoop of occasional waterskier in the distance. Ah, summer in Canada.

How fine it would be if we—the ‘Royal’ we, alright?— could allow ourselves to BE HERE NOW. Yet, our addiction to busyness requires us to work, work, work, lest we succumb to some calamity reserved only for inveterate sloths.

Self-imposed busyness temporarily quells our anxiety but, when it comes to investing, it’s the pits. No wonder Warren Buffett, famed investor and quote-factory, said, “Lethargy bordering on sloth remains the cornerstone of our investment style.”

The four horsemen of portfolio returns are: high fees, high turnover, taxes, and market timing. Being a busy-bee in Busy Town contributes to all of them. Let’s take turnover: Once you’ve established your investment goals and made a suitable asset allocation, you should be able to let things coast for long time.

How long? Ten years, for starters. Although that depends on your personal goals and circumstances and on material changes affecting your holdings. Buffett’s favorite holding period is “forever”. Between 10 years and forever is about right.

Look what happens when you or your financial advisor has a Busy Town itch she needs to scratch? Your transaction costs rise. If the transaction triggers capital gains, you’ve now got tax to pay. Investors tend to buy on exuberance and sell on fear. That leads to buying high and selling low. No one can time the market, so when buying high you’ve lost your margin of safety.

Most of us are not stupid and yet our addiction to busyness makes us do stupid things, at least from an investment point-of-view. There’s a famous quote: “An investment portfolio is like a bar of soap, the more you touch it, the smaller it gets.”  The good news is, Busy Town is not Hotel California. We can check-in and we can check-out. Here’s how:

Put yourself on an information diet:
The 24-hour news cycle entraps the mind. Reporters, commentators, opinionators, and pundits all have a job to do. Your job is to periodically take a break from the ‘noise’. Feeling overwhelmed by information is not a recipe for good decision-making.

Trust your plan:
Unless your investment goals or time horizon have changed substantially, trust your investment plan. Tweaking, fiddling, re-allocating, are make-work projects at best and portfolio hazards.

Do nothing:
Sometimes doing nothing is the best course of action. My portfolio has lived through several market meltdowns. Had I panicked and traded, I would have lost out on a robust recovery. Not to mention that once you’re out of the market, it’s emotionally difficult to get back in.

Though it seems counter-intuitive, one of the keys to successful investing is to do nothing, or at least as little as possible. Now I’m going to grab a cold beer, sit on the dock and watch the ducks bob-on-by. They seem to have the right idea.