Buy and hold?
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Update: Well the planned boat trip didn't come off as planned. Seems the boat failed it's shakedown cruise. So, I'm back up north , but will be in FLA on Friday to close a biz deal. The combo of getting the boat ready to go, the shrinking weather and time window just made the trip undoable. Just like my old helicopter flying days, all dressed up and no where to go.
The Beneteau Oceanis 50 is advertised as a Bluewater boat. Sailing World mag even did a story and pronounced it so. But in truth, not so much. It's a comfortable fast cruiser that will serve it's main task of Island hopping well. But the thought of doing the 1200 mile slog from Lauderdale to Tortola on this boat sends shivers down my spine. And going the Thorn route, yeah right, that ain't happenin' even if i did have the time. Of course i already knew all this which why we're basing the boat in Florida to start. In August it's going to Georgia for a makeover, of sorts, to get some beefing up so it can handle some offshore work without scaring the living daylights out of it's skipper. BTY, did i mention that my experience resume also includes some serious Bluewater sailing? I love it out there. Just you and nature. When the wind blows hard and the sea builds into mountains of water you are in it now! There is no place to hide! Scared shitless, but living every minute! Whew ,what a feeling! I'm getting excited just writing about it! I can't wait to get back out there! And, it sure beats the desk i get to drive on my day job!
As anyone who has owned boats can tell you, not only are they big holes in the water into which you pour money, they are also compromises. The boats that come off the assembly line ready made to face the toughest sea don't have the room, creature comforts, or performance of this boat. Think station wagon versus Corvette. And the truth is, most of the time this boat won't be more than a dozen miles off shore. An average day in the life will be spent at anchor in some cay. So, really, just how much boat do you need to do that? But, it has to be able to navigate vast expanses of unfriendly ocean to get to these sailing grounds and thus the beef up makeover.
Now, I'm really sorry that some of you guys don't like it when I speak of my success. And to tell you the truth, I feel pretty guilty about pissing some of you off, or making you unhappy, so, next winter i'm going to go and feel guilty on some beaches in the Berry's. In fact to deal with my deep feeling of angst i'm going to go on a 12 step program. I'm going to step from Lauderdale to Bimini, and then step from Bimini to Chub Cay and then from Chub Cay to Green Turtle Cay and so on until i finish my rehab. And you can hit the ignore button if you don't like it!
Back on topic- Milly, you have a serious reading comprehension problem. Please show me where i said I outperformed the S&P 500? Feel free to parse and snip. To those who are interested what i said it was that the S&P 500, the most widely held basket of stocks, is an example buy and hold not working. i'm not bashing anyone's strategy, or slamming a way of life, i'm pointing out a fact. I again ask you to prove to me that buy and hold does work. You said it does work. back that up! Apparently you can't.
Navet, interesting post! The enitire "My job isn't to beat an index it's to help you achieive your financial goals" line of thinking was created by Wall Street's biggest firms as a defense against poor performance. This was done to stem the exodus to the DIY side and to protect the fee model. It would be hard to build a scalable business if you had old money walking out the back door faster than you were bringing new money in the front. Thus a marketing campaign was created to counteract the drumbeat of performance pushed by the competition. It isn't surprising that the unsophisticated investing public fell for this line, but apparently they have company. And, think about it, not having to outperform? What a great deal!!!! Who hires that guy? That entire line of thinking get's Wall Street off the hook for not being able to deliver the goods.
Magician, Real World - good stuff!!!
[quote=deekay]
So, if I, say, sell life insurance to business owners and do complex succession and estate planning, but do no investments, I can't call myself an advisor? But if I throw a wrap fee around a bucket of stocks and 'manage' them for a fee, I can?
[/quote]
I think you need to be able to do both to be an advisor. Otherwise you are a life insurance agent rather than an advisor. (not that there is anything wrong with that) I have found that the life insurance companies give better training on estate planning than the brokerages.
[quote=I am legend]
[quote=deekay]
So, if I, say, sell life insurance to business owners and do complex succession and estate planning, but do no investments, I can't call myself an advisor? But if I throw a wrap fee around a bucket of stocks and 'manage' them for a fee, I can?
[/quote]
I think you need to be able to do both to be an advisor. Otherwise you are a life insurance agent rather than an advisor. (not that there is anything wrong with that) I have found that the life insurance companies give better training on estate planning than the brokerages.
[/quote]
And if all you do is manage investments, you're an investment advisor, not necessarily a financial advisor. Yet all the reps that are making a big stink about the advisor vs. salesperson debate are 99.9% investment-driven. A miniscule amount know about insurance/asset protection. Kinda ridiculous if you ask me.
If you bother to get your CLU, you hold a license that distinguishes you as an insurance expert.
CFA, investments.
CFP, generalist.
If I was doing buy-sells for my business, I'd work with my CPA and CLU and JD.
Series 7 is probably more of a basic intelligence test and compliance license. Same with state insurance.
Experience and honesty are huge. At least if you hold any license, it can be taken away for abuse of ethics, and so on.
Saying that it is ridiculous to distinguish between holding advanced designations in your chosen profession and dealing with someone who didn't bother - is ridiculous.
Anyway, its an education problem, not a boasting contest.
So you are saying that MPT is based on science, but not acknowledging the flaws?
Keep in mind that Ibbotson is using the exact same flawed methods. What this article is pointing out is that the "93%" argument is flawed, because it is not distinguishing between asset allocation and market movement.
MPT is predicated on a normal distribution, when it is factual that investment returns do not follow a normal distribution. Economists using parametric methods to deal with non-parametric statistics is going to show flaws.
You think there isn't science behind Faber's study, or any of Ibbotson's? Ibbotson teaches at Yale. He's not a dumb guy.
Then there is the issue of equating volatility with risk. Not all volatility is bad. How risk averse is a client who just saw their portfolio double in a year? Not very, yet that portfolio is twice as volatile as the market.
As for my grandfather. My grandfather every year would set aside a portion of money and simply buy stocks that he thought would do well based on his own brand of research (he was a petroleum engineer) of companies he either knew about through work or worked with. He would buy four or five small companies. Some would fizzle, some would grow slowly, and some would grow astronomically.
He recognized that he could put $1000 in a stock and if it tanked, he would only lose $1000. If it quadrupled, it would make up for any other losses. If it was a real gem, he would make tons more. This is how he invested. He was frugal, and never spent it, and in retirement relied on his pension and even started a business (which failed). After his death in 2004, he was able to provide six good years of living for his widow and still leave a portfolio that blows past anything American Funds or Franklin Templeton has done.
His method of investing worked better than any asset allocation model you MPT guys use today. There are countless tales of investing like this.
Another guy who says buy one quality company and then take the rest of your money and invest it in some potential growth companies.
Continue to follow the path of the passive advisor if that is your choice. But don't think that just because that is seen by large brokerages and the FPA as a way to justify losses in a down market, that it makes you better than people who also use science that has been tested, tried and true to prevent drawdown, which is the real portfolio killer.
By the way BondGuy - some of us admire your success and are glad that you have shared your approximate lifestyle with us. Part of doing this job and dealing with the stress involved is to reward yourself. Kudos to you.
I follow you until you talk about justifying losses in a down market. Losses, compared to what? By definition, if your time period is longer, your definition of losses and gains changes - that's the whole point.
When I was a kid, there were half as many people in the world. Everyone needs to figure out things like geopolitical risk, or even, in your grandfather's case, individual security risk.
You could be a pensioner in the UK holding BP stock, and could have hedged that risk of owning a concentrated holding - or you could have just owned the energy or large cap index. I don't really care about the individual strategy, not saying one is better than the other. But when you are managing other people's money, you better be aware of th risks and have a plan ( investment policy statement). Basic stuff, I'm pretty certain this debate is tapped out.
Of course there are flaws in MPT, it is just a guideline. From the research, I'd say it is still a pretty good guideline. For professionals, and with regards to OPM, it's probably safe to say you should consider learning the rules before you "break" them. Being accountable to things like having an investment statement and not being manipulated in understanding or being sold on narrative stories or criticism of the competition could help the public trust "financial advisors" better. You don't have dentists calling up prospects and bragging about their work or saying their d*** is bigger than guy on the other side of the wall.
I follow you until you talk about justifying losses in a down market. Losses, compared to what? By definition, if your time period is longer, your definition of losses and gains changes - that's the whole point.
When I was a kid, there were half as many people in the world. Everyone needs to figure out things like geopolitical risk, or even, in your grandfather's case, individual security risk. Everyone knows about the black swan - in the case of a "flash crash", the hedging mechanisms themselves may be at risk. This is why I go back to basics, like having the right proportion of equity ownership for the long haul, and capital preservation. There is always a cost associated with (shorter term) transactions, concentrations, or just plain risk mitigation, which often turns out to be feeling better about the short term - sleeping better at night.
You could be a pensioner in the UK holding BP stock, and could have hedged that risk of owning a concentrated holding - or you could have just owned the energy or large cap index. I don't really care about the individual strategy, not saying one is better than the other. But when you are managing other people's money, you better be aware of th risks and have a plan ( investment policy statement). Basic stuff, I'm pretty certain this debate is tapped out.
Of course there are flaws in MPT, it is just a guideline. From the research, I'd say it is still a pretty good guideline. For professionals, and with regards to OPM, it's probably safe to say you should consider learning the rules before you "break" them. Being accountable to things like having an investment statement and not being manipulated in understanding or being sold on narrative stories or criticism of the competition could help the public trust "financial advisors" better. You don't have dentists calling up prospects and bragging about their work or saying their d*** is bigger than the dentist with the new leather chairs on the other side of the wall.
You could probably do well just trading between cash and international small caps indexes. A lot of time for fishing and sleeping. Sometimes you're beating the "index" and other times you're lagging, but in the end you come out all right. Doesn't mean you're the greatest thing sinced sliced bread, or that the risk and excitement and sleep and fishing makes your way better. First, do no harm, to your clients OR your colleagues.
Magician, great post! Nice to see someone else who gets it. Sounds like your grand father and i would have gotten along just fine. i love people like that and i love hearing the stories of success. You never know when you're going to learn something or who you'll learn it from.
As i was reading some of the posts here, some of which are excuses for poor performance, I was trying to figure out what's wrong with buying a basket of well researched stocks, and then including a 20% stop loss on each? Basic risk management founded on the fact that if you buy an equity that then goes down in price you bought it wrong. Using a simple example, take the equity portion of the allocation, buy five stocks using a 20% stop loss limits your exposure to any one mistake to 4%. Four percent is a loss we can come back from. This simple concept is lost in this conversation, but to me this is Risk Management 101.
And thanks for the kind words regarding my outside interest. I know it's a bore to listen to someone drone on about their stuff, but I'm pumped! I gave up Flying because of unpredictable migraine headaches. So i took up sailing to try to get my yah yahs. As my kids came along I gave up bluewater sailing because it didn't fit with being a Dad, little league coach, soccer cheerleader ,and chauffer. So, now with most of chicks out of the nest, it's now or never. Like I always say " Growing old is mandatory ; growing up is optional !"
I believe you on the growing up comment.
Add value by doing research to discover value, then buy equities.
If the rest of the market tanks (relative to your individual security holdings), or if the market rejects the value you added with your research, automatically sell out - at a 4% loss. And then ...
Viewed from a different angle (MPT), your loss is potentially not limited to 4% ( you sold out your equity allocation at 20% loss). Your stop loss order "manages" or addresses a narrow range of risk or opportunity (like, individual security risk or market risk).
Because there are other things going on besides market fluctuation, or because short term market perception of your researched holding may not equate to realistic long term valuation, at the very least, either your research or your strategy are likely to subtract value, not to mention your trading costs or potential taxes.
Limiting loss is a huge component of risk management. Limiting potential gain or even gambling with the equity portion of the portfolio over longer timeframes is another risk - to the entire portfolio, and the client's goals. You add value ( and charge) for research in stock selection, you probably need to justify profit (or loss) taking with research. Most of the tactical stuff seems to focus on profit taking, not loss selling coupled with value research. But the fact is, in reading the industry articles recently, tactical people are mostly BSing. Really.
Your idea points out a need for a basic level of education, if planners want respect as professionals. At the very least, you need to have a plan on where to go from here, which would be interesting to hear and test.
You talk about excuses for poor performance, I'll bet you know plenty of them.
[quote=Milyunair]
I believe you on the growing up comment.
Add value by doing research to discover value, then buy equities.
If the rest of the market tanks, automatically sell out - at a 4% loss. And then ... You are really a blowhard.
[/quote]
Question: Is math also a challenge for you or is your incorrect math in this post a result of the reading problem? Just curious?
If the entire market tanked the loss would be 20%, not 4%.
The premise is that the future is unknowable. Certainly, the market could tank 20%, and then bounce right back. The immediate bounce back is unlikely and without precedent. But it could happen. As for 20%, that would be a gift to those buy and hold advocates/victims who suffered thru 01-02 and who again suffered in 07-09. As well as 29-32 and 87.
The reality of the stop loss and it's correct use is to limit loss. It's use recognises the undeniable fact that the future is unknowable. Setting a 20% gap, in most cases, takes it beyond normal market movement caused by day to day trading. IOW, if a stock is down 20% something is wrong; either with the stock or the market. The research that dictated buy is no longer valid and the best place to be is out.
BP is a good example. BP is a high quality company, had a strong dividend. A strong argument for purchase could have been made in April 09 at 40. The stock topped at about 60. A trailing 20% stop loss would have taken investors out at 48. A solid 20% gain not counting the div. What's wrong with that? It sure beats being down the 20% the buy and hold crowd now finds themselves in, in the same scenerio. By a show of hands, which client would you rather be, up 20% or down 20%?
Likewise the investor who bought BP two months ago at 60. They would have been out at 48. Since math isn't a strong suit here I'll do it for you. A 12 point 20% loss is better than a 28 point 47% loss. See how simple that is?
But wait, there's more! The buy and hold crowd is without options. Down 40% plus what can they do now? They are stuck with thier lousy investment and need an 88% gain just to get even. Ouch!!!! And now, no dividend. Ouch again!!!!
Meanwhile over at the stop loss table they are counting their profit and considering a repurchase. Buy at 32 with a SL set at about 26. They've got options. They can buy BP or walk away. Again, by a show of hands, which group would you rather be part of?
As far as the math, in a stock and bond portfolio, obviously the stock decline can be viewed as pure stocks, or what the stocks do to the value of the whole portfolio, in terms of volatility - the fluctuation seen on the client statement. Duh.
If the buy and hold crowd is invested in half stocks and half bonds, and the stock market tanks 20%, how low does the portfolio value go and what percent upward fluctuation brings you back to even?
About 15 years ago, I practiced your little idea here and moved on to something better. A big part of that is spending valuable time on what really matters.
Reading comprehension: since I run indexes, I don't care about individual security risk. Leave BP at the door.
I don't really care how you run your money or how you patronize with your babble.
The mental image of Ted Kennedy on his sailboat with his minions is priceless.
[quote=deekay]
[quote=I am legend]
[quote=deekay]
So, if I, say, sell life insurance to business owners and do complex succession and estate planning, but do no investments, I can't call myself an advisor? But if I throw a wrap fee around a bucket of stocks and 'manage' them for a fee, I can?
[/quote]
I think you need to be able to do both to be an advisor. Otherwise you are a life insurance agent rather than an advisor. (not that there is anything wrong with that) I have found that the life insurance companies give better training on estate planning than the brokerages.
[/quote]
And if all you do is manage investments, you're an investment advisor, not necessarily a financial advisor. Yet all the reps that are making a big stink about the advisor vs. salesperson debate are 99.9% investment-driven. A miniscule amount know about insurance/asset protection. Kinda ridiculous if you ask me.
[/quote]
I get what you are saying here and mostly agree. Just the ability to do it because you have the licenses doesn't mean you are doing a full planning job for clients. We should be doing both in order to be called a planner or advisor.