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Aug 8, 2009 4:35 pm

[quote=Spaceman Spiff] Lew - the point of advisory solutions is to NOT have 3000 funds to pick from. Who’s doing the research on those 3000 funds? Who’s making sure, like with ABNDX, that they’re not style drifting. 3000 funds means that whoever put it together isn’t doing any research other than where the fund rep takes him or her for lunch. Ruth’s Chris? You’re in. Taco Bell? Get out of my office. There are lots of funds that didn’t make the cut. The program was designed specifically to only allow a select group of funds in. And it had nothing to do with revenue sharing or preferred status. And it has no loads in it. It’s designed to be a structured, disciplined approach to investing. Not making sector bets or prognosticating based on whatever Money magazine says is coming around the corner. It’s not like the indie guys or the wirehouses. That’s the point.



It kills me that in a few brief years time tested strategies can become so passe. Who said buy and hold is dead? Who said you have to be tactical with your portfolio? At what point did Markowitz retract his previous statements? At what point did the market become inefficient? Who defines a secular bear market?



See, I would have sworn that when I got into this biz in the mid 90’s the Dow was at like 4000. Doesn’t that mean that we have doubled since then? Is that a secular bear or a secular bull? I get them confused. Can’t we pretty much say that given a long enough span of time the market has ALWAYS been bullish?



Doesn’t being tactical simply mean you’re betting on something? You’re betting that senior loan funds are going to outperform corp bond funds. Or you’re betting that emerging markets is going to outperform large cap value. How do you know that for sure? Tea leaves?



Thus the Advisory Solutions platform. Asset allocation. Diversify. Rebalance as necessary. No style drift allowed. Simple. Easy. 1.35% Thank you very much. Where’s that FAST report?[/quote]



I agree that the market has gone up over time but the problem is the concept of “time”…since 1898 the DJIA has increased from around 96 to 9370… However most of my clients down have 100+…



Rydex has an interesting DJIA graph… plots the DJIA growth from 12/1896 to 12/20008. It show the returns for the four bull markets and the four bear markets that have occurred.

I agree buy and hold works in bull markets(1982-2000) but in bears markets (2000- current) it doesn’t…



As far as markowitz, check out DFA funds, and how quickly that fad vanished. The problem with MPT(other than it fails during bear markets) is that is makes assumptions that are skeptical at best. First of all they assume that variance of returns is the best way to measure risk(obviously has issues) and that returns are represented by normal distributions.

Standard deviation says that better-than-expected returns are just as risky as those returns that are worse than expected.

Normal distribution make investment results with more upside than downside returns appear more risky than they are and vice versa.

However most investors(and advisors) think risk does not pertain to returns about the minimum they are looking for. They think risk has to do with losses or returns below what they want(say 8%).



Aug 8, 2009 4:43 pm

Fundamental analysis, follow a select few equities REALLY closely, buy them when they are cheap, sell them when they are expensive. The problem with buy and hold is the HOLD part.



And MPT is a crock. Not that it’s dead. It’s just a crock. Once again, it is the global warming of the financial world.



People do not become wealthy in the investment world by strictly following MPT and buy and hold.

Aug 8, 2009 4:49 pm
Ron 14:

I want a model that warns me that the market will collapse. Basically, I log onto my computer before the market opens and a siren goes off so I can sell everything out. Then that same system will sound the siren telling me exactly when to get back in. Are those out there ?



I love it!! This is hilarious!!
Aug 8, 2009 7:03 pm

Looks like I touched nerve.  That’s good-- It’s nice to be posting on a topic other than the fact that management at my firm sucks while hypothesizing about when my firm (UBS) will be spun off.

  Jebediah is right-- It's not just the fact that we have 3000 funds to choose from in our various advisory platforms, it's which funds we as advisors recommend to our clients.  But in order to narrow the list of 3000 funds down to the 40-50 that I actually follow closely, the advisor has to know what he's looking for.  And each advisor may want to run his practice in a different manner.  Some may want to use more tactical funds that regularly adjust the asset allocation for them, and others may want to do it themselves, via a discretionary trading platform.  We have both at UBS, but it doesn't seem like EJ is allowing their FA's to do either.  It's buy and hold, all the way.  And yes, I know EJ doesn't have the patent on that theory, but it is quite prevalent in the culture.  And even in secular bull markets (e.g. 1982-2000 for iceco1d and Ron 14 that don't understand the significance of that "cliche"), buy and hold will only work if the client has the stones to hold or buy when they're down 30%.  And I can tell you this, boomers have a hard time with this more than any other segment of our business.  Most of my clients are boomers, hence my preference for tactical management and risk control.   Space-- This thing about style drift.  For the life of me, I don't get why everyone is so married to this Morningstar style purity.  Who cares what style the fund is in, as long as they have demonstrated for a long time that they stay within the risk band that they promised, and they generate lots of alpha for our clients.   Case in point-- Compare the numbers for two Wellington-managed funds at Hartord-- Capital Appreciation and Stock Fund.  Stock fund was indeed style pure.  It remained a large cap growth fund, even though the manager knew deep down that LCG was over valued and most likely going to underperform for years.  But he stayed style pure and lost a TON of money in the tech crash.  Saul Pannell, on the other hand, is a stock picker.  He finds great companies trading below their value, and he doesn't give a rip whether it's large value or large growth.  He too was down during the tech crash, a lot, but not nearly the disaster that was Stock Fund.  Would the manager of stock fund have diversified into large value if he could have?  I believe he would have if not for the prospectus which mandated LCG.   Why not give a talented manager (who spends every waking hour managing risk and return for a fund and not meeting with clients, looking for new clients, doing financial plans, etc) the latitude to make moves between different asset classes outside of just stocks?  Especially since we are most definitely not in a secular bull market.  And who cares if ABNDX is drifting a bit, as long as they are making money and controlling risk.  I don't use the fund, personally, but that was the fund EJ eliminated for style drift reasons.   Like I said in my previous post, I'm very happy for my Jones friends now that they have a mutual fund advisory platform.  I believe their clients will be much better off in the long run with that program versus A share commissions.  When we discuss our advisory platforms at UBS and other firms, including most indies, they all agree though.  The EJ platform still has a very long way to go before they measure up to the rest of the industry.   Have a great weekend everyone!   LA
Aug 9, 2009 12:16 am
iceco1d:

Am I being “called out?”  TAG ME IN RON!

 LOL
Aug 9, 2009 3:52 am
Moraen:

Fundamental analysis, follow a select few equities REALLY closely, buy them when they are cheap, sell them when they are expensive. The problem with buy and hold is the HOLD part.

And MPT is a crock. Not that it’s dead. It’s just a crock. Once again, it is the global warming of the financial world.

People do not become wealthy in the investment world by strictly following MPT and buy and hold.

  How the hell can you possibly say that people can't become wealthy by buy and hold ?  You instead think they should spend 3 hours at work "studying a select few stocks" and trade it up in their ETRADE IRA ?
Aug 9, 2009 4:05 am

[quote=Moraen]Fundamental analysis, follow a select few equities REALLY closely, buy them when they are cheap, sell them when they are expensive. The problem with buy and hold is the HOLD part.

And MPT is a crock. Not that it’s dead. It’s just a crock. Once again, it is the global warming of the financial world.

People do not become wealthy in the investment world by strictly following MPT and buy and hold.[/quote] Why not sell calls or buy puts until they are cheap again and then buy more? Or would that be considered buy and hold? If you are going to spend that much time researching then you should make money going up and down.

Aug 9, 2009 11:51 pm
Ron 14:

[quote=Moraen]Fundamental analysis, follow a select few equities REALLY closely, buy them when they are cheap, sell them when they are expensive. The problem with buy and hold is the HOLD part. And MPT is a crock. Not that it’s dead. It’s just a crock. Once again, it is the global warming of the financial world. People do not become wealthy in the investment world by strictly following MPT and buy and hold.



How the hell can you possibly say that people can’t become wealthy by buy and hold ? You instead think they should spend 3 hours at work “studying a select few stocks” and trade it up in their ETRADE IRA ? [/quote]



Easily - how many millionaires (who made their money in the market almost exclusively) that you know became that way by owning mutual funds and holding them forever? People who have become WEALTHY own individual stocks. Sorry, that’s a fact. There have been several papers published to the effect (much like MPT - except instead of a theory, they are charting FACTS).



I know more people who have made overall better returns getting LUCKY buying a few individual stocks, maybe losing money on one, but destroying it on others than I know people who had better returns in mutual funds.
Aug 10, 2009 2:15 pm

No, people who became wealthy started a business, grew it, and sold it.  People become wealthy in their investments not because they have a superior strategy (granted there are some out there that do), but because they have a superior discipline.  They make their IRA contributions EVERY year.  They do those things that most people just simply don’t.  Some of my “wealthiest” clients don’t do anything but buy American Funds and do their IRA contributions.  Period.  No individual equities, no individual bonds, no covered calls or collars, or hedge funds.  It’s discipline.  Pure and simple. 

  To think that the average person gets wealthy in the market BECAUSE of the market is just retarded.    The problem with stating that there aren't a lot of millionaires that used mutual funds to get there is that mutual funds are a, relatively speaking, new phenomenon.  I don't know of very many people that actually put $10K into AIVSX in 1929.  Actually I don't know any.  It wasn't until probably the 1980's that mutual funds became the primary investment vehicle people used to invest.    I think your last paragraph states it best: "I know more people who have made overall better returns getting LUCKY buying a few individual stocks".  Luck isn't the way I want to run my practice.  I don't want to be lucky with one or two and unlucky with one or two and call it a day.  Because for every one person who got lucky, 5 got unlucky.  Those aren't good enough odds for me.  Not everyone has a Captain Dan buying them stock in that fruit company back in the 70's. 
Aug 10, 2009 3:09 pm

[quote=Moraen] [quote=Ron 14] [quote=Moraen]Fundamental analysis, follow a select few equities REALLY closely, buy them when they are cheap, sell them when they are expensive. The problem with buy and hold is the HOLD part. And MPT is a crock. Not that it’s dead. It’s just a crock. Once again, it is the global warming of the financial world. People do not become wealthy in the investment world by strictly following MPT and buy and hold.[/quote]

 
How the hell can you possibly say that people can't become wealthy by buy and hold ?  You instead think they should spend 3 hours at work "studying a select few stocks" and trade it up in their ETRADE IRA ? [/quote]

Easily - how many millionaires (who made their money in the market almost exclusively) that you know became that way by owning mutual funds and holding them forever? People who have become WEALTHY own individual stocks. Sorry, that's a fact. There have been several papers published to the effect (much like MPT - except instead of a theory, they are charting FACTS).

I know more people who have made overall better returns getting LUCKY buying a few individual stocks, maybe losing money on one, but destroying it on others than I know people who had better returns in mutual funds.[/quote]   Sorry Spiff, I have to agree with Moraen on this one.  Other than my business owner clients, the only clients I have that became truly wealthy through the market are people that have owned individual equities forever.  And most of them have owned blue-chip stocks for 20, 30, 40 (one of them 50) years.  The double-edged sword in this is that many of them lost their shirts because they were 70 years old and I couldn't pry anything out of their hands.  The old "my husband bought these shares in 1956......." story.  I have one client that just died at age 90, and she had 115K in Coke stock (among her 18 positions).  The cost basis was about 3K.  She owned XOM, PG, JNJ, etc. (the saddest part is that this portfolio was built over 50+ years, and her boomer children are now tearing it down in a matter of weeks)   I'm not saying people CAN'T become wealthy on funds, I just find that funds are better served for maintaining wealth (which includes growing it moderately).  But you are right, in either case, it requires tremendous discipline.  And most people that buy individual securities to buy and hold forever have that discipline. 
Aug 10, 2009 4:21 pm

Yes, I know.  That’s my point.  My clients who have owned stocks forever are wealthy too.  But would they have been better off had they purchased AIVSX instead of KO 50 years ago?  Unfortunately our hypo system only goes back to 1972 on stocks for some reason, so I’ll have make my case with limited data.  I ran a hypo of $10K invested in KO, PG, and AIVSX starting in June of 1972.  There’s been one time in the past almost 40 years that the KO would have been worth more than the AIVSX.  And PG doesn’t even come close.  Now, you throw a stock like WMT in there and it’s not even fair.  A $10K investment in Sam Walton in 1972 turns into over $8.6 mil today.  That goes back to that Captain Dan comment.  How many people do you know of (outside of the rednecks in Bentonville, Arkansas who worked for the man and got shares on accident when he took it public)  that would have put $10K into WMT in 1972? 

  So, I think our viewpoint is skewed.  Kind of like it might be 20 years from now when we look back at our clients and say none of them got rich buying ETFs.  Same thing.      
Aug 10, 2009 4:33 pm

So you guys mean to tell me if you were 25 in 1985 went to work in corporate america, worked your way up, purchased a home, funded IRA's/401k's to the max, used a strict discipline and lived well within your means that the market wouldn't have made you a millionaire ?

Aug 10, 2009 5:07 pm

I agree with Ron 14(but only on his last point). I think the market can make people money.

Aug 10, 2009 6:04 pm

I agree with both points of view.  However, I think there tends to be a difference between people that buy and hold stocks forever, and other investors.  Due to the ease of transacting mutual funds, there tends to be a “trading card” mentality with funds vs. individual securities (I think muni’s tend to fall in this same camp as stocks, although for different reasons).

Yes, buying a good quality grwoth & Income fund and holding it forever will have a similar effect to holding a stock.  Yes, there are some tax consequences to funds, but by and large, if you are comparing quality G&I funds to quality blue-chip stocks, the results will essentially be the same.  Now, if we are looking at buying a company in it's early growth years, that's a different story.  Today's RIMM may be tomorrow's Apple or MSFT.  But don't expect to buy P&G today and be a millionaire in 20 years.
Aug 10, 2009 6:32 pm

[quote=Ron 14]

So you guys mean to tell me if you were 25 in 1985 went to work in corporate america, worked your way up, purchased a home, funded IRA's/401k's to the max, used a strict discipline and lived well within your means that the market wouldn't have made you a millionaire ?

[/quote]   Would the "market" have made me a millionaire?  No.  The things I highlighted above would have made me a millionaire.  The market would have helped along the way, of course, but it's my discipline, routine, and willingness to tell myself no that would have made the millionaire next door.   Anyway, I probably would have worked for AT&T, got spun off to LU, put all my money in company stock, rode it to the ground and then lost my job, my house, and racked up a lot of credit cards debt because I wasn't willing to give up my BMW convertible, 3500 sq foot house,2000 sq ft lake house, and ski boat.  I would have then went to work for Citigroup because mortages and real estate were hopping, put all my money again into company stock, rode it to the ground, lost my job, my house, and racked up more credit card debt because I wasn't willing to...well you get the idea.  See what the "market" can do to a guy!     
Aug 10, 2009 6:36 pm

[quote=Spaceman Spiff][quote=Ron 14]

So you guys mean to tell me if you were 25 in 1985 went to work in corporate america, worked your way up, purchased a home, funded IRA's/401k's to the max, used a strict discipline and lived well within your means that the market wouldn't have made you a millionaire ?

[/quote]   Would the "market" have made me a millionaire?  No.  The things I highlighted above would have made me a millionaire.  The market would have helped along the way, of course, but it's my discipline, routine, and willingness to tell myself no that would have made the millionaire next door.   Anyway, I probably would have worked for AT&T, got spun off to LU, put all my money in company stock, rode it to the ground and then lost my job, my house, and racked up a lot of credit cards debt because I wasn't willing to give up my BMW convertible, 3500 sq foot house,2000 sq ft lake house, and ski boat.  I would have then went to work for Citigroup because mortages and real estate were hopping, put all my money again into company stock, rode it to the ground, lost my job, my house, and racked up more credit card debt because I wasn't willing to...well you get the idea.  See what the "market" can do to a guy!     [/quote]   Well actually the market did make you a millionaire because that disciplined approach into savings accounts would have cut your return by 80%.
Aug 10, 2009 6:47 pm

I have a client who inherited a lot of bank stock.  His family started the original community banks in the late 19th century and after mergers, buyouts etc, he had over $7mm+ before the financial crash…what is left is now about $2mm.   He had a personal attachment to the stock and for most of his life the stock performed very well for him.   He doesn’t care so much about the principle, but his dividends went from 400k+ to 50K per year.  He is finally willing to listen to  a disciplined covered call strategy to supliment his income stream.  I don’t know how many times we discussed diversification.  And he should know better: top boarding school, GA Tech, Yale MBA and over the years has proven to be a very sharp stock and trend picker.

  Sometimes emotion gets in the way of making the correct decision.    On the other hand, I have a few clients who were disciplined enough to put money away early and often, live within their means etc and who are now worth 1mm+.  Their secret is that they wanted to put it away and forget about it....dealing with money on an ongoing basis scared them.
Aug 10, 2009 7:04 pm

Good points.  To speak to that point, I also find that individual investors have a  hard time transitioning from wealth “accumulation” to wealth “preservation” (or de-cumulation if they are taking income).  I have several clients (and emt many along the way) that are fatalistically attached to their company stock.  More often than not, I get the “this company made me rich, I can’t sell this stuff now”, or “if I had invested in the rest of the market, I would have lost a ton of it”.  All true, but the problem is, I would have had much of their money out of the stock market.  We’re talking millionaire-next-door types that worked at the same company for 30 years, they are now 62 and invested 100% in their company stock.  SCARY!!!

Aug 10, 2009 7:21 pm

Very scary. I have a Caterpillar plant a few miles from my branch and it seems once a month I speak to a guy who got laid off 3-5 years before he wanted to retire, has his entire 401k in CAT stock, won’t sell or reallocate it because “its still a solid company.” Like you say, you cant save them all. NEXT!

Aug 10, 2009 7:30 pm

Its funny because I normally, in my personal life, convince coworkers not to buy company stock (despite what HR and Leadership says).  If it weren't for FINRA, I'd advocate shorting it sometimes.

My reasoning is:  My whole income is contingent on this company (if I get fired or the company goes under), do I want to make my savings / retirement that way too?   Answer is always no.