NewsLetter - July 2019
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View Membership BenefitsMixing vegetables together may be fine for food (although it’s not my favorite), but it’s nonsense in the investment world. When you hire a money manager (e.g., a mutual fund), do you really care how good his or her sibling managers are if he or she is awful? Do your due diligence on the fund, not the family.
THE LEAST EXPENSIVE U.S. CITIES FOR RETIREES
Y’all come!
ON THE OTHER HAND…DEPRESSING
Florida is the No. 1 state for fraud and the No. 4 for identity theft. Florida was the top state for formal reports of fraud to the federal government in 2018. Floridians made about 205,400 fraud reports last year, amounting to an average loss of $400.
https://www.floridatrend.com/article/26849/wednesdays-afternoon-update
MOUTH AGAPE FROZEN
Also balderdash and horsepucky!
From InvestmentNews:
SEC commissioner Hester Peirce said the proposal to raise advice requirements for brokers will result in a standard for them that is stronger than the fiduciary duty investment advisers must meet.
“We have this new standard, which is something more than suitability,” Ms. Peirce said at an Institute for Portfolio Alternatives conference in Washington on Tuesday. “When you lay it side-to-side against the fiduciary standard, I think one could argue that it’s a stronger standard because it does require mitigation or elimination of conflicts in a way the fiduciary standard does not.”
I won’t bother to detail what insulting nonsense this is, but I would be happy to chat with anyone who is interested. Alternatively, ask any knowledgeable attorney how the “new suitability” standard can possibly be stronger than the RIA standard of the Investment Advisers Act of 1940.
It obviously begs the question: if it is indeed a stronger standard, why does the brokerage industry spend millions of dollars trying to prevent the enactment of a fiduciary standard? Why not just make brokers subject to the ’40 Act? A cheap and simple solution.
SAY IT ISN’T SO!
Classic Board Game Monopoly Gets a Modern Makeover Using Digital Technology to Go Cashless
- Hasbro created a version that uses digital assistant technology like Amazon Echo.
- The technology is set to make cheating in the board game a thing of the past.
- Monopoly will be a voice-activated banker, broadcast from a smart speaker.
- Playing pieces will each have a button so the players can activate transactions.
Cashless??!! That’s not Monopoly!
MAKING MONKEYS OUT OF SOME INVESTING GURUS*
More picking on active managers reported in the Wall Street Journal:
No animals were harmed in this financial experiment, but some human egos were bruised…
The results were brutal. Heard columnists, not monkeys, threw the darts at newspaper stock listings…. The columnists’ eight long and two short picks beat the pros’ selections by a stinging 22 percentage points in the year through April 22. Only 4 of 12 of the Sohn picks even outperformed the S&P 500.
*Wall Street’s best and brightest investors participate in this unique, “must attend” event to share their expertise with an audience of more than 3,000 people, comprised of portfolio managers, asset allocators and private investors. Most speakers manage large proprietary investment portfolios that have outperformed the market for many years and do not share their insights in any public forum, but they volunteer their time to The Sohn Investment Conference for the benefit of The Foundation.
https://www.wsj.com/articles/making-monkeys-out-of-the-sohn-investing-gurus-11557115260
WHO KNEW?
From Forbes:
Those oh-so-handy USB power charging stations in the airport may come with a cost you can’t see. Cybercriminals can modify those USB connections to install malware on your phone or download data without your knowledge.
“Plugging into a public USB port is kind of like finding a toothbrush on the side of the road and deciding to stick it in your mouth. You have no idea where that thing has been,” says Caleb Barlow, Vice President of X-Force Threat Intelligence at IBM Security. “And remember that that USB port can pass data.”
It’s much safer to bring your regular charger along and plug it into a wall outlet or, alternatively, bring a portable power bank to recharge your phone when you’re low on bars.
INVESTORS SEEM TO BE CATCHING ON
From Morningstar:
https://fundflows.morningstar.com/fundflows/marketsummary.aspx
MORE KATIE
Our partner Katie continues to learn about Lubbock infrastructure. She got to drive the airport fire truck, shoot the 19-inch hose and shoot a Taser at the police department. (“Luckily my suspect was cardboard and not moving!”)
SOME GOOD ADVICE FROM VANGUARD
Changing Market Leadership
Positive International Outlook
Volatility Reduction
https://advisors.vanguard.com/iwe/pdf/FAWHYINT.pdf
GUESS WHO’S OLDER THAN DIRT
17 out of 17!
AND IF I HAD ANY DOUBT
From The Hollywood Reporter:
It’s not just a game for the 250 million players who are eschewing traditional social media, Netflix and other leisure activities in favor of community events like Marshmello’s virtual concert.
Fortnite isn’t just a game—it’s also social media. So says a study from National Research Group, which provides a telling snapshot of the new attention economy. Fortnite players spend more of their free time logging into the battle royale game than they do scrolling through Facebook and Instagram or streaming on Netflix and YouTube.
In the two years since its July 2017 launch, Fortnite has grown into a global phenomenon with more than 250 million active players (82 percent under age 35) and $2.4 billion in annual revenue. Netflix CEO Reed Hastings was onto something when he noted in January that the streamer “competes (and loses) more with Fortnite than with HBO.” According to NRG, Fortnite players spend 21 percent of their free time with the game.
And I’ve never even heard of Fortnite! I’m definitely older than dirt!
BUFFETT ON GOLD
From Investment Advisor:
Buffett made his first investment, of $114.75, in 1942. In a no-fee S&P 500 index fund with dividends reinvested, that money would have grown to $606,811. The same amount invested in 3¼ ounces of gold would now be worth about $4,200. That’s “less than 1% of what would have been realized from a simple unmanaged investment in American business,” says Buffett. “The magical metal was no match for the American mettle.”
BEWARE
From CNN:
If you get a call from an unfamiliar number that rings once and hangs up, don’t call back. The Federal Communications Commission is warning people about a new phone scam, which they’re calling the “one ring” or Wangiri scam. (Wangiri is Japanese for “one ring and drop.”)
The scam works like this: A scammer places a robocall to a number and hangs up after one or two rings. They may call back several times. The idea is to get the caller to call the number back. When they do, the caller is prompted to pay long distance fees to connect the call, fees that are usually paid in part to the scammer.
https://www.cnn.com/2019/05/07/us/fcc-robocall-scheme-scam-warning-trnd/index.html
WOW!!
The Indian Army says it found yeti footprints in the Himalayas. Stay tuned—the Loch Ness monster and Golden Asteroids are next.
https://www.nbcnews.com/news/world/indian-army-says-it-found-yeti-footprints-himalayas-n999951
PLACES TO GO
DEPARTURES – CITY GUIDES
https://www.departures.com/city-guides/barcelona
https://www.departures.com/city-guides/paris
https://www.departures.com/city-guides/london
https://www.departures.com/city-guides/new-york-city
https://www.departures.com/city-guides/rome
SOME GOOD NEWS
From Wealth Management:
N.J. Governor Vetoes Bill Saying Insurance Agents Are Not Fiduciaries
Gov. Phil Murphy said the bill runs counter to the state’s efforts to improve consumer protections, including its recent fiduciary rule proposal for financial advisors.
New Jersey Gov. Phil Murphy has been an outspoken proponent of the state’s proposed fiduciary rule, which he called “some of the strongest investor protections in the nation.” So when a state bill was passed that would eliminate a fiduciary standard for insurance producers, he, naturally, vetoed it…
He recommended the legislature remove section 1 of the bill, which “prohibits a cause of action against an insurance producer arising from transactions involving property and casualty insurance or a health benefits plan where the cause of action is based on a fiduciary duty.” He believes that will also leave it open for lawmakers to impose a fiduciary duty on insurance producers.
He also suggests the removal of the third section of the bill, which would require the insurance agent to notify clients that information about their compensation is available, rather than disclose that information to the client directly. And they’d have to include only information about compensation that’s based on a percentage of the premium.
A recently proposed rule by the state’s Bureau of Securities would require all financial advisors registered in the state to act as fiduciaries, making New Jersey one of the first states to propose a uniform fiduciary standard for all financial services professionals.
The rule would apply to recommendations on investments; opening or transferring assets into any kind of account; and the purchase, sale or exchange of any security. A broker or advisor has to make “reasonable inquiry” in the best interest of their client, and any recommendations offered cannot be made with regard to a financial interest of the broker, advisor or any other third party.
The SEC has said it intends to release a final rule on its Regulation Best Interest this fall. This regulation is expected to require more robust disclosure procedures to ensure that brokers are acting in the “best interest” of a client, though critics contend this would fall short of the fiduciary duty demanded of investment advisors; New Jersey’s rule stressed that disclosing conflicts alone would not suffice in protecting investors.”
COOL TIP
From One Mile at a Time:
Using FlightAware to check inbound flight status
There’s one cool hack that many people aren’t aware of that makes this really easy. FlightAware is a flight tracking website, and it will also show you where your plane is coming from. Just enter the flight number for your journey.
Then when you see the map for your flight, on the right side you should see a section that says “track inbound plane.” Just click that, and you’ll see where the plane is coming from.
https://onemileatatime.com/track-inbound-plane/
DEPRESSING
Journal of Financial Planning Stat Bank:
65…Percent of people surveyed who said they mistrust the financial services industry to some degree.
2…Percent of people surveyed who said they trust financial professionals “a lot.” (We work hard to be in that 2%.)
21…Percent of people who understand the difference between a planner who is a fiduciary and one who is not. (I hope regular readers of my NewsLetter know the difference!)
50…Percent of investors who work with a financial advisor who know for certain their advisor is a fiduciary. (I hope my readers and our clients know that we are fiduciaries.)
YOU READ IT HERE FIRST!
https://www.foxnews.com/tech/loch-ness-monster-might-be-real-according-to-new-scientific-study
AND IF THE YETI AND LOCH NESS MONSTER DON’T GET YOU EXCITED, HERE’S AN ITEM FROM DAVID THAT MIGHT
The Golden Asteroid That Could Make Everyone on Earth a Billionaire
Whether it was the Big Bang, Midas or God himself, we don’t really need to unlock the mystery of the origins of gold when we’ve already identified an asteroid worth $700 quintillion in precious heavy metals.
If anything launches this metals mining space race, it will be this asteroid—Psyche 16, which is somewhere between Mars and Jupiter and carries around enough heavy metals to net every single person on the planet close to a trillion dollars.
The massive quantities of gold, iron and nickel contained in this asteroid are mind-blowing. The discovery has been made. Now it’s a question of probing it.
NASA plans to do just that, beginning in 2022.
https://www.rt.com/business/462703-golden-asteroid-everyone-billionaire/
SNAKE OIL SELLS
My partner Lane shared an interesting marketing piece with me.
Investment Strategies
Defensive Alpha
Our Defensive Alpha portfolios aim to reduce market drawdowns without sacrificing participation in rising markets. These strategies seek to invest in a global allocation of market blend indices during rising markets, but attempt to exit to defensive, low volatility stocks in the early stages of market declines. When markets rebound, the portfolios are expected to return to a growth posture.
Unconstrained Tactical
Our Unconstrained Tactical strategies attempt to track global allocations of market blend indices during rising markets, but seek to exit to cash or more stable fixed income assets as prices start to move lower. When markets begin to rebound, the portfolios attempt to return to fully invested positions. Because these strategies seek to exit to cash, they are a means of attempting to gain access to above inflation returns with robust loss avoidance.
I’m obviously a massive skeptic. The key words are attempts and seeks—“attempts to exit” and “attempts to track” and “attempts to return” and “attempting to gain” and “seeks to exit.” With an eye on possible customer complaints, there are no promises here, but lots of attempting and seeking.
In the last few hundred years, no manager has done this successfully over long periods of time, but I guess hope springs eternal. We’re still passionate believers that successful investing is not timing the market but time in the market.
COOL HISTORY
PERCEPTION vs. REALITY:
Causes of Death in the United States
NOT SURE IF I COULD BRING MYSELF TO EAT THEM—MAYBE IF IT WAS A BOTTLE OF WINE
Two melons sold at a Japanese auction for $45,000
CAVEAT EMPTOR
From Jason Zweig of the Wall Street Journal:
A New Rule Won’t Make Your Broker an Angel
All brokers and financial advisers have conflicts of interest. New regulations, no matter how well intended, can’t change that.
Next week, the Securities and Exchange Commission is expected to approve a rule that will require brokers to act in the best interest of their customers—rather than their own wallets—when offering investment advice. That’s good, so far as it goes.
It probably won’t go far enough, however. The new rule is also likely to lead many investors to drop their guard, in the misguided belief their brokers now can do no wrong. And it may create a marketing bonanza for brokers and investment advisers…
The most immediate result, I expect, will be to weaponize the marketing pitch that brokers have used for so long: “Trust me.” The corollary now will be: “The U.S. government requires me to act in your best interest.” That new clincher will act like kryptonite on the skepticism or objections that many customers otherwise might have mustered.”
https://www.wsj.com/articles/a-new-rule-wont-make-your-broker-an-angel-11559313036
DO YOUR HOMEWORK—A SHORT LESSON IN DUE DILIGENCE
I recently received an email touting the Ampersand Fund. The “headline” was certainly impressive.
Looking a little further, I found it was honestly labeled a Morningstar 5 Star fund.
I also found it had indeed outperformed the S&P for 5-month for 2019 through 5/31/2019.
It also significantly outperformed its Morningstar category peers.
And on an after-tax basis, the difference is magnified.
How about managing risk? The fund’s website says “Objective: An innovative fund solution that aims to achieve returns and volatility comparable to the S&P 500® Total Return Index [that’s the IVV iShare], while seeking to avoid the full impact of downside risk.”
While it’s true that it tracks the volatility of the S&P (standard deviation), on a risk-adjusted basis (Sharpe Ratio), it fails.
And as for “avoiding the full impact of downside risk,” not so much so during the most recent correction.
The moral? Caveat emptor. Do your homework. Don’t make your investments based on Morningstar Star “Stars” or clever ads.
MORE “WHO KNEW?”
From USA Today:
States With the Most UFO Sightings: Vermont Leads the Way
UFO reporting levels vary by state. In states with cold winters, sightings increase dramatically during summer months, when more residents are spending their leisure time outdoors. The five states with the most reported UFO sightings per 100,000 people are all northern states, and three of them—Vermont, New Hampshire and Maine—are located in New England. By comparison, UFO reports don’t fluctuate much during the year in southern states, where weather and daylight conditions don’t vary as much.
https://www.usatoday.com/story/news/nation/2019/06/19/states-with-the-most-ufo-sightings/39306977/
MORE AMAZING PICTURES
From my friend Peter:
FOR THE ACADEMIC-MINDED
This is admittedly a bit heavy, but those of you who are familiar with my writing know I’m a passionate fan of behavioral economics, as I believe it explains most of the issues our clients deal with in investing. This is such a good example that I thought an excerpt would be worth sharing.
How Active Management Survives
J.B. Heaton, Ginger L. Pennington; Financial Planning Review
Abstract
There is much evidence that passive equity strategies dominate active equity management, but many investors remain committed to active investing despite its poor relative performance. We explore the behavioral‐economic hypothesis that investors fall prey to the conjunction fallacy, believing good returns are more likely if investment is accompanied by hard work. This is an especially plausible manifestation of the conjunction fallacy, because in most areas of life, hard work leads to greater success than laziness. Our internet survey results show that from 30% to over 60% of higher‐income, over‐30 individuals fall prey to the conjunction fallacy in this context, raising significant questions for law and regulatory policy, including whether actively managed equity products should carry warnings, at least for retail investors. [They don’t mince words.]
Belief in a “just world” is a second psychological factor that may explain the strong subjective appeal of a causal association between financial success and active investment. The “just world hypothesis” asserts that people have a strong desire to view the world as a fair, predictable place—a place in which a person’s merit and her fate are closely intertwined, and where hard work can be expected to yield just rewards (Lerner, 1980). While a large amount of research on the just world hypothesis focuses on harmful societal effects of this belief (that is, victim blaming), other work examines the influence of just world beliefs on decision‐making. Decision makers with a strong belief in the association between hard work and success tend to engage in a range of counter‐productive behaviors, spending excessive amounts of time reaching a decision and distorting perceptions of alternatives in a way that unnecessarily complicates choice (Schrift et al., 2016).
The psychological tendency to believe in a just world influences investors on multiple levels…it encourages investors to overcomplicate what should be a relatively simple decision problem—believing that a more complex investment scheme is necessary to achieve good outcomes. This last point may go far in explaining the efforts to which some leading hedge funds go to give an appearance of hiring the “best and the brightest” even when their investment results are inconsistent with the value of that practice.
The confluence of illusions of control and just world beliefs probably leads investors to accept the idea of a causal link between traders’ work and financial success. When asked to assess the likelihood of achieving financial gains in the stock market, investors employ these feelings as relevant information, judging success to be more likely with an active management. Using very brief surveys, we presented approximately 1,000 adults with a choice judgment task to test for the emergence of the conjunctive fallacy. Similar to Tversky and Kahneman’s heart attack problem,* we expected respondents to find the joint outcome more probable, due to feelings of fluency invoked by the assumed causal relationship…
The most straightforward test of our hypothesis was conducted with a sample of 1,004 individuals, roughly 57% male (n = 572) and 43% female (n = 431). All participants were above the age of 30 (roughly 34% between the ages of 45 and 60 and 41% over age 60), with household incomes in excess of $100,000 (20% of the sample earned over $200,000/year). This is the first question presented to that sample:
ABC Fund invests in common stocks listed on United States stock exchanges. Which is more likely?
(1) ABC Fund will earn a good return this year for its investors.
(2) ABC Fund will earn a good return this year for its investors and ABC Fund employs investment analysts who work hard to identify the best stocks for ABC Fund to invest in.
This question evoked a strong manifestation of the conjunction fallacy, with 62.8% selecting choice (2). This rate is on par with the magnitude of bias found in past studies using this problem structure. By comparison, the “heart attack” problem in Tversky and Kahneman (1983) produced a 58% error rate.*
*The conjunction fallacy emerges even in contexts that are not amenable to that explanation, namely, those in which little to no background information has been provided to participants. In one such demonstration, Tversky and Kahneman asked participants to consider the likelihood of a randomly selected adult male having suffered a heart attack. Participants were instructed to choose which statement was more likely:
(1) This person has had one or more heart attacks.
(2) This person has had one or more heart attacks and is over 55 years of age.
The majority of respondents selected the second option. Despite choice (1) being logically more probable, the addition of age‐related information to choice (2) lends it an air of enhanced plausibility. This is because choice (2) suggests a causal explanation that is consistent with both participants’ prior knowledge and objective reality (that is, the risk of heart attack does, in fact, increase with age). Qualitatively, choice (2) “feels” more likely to participants.
You can read the whole paper here: https://onlinelibrary.wiley.com/doi/10.1002/cfp2.1031
Now go back and look at the graph PERCEPTION vs. REALITY: Causes of Death in the United States for another example of Behavioral Economics.
Hope you enjoyed this issue, and I look forward to “seeing you” again.
Harold Evensky
Chairman
Evensky & Katz / Foldes Financial Wealth Management
IMPORTANT DISCLOSURE
PLEASE REMEMBER THAT PAST PERFORMANCE MAY NOT BE INDICATIVE OF FUTURE RESULTS. DIFFERENT TYPES OF INVESTMENTS INVOLVE VARYING DEGREES OF RISK, AND THERE CAN BE NO ASSURANCE THAT THE FUTURE PERFORMANCE OF ANY SPECIFIC INVESTMENT, INVESTMENT STRATEGY, OR PRODUCT (INCLUDING THE INVESTMENTS AND/OR INVESTMENT STRATEGIES RECOMMENDED OR UNDERTAKEN BY EVENSKY & KATZ / FOLDES FINANCIAL WEALTH MANAGEMENT (“EK-FF”), OR ANY NON-INVESTMENT-RELATED CONTENT, MADE REFERENCE TO DIRECTLY OR INDIRECTLY IN THIS NEWSLETTER WILL BE PROFITABLE, EQUAL ANY CORRESPONDING INDICATED HISTORICAL PERFORMANCE LEVEL(S), BE SUITABLE FOR YOUR PORTFOLIO OR INDIVIDUAL SITUATION, OR PROVE SUCCESSFUL. DUE TO VARIOUS FACTORS, INCLUDING CHANGING MARKET CONDITIONS AND/OR APPLICABLE LAWS, THE CONTENT MAY NO LONGER BE REFLECTIVE OF CURRENT OPINIONS OR POSITIONS. MOREOVER, YOU SHOULD NOT ASSUME THAT ANY DISCUSSION OR INFORMATION CONTAINED IN THIS NEWSLETTER SERVES AS THE RECEIPT OF, OR AS A SUBSTITUTE FOR, PERSONALIZED INVESTMENT ADVICE FROM EK-FF. TO THE EXTENT THAT A READER HAS ANY QUESTIONS REGARDING THE APPLICABILITY OF ANY SPECIFIC ISSUE DISCUSSED ABOVE TO HIS/HER INDIVIDUAL SITUATION, HE/SHE IS ENCOURAGED TO CONSULT WITH THE PROFESSIONAL ADVISOR OF HIS/HER CHOOSING. EK-FF IS NEITHER A LAW FIRM, NOR A CERTIFIED PUBLIC ACCOUNTING FIRM, AND NO PORTION OF THE NEWSLETTER CONTENT SHOULD BE CONSTRUED AS LEGAL OR ACCOUNTING ADVICE. A COPY OF EK-FF’S CURRENT WRITTEN DISCLOSURE BROCHURE DISCUSSING OUR ADVISORY SERVICES AND FEES IS AVAILABLE UPON REQUEST. PLEASE NOTE: IF YOU ARE AN EK-FF CLIENT, PLEASE REMEMBER TO CONTACT EK-FF, IN WRITING, IF THERE ARE ANY CHANGES IN YOUR PERSONAL/FINANCIAL SITUATION OR INVESTMENT OBJECTIVES FOR THE PURPOSE OF REVIEWING/EVALUATING/REVISING OUR PREVIOUS RECOMMENDATIONS AND/OR SERVICES, OR IF YOU WOULD LIKE TO IMPOSE, ADD, OR TO MODIFY ANY REASONABLE RESTRICTIONS TO OUR INVESTMENT ADVISORY SERVICES. EK-FF SHALL CONTINUE TO RELY ON THE ACCURACY OF INFORMATION THAT YOU HAVE PROVIDED.
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