There have been several articles of late that have grabbed our attention or garnered significant national press that we thought we would take the time to share this week. Please see a brief intro to each and a link to access below . . .
Why I am Leaving Goldman Sachs
Now former Goldman Sachs employee Greg Smith wrote an op-ed piece for the New York Times last week on how watching clients' interests being routinely and systematically ignored for the betterment of the firm led to him feeling like the only ethical option was to resign. The piece has been much publicized as an indictment against Goldman and the entire wirehouse business model in general.
Really Big Claims Based on Too Little Data
TAAG Blog favorite Carl Richards posted this New York Times Bucks blog recently. Carl takes on the dangers of looking at data over the short term and building conclusions based upon not enough information. He also does an excellent job of explaining why, ultimately, the data supports a low cost, globally diverse portfolio over finding the best fund manager du jour every time.
The Real Cost of Paper Savings Bonds
This was a post from a guest blogger to the FPA All Things Financial Planning Blog that Chip contirbutes to monthly on the potential risks of hanging onto physical, paper savings bonds and the electronic deposit program the Treasury has established to make tracking and redeeming your bonds safe and simple.
Have a great week!
The Asset Advisory Group
Website / E-mail
Showing posts with label active management. Show all posts
Showing posts with label active management. Show all posts
Tuesday, March 20, 2012
Wednesday, December 7, 2011
My Headline: Headline Risk Is a Lame Excuse for Active Managers
(from Dan Solin's Huffington Post blog, 12/6/2011 - click here for the original post)
A recent blog on CNBC almost made you feel sorry for active managers It referenced a study by Bank of America Merrill Lynch which found that active managers were having "a rough year." Only 23 percent of large-cap managers beat the S&P 500 index and only 27 percent topped the performance of the Russell 1000.
There is a certain irony in the fact that Bank of America Merrill Lynch is the source of this information. The merger of these two mega active managers was triggered by what the New York Times characterized as Merrill's "billions of dollars in mortgage-related mistakes." Merrill's active management of its own portfolio did little to inspire confidence in its investment expertise.
But I digress.
Active managers were quick to explain their underperformance. Mark Lamkin, the CEO and "chief investment strategist" at Lamkin Wealth Management, blamed his underperformance on "headline risk," noting: "Nine of the last 11 years my active strategies have beaten the market, and I'm underperforming this market. It's all headline risk."
"Headline risk" is the possibility that a negative news story will adversely affect the price of a stock.
I tried to verify Mr. Lamkin's claim that his active strategies have "beaten the market" in nine of the last eleven years and was unable to do so. His firm does not publish the results of its portfolios on its web page. I called his office and asked for additional information but received no response.
Analyzing the significance of claims that a fund manager or advisor "beat the markets" is not uncomplicated. You need to understand how much risk the manager took and whether the benchmark used for comparison is an appropriate benchmark, comprised of a proportionately weighted mix of stocks and bonds.
Mr. Lamkin's lament about "headline risk" is troublesome. Unexpected news is a reason for under performance by active managers, but it is not an excuse that active managers should use to explain their inability to "beat the markets." Tomorrow's news drives stock prices. Active managers don't know tomorrow's news. They can't anticipate what they don't know. "Headline risk" is one of many reasons why active managers historically have underperformed the markets and are likely to continue to do so in the future.
According to a mid-year 2011 study by Standard and Poors, Over the past three years, 63.96% of actively managed large-cap funds were outperformed by the S&P 500, 75.07% of mid-cap funds were outperformed by the S&P MidCap 400 and 63.08% of the small-cap funds were outperformed by the S&P SmallCap 600. Passive management trumped actively managed in nearly all major domestic and international stock categories.
The results for this year, while worse than in previous years, are not unexpected. The skill of active managers is not in "beating the markets." It's convincing you they are likely to do so in the future, and coming up with lame explanations for why they have not done so in the past.
That's my headline.
Dan Solin is a Senior Vice-President of Index Funds Advisors (ifa.com). He is the author of the New York Times best sellers The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, and The Smartest Retirement Book You'll Ever Read. His new book, The Smartest Portfolio You'll Ever Own, was released in September, 2011.The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.
A recent blog on CNBC almost made you feel sorry for active managers It referenced a study by Bank of America Merrill Lynch which found that active managers were having "a rough year." Only 23 percent of large-cap managers beat the S&P 500 index and only 27 percent topped the performance of the Russell 1000.
There is a certain irony in the fact that Bank of America Merrill Lynch is the source of this information. The merger of these two mega active managers was triggered by what the New York Times characterized as Merrill's "billions of dollars in mortgage-related mistakes." Merrill's active management of its own portfolio did little to inspire confidence in its investment expertise.
But I digress.
Active managers were quick to explain their underperformance. Mark Lamkin, the CEO and "chief investment strategist" at Lamkin Wealth Management, blamed his underperformance on "headline risk," noting: "Nine of the last 11 years my active strategies have beaten the market, and I'm underperforming this market. It's all headline risk."
"Headline risk" is the possibility that a negative news story will adversely affect the price of a stock.
I tried to verify Mr. Lamkin's claim that his active strategies have "beaten the market" in nine of the last eleven years and was unable to do so. His firm does not publish the results of its portfolios on its web page. I called his office and asked for additional information but received no response.
Analyzing the significance of claims that a fund manager or advisor "beat the markets" is not uncomplicated. You need to understand how much risk the manager took and whether the benchmark used for comparison is an appropriate benchmark, comprised of a proportionately weighted mix of stocks and bonds.
Mr. Lamkin's lament about "headline risk" is troublesome. Unexpected news is a reason for under performance by active managers, but it is not an excuse that active managers should use to explain their inability to "beat the markets." Tomorrow's news drives stock prices. Active managers don't know tomorrow's news. They can't anticipate what they don't know. "Headline risk" is one of many reasons why active managers historically have underperformed the markets and are likely to continue to do so in the future.
According to a mid-year 2011 study by Standard and Poors, Over the past three years, 63.96% of actively managed large-cap funds were outperformed by the S&P 500, 75.07% of mid-cap funds were outperformed by the S&P MidCap 400 and 63.08% of the small-cap funds were outperformed by the S&P SmallCap 600. Passive management trumped actively managed in nearly all major domestic and international stock categories.
The results for this year, while worse than in previous years, are not unexpected. The skill of active managers is not in "beating the markets." It's convincing you they are likely to do so in the future, and coming up with lame explanations for why they have not done so in the past.
That's my headline.
Dan Solin is a Senior Vice-President of Index Funds Advisors (ifa.com). He is the author of the New York Times best sellers The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, and The Smartest Retirement Book You'll Ever Read. His new book, The Smartest Portfolio You'll Ever Own, was released in September, 2011.The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.
Friday, July 9, 2010
Free Agent Forecasting
What can LeBron James teach us about financial experts forecasting the future?
I’m probably in the minority of those of us who participate in this blog as a fan of the National Basketball Association, so some of this information may be new to some of you. That said, if you have picked up a paper, watched a news broadcast or have even a fleeting interest in sports, you have probably at least heard LeBron James’ name over the last several weeks.
For the uninitiated, LeBron James is one of the top players in the NBA. As of the end of this season, he’d spent his entire career playing for his hometown Cleveland Cavaliers. On July 1st, LeBron became an unrestricted free agent and could choose to stay at home or test the waters in a new market.
When did the media start forecasting where he would go? Last week? Last month? Actually, the first news stories speculating about his future began as early as 2008. Things built to a roar over the last basketball season and ended in full blown mayhem over the last month. The event culminated in LeBron dictating terms to ESPN for a one hour prime time TV special last Thursday in which he announced his decision to leave home for the warm air and blue waters of Miami, Florida.
The point to all of this is how important it was for someone, anyone to break the story of where he was going in advance of the announcement. Reporters and other so-called “experts” postured and positioned to be first to break the story and reap the rewards if they did. If you were to believe each report, it was all but guaranteed by these experts that LeBron was to sign with six different teams at any given time.
Did these reporters really have trusted sources that could verify each and every one of these scenarios? No, they were placing a bet. The bet was that they’d leak a scenario based on flimsy information and, if proven right, would claim that they broke the news first.
So what does all of this teach us about reporting on the markets? Part of the 24 hour news, sports and entertainment cycle that we all live with are lots of business writers, economists and other experts that benefit greatly if their forecasts end up paying off. Like with the sports reporters, it can mean book deals, lucrative media contracts and other such offers that can certainly boost the lifestyle of said “expert”. These industry incentives have shifted and are now there to encourage guessing or betting on the correct forecast over focusing on accuracy.
In the end, someone is going to be right, but can you pick that person in advance and would you be comfortable enough if you thought you could to risk your savings on that bet? For most of us, the answer is no, yet many investors choose that path on a daily basis.
The race for accuracy has been replaced by the race to be first. To sports fans, the misinformation that results is a minor annoyance as we watch egos pick which city will earn the right to pay players millions of dollars each season. But with investing, it’s a dangerous game that can toy with investors’ emotions. Rise above the fray, have a concrete plan in place, stick to it and tune out the noise.
Chip Workman, CFP®
cworkman@taaginc.com
http://www.taaginc.com
I’m probably in the minority of those of us who participate in this blog as a fan of the National Basketball Association, so some of this information may be new to some of you. That said, if you have picked up a paper, watched a news broadcast or have even a fleeting interest in sports, you have probably at least heard LeBron James’ name over the last several weeks.
For the uninitiated, LeBron James is one of the top players in the NBA. As of the end of this season, he’d spent his entire career playing for his hometown Cleveland Cavaliers. On July 1st, LeBron became an unrestricted free agent and could choose to stay at home or test the waters in a new market.
When did the media start forecasting where he would go? Last week? Last month? Actually, the first news stories speculating about his future began as early as 2008. Things built to a roar over the last basketball season and ended in full blown mayhem over the last month. The event culminated in LeBron dictating terms to ESPN for a one hour prime time TV special last Thursday in which he announced his decision to leave home for the warm air and blue waters of Miami, Florida.
The point to all of this is how important it was for someone, anyone to break the story of where he was going in advance of the announcement. Reporters and other so-called “experts” postured and positioned to be first to break the story and reap the rewards if they did. If you were to believe each report, it was all but guaranteed by these experts that LeBron was to sign with six different teams at any given time.
Did these reporters really have trusted sources that could verify each and every one of these scenarios? No, they were placing a bet. The bet was that they’d leak a scenario based on flimsy information and, if proven right, would claim that they broke the news first.
So what does all of this teach us about reporting on the markets? Part of the 24 hour news, sports and entertainment cycle that we all live with are lots of business writers, economists and other experts that benefit greatly if their forecasts end up paying off. Like with the sports reporters, it can mean book deals, lucrative media contracts and other such offers that can certainly boost the lifestyle of said “expert”. These industry incentives have shifted and are now there to encourage guessing or betting on the correct forecast over focusing on accuracy.
In the end, someone is going to be right, but can you pick that person in advance and would you be comfortable enough if you thought you could to risk your savings on that bet? For most of us, the answer is no, yet many investors choose that path on a daily basis.
The race for accuracy has been replaced by the race to be first. To sports fans, the misinformation that results is a minor annoyance as we watch egos pick which city will earn the right to pay players millions of dollars each season. But with investing, it’s a dangerous game that can toy with investors’ emotions. Rise above the fray, have a concrete plan in place, stick to it and tune out the noise.
Chip Workman, CFP®
cworkman@taaginc.com
http://www.taaginc.com
Monday, November 2, 2009
And Down the Stretch They Come
On a recent trip down the Historic Kentucky Bourbon Trail, I attended a brunch at Woodford Reserve Distillery in Versailles, Kentucky. The featured speaker at the event was Ellis Starr, one of the worlds’ premier horseracing handicappers. The distillery had brought Mr. Starr in to discuss the finer points of wagering at the track for the many attendees planning on spending the day at Keeneland.Being a horseracing novice, I was intrigued by what Mr. Starr did for a living. In short, people interested in betting on horseracing will actually pay for Mr. Starr’s advice. Race tracks will also hire him to pick winners and losers for their in-house television networks that are broadcast to track patrons, off-track betting facilities and home satellite services.
As he talked about how to read a program and analyze each horse, the overall conditions of the track, the quality of the jockey and past performance of the horse, it dawned on me how similar these methods were to actively managing an investment portfolio. Was there really a method I could use to beat the odds at the track and expect better than average returns on a regular basis? There must be some hidden piece of data lurking in the race program that only I could see the right way.
Analyzing all the statistics surrounding various horses, much like investments, feels like the right thing to do. Unfortunately, the truth is whether at the track or on the trading floor, countless variables are at work that cannot possibly be interpreted with any regularity. Horses, like stocks, are going to behave however they choose to once they get out of the gate and are free to run.
My trip did not take me to Keeneland that day, but I did go back to review that day’s results as compared to the expert analysis. Much like the stock picking program offers that fill my inbox each day, a broker’s hot tip, or even my good friends on CNBC, I was left disappointed. In not one instance was the winner selected with any degree of certainty. There were a few picks that, if wagered properly, could’ve been winners, but knowing when and how to place that well timed wager would have been a gamble all its own.
What’s more, I got to hear this analysis for free. Most folks, just like in the investing examples mentioned above, pay for expert advice. This is not to disparage horse handicapping in any way, but rather to revisit that tried and true ideal that if something seems too good to be true, it probably is. No investment strategy, whether betting on the ponies or the stock market, is a guaranteed winner. It doesn’t make financial sense to bet on every horse, but, fortunately, you can bet on virtually every company in the world market and ensure that, over time, you’ll have more winners than losers.
As we come down the stretch of the investing year, now is a great time to evaluate how you choose to invest. Is it a thoughtful plan based on your appetite for risk and meeting your needs in retirement? Is it being carried out by professionals with no conflicts and only your best interests in mind? Or, are you simply spending day after day at the race track that is Wall Street, leaving your money in the hands of folks that continue to sell you products and advice based on a promised level of expertise that they simply do not have?
Wagering on a race here and there can be a lot of fun, but I wouldn’t bet my retirement on it.
By Chip Workman
By Chip Workman
Subscribe to:
Posts (Atom)
Posts
