For years now, there has been a war in the investment industry, driving down fees as fund companies compete for business. At first glance, lower fees may seem like the answer to investors’ prayers. After all, keeping costs as low as possible is an important pillar to maximizing one’s invested wealth, as it is one of the few things you can control in an uncertain market. While our firm’s investment thesis agrees with this idea, we constantly remind ourselves and our clients that there’s no such thing as a free lunch.
Gender income and leadership inequality continue to receive a lot of attention. The good news is that changes that work to level these imbalances seem to be happening. Companies are beginning to recognize that adding women to leadership roles and management teams makes the organizations better. More women are being invited to the table, are "leaning in" and becoming a more powerful demographic. However, the pay gap is not the only financial challenge that women face. Not only do we earn less, we also live longer and tend to take more career breaks. Therefore, in terms of managing our money, we can’t be content to do as well as men, we must do better. Smart investing is crucial to financial security and independence. It also provides freedom to pursue opportunities and can prepare us for life events. Unfortunately, when it comes to investing, women are coming up short.
If you follow financial news, you have probably noticed pundits warning of the flattening yield curve recently. In fact, they say, someday soon it will invert and part of it has already! Furthermore, when the yield curve inverts, these pundits claim, it predicts a recession almost perfectly!!! If you are like many people watching these shows, your anxiety spiked on the word "recession" and you forgot to ask what the yield curve even was. Our team is fairly level headed and analytical, and as a firm we reject market timing, so we think this kind of hyperbolic commentary should be analyzed rather than taken as simple fact.
With few exceptions, devotees of the business reality show Shark Tank almost always harbor a secret desire to sit side by side doing deals with the likes of Mark Cuban, Daymond John, Barbara Corcoran, and Kevin O'Leary (aka Mr. Wonderful). These guys make it look so easy; cherry picking the best of the best all the while lounging comfortably in a studio set made to resemble your typical living room.
What most of us fail to appreciate however, is the show's producers have already sifted through thousands of truly awful pitches before curating the 3 or 4 worthy of making their way into each episode. While the end result makes for compelling TV, the practiced observer sees there's also a bit of financial slight of hand that cleverly obscures a textbook case of survivor bias. That is, the tendency to overestimate the odds of investment success by drawing a circle around a pre-selected subset of the original data pool and then declaring whatever happens to fall inside the lines as the intended "bullseye".
We can’t help but contemplate unlikely events, both good and bad. When you buy a lottery ticket, you know you will almost certainly not win, but you enjoy the minute-long fantasy of what you would do if you did win. The Tigers could get something going this season and win the World Series, says a hopeful sports analyst on the radio. The medical website shows that your symptoms indicate seasonal allergies, but it could be the rare disease that killed a man last year. There are many books in the world of investing, but many of the bestsellers are about the huge losses that most people thought were impossible. We call these unlikely scenarios extreme tail events or black swans.
In June of 1812 and the height of French military power, Napoléon Bonaparte crossed the border at the Niemen River and launched an ill-fated invasion into Russia. Commanding an army of 680,000 French soldiers and conscripts, Napoléon by some estimates started with the largest and most powerful military force ever assembled. Ironically, at the start of his campaign Napoléon had no real intention of marching on Moscow. A few quick battles, near the border and it would be over. As every schoolchild now knows, things didn’t quite work out according to plan.
So how did the Tsar’s peasant army manage to neutralize a force whose power vastly exceeded its own? As the war stretched on, it turns out the Russians had two enormous structural advantages: the French supply lines became overstretched with each advancing step towards Moscow, and the bitter cold of the Russian winter turned lethal for a French army that was unprepared. The fatal flaw in Napoléon’s campaign strategy was not that he picked the wrong battles, it was he deployed his forces against one foe when in reality there were three.
When it comes to sustaining a successful investment planning campaign, the challenge of recognizing the threats hiding in plain sight are remarkably parallel to those that confronted Napoléon. Ultimately, every investor needs to understand there are three disguised threats to their financial security and devise a plan that confronts all three simultaneously.
Have you heard about the ivory tower academics who unilaterally made a huge decision affecting billions of dollars last year? To make matters worse, if investors fall into the trap of trading like automatons, this will trigger untold millions in taxable gains in the process!!! I presume you hadn't heard about this investment earthquake, but I bet I have your attention now.
We spend much of our time in our writings here discussing high level topics like the importance of financial plans, why working with a fiduciary is so valuable, and the traps of behavioral finance. Rightfully so, as these are the big decisions we need to get right to achieve our goals. Nonetheless, I expect most of our readers go a level deeper in their interest and keep track of the stock market (and maybe the bond market) over long periods of time, and we write on broad market behavior now and then to help articulate what we see in our research. Sometimes, though, the market watchers among us notice market movements like we experienced at the beginning of this month and wonder "why the heck did that happen?!" Completely answering that question is almost impossible, but I believe two things: