First, Understand Their Biases

If you are a regular consumer of written or televised media (political, financial, etc) one of the most important things you can do before consuming your content is to understand the creator's bias.  We all have biases (even me!).  If the author of the content is a journalist, it could be to get more eyeballs on their piece.  If the author is an practitioner, then it could be to sell you a product or service.  Whatever it may be, we all have an ax to grind, and no one is going to come out and tell you they have a conflict of interest in presenting this information to you.

I have noticed several articles written by an author on MarketWatch's website.  His articles all talk about a major crash coming in the markets. In this one he predicts a greater than 50% crash to hit the markets next year.  Outside of the fact that it is nearly impossible to predict the future and he has been wrong for a considerable amount of time, MarketWatch continues to publish this nonsense.  You have to ask yourself why?  What is their motivation for publishing articles that are obviously misleading?

Ask yourself this- would you read article after article about how you should stay the course, keep a balanced asset allocation and not try to time the market?  Of course not.  Fear sells…MarketWatch knows this and their main motivation is how many people click on their website.  They can derive more ad revenue that way.  So they put out article after article with extreme headlines hoping you'll click.  They are not being paid to advise you, they are being paid to get your attention.

Our advice is simple.  When you are reading an article, first find out about the author.  What business are they in?  What are they trying to sell you?  When you start with this this mindset you will have a better understanding when you are reading something that is actually valuable or heavily conflicted.  If you are truly looking for advice about your finances, the only real way you can be sure you are getting unconflicted advice is if you find an advisor that you pay directly for that advice.  There are very few advisors out there that operate in this fashion.  Most advisors and/or firms receive compensation from products they sell their clients.  This is one of those conflicts you must be aware of when you seeking advice.  If you are interested in finding out more about advisors who only receive compensation from their clients (and not selling products) go to the National Association of Personal Financial Advisors (www.napfa.org) and search for an advisor in your area.

 

(Full disclosure:  Greenspring is a member of NAPFA).

How The Sausage Gets Made on Wall Street

Ever wonder how the "sausage gets made" at big Wall Street firms like Merrill Lynch, Morgan Stanley and UBS?  Many of us at Greenspring worked at these organizations in the past and have some strong feelings about their business practices.  One of the main factors that motivates behavior is the compensation plan for advisors at the firm.  As you can imagine, brokers are often incented to push clients into various products (that are profitable for the firm) by constantly adjusting the compensation plans.  A Wall Street Journal article discusses some of those practices:

"How do you get paid?" the client asks.

Thinking about the new comp plan your wirehouse introduced last month, you pause to weigh your response. You decide it’s a mistake to get into the weeds.

Your client’s eyes will glaze over. He’ll drum his fingers and glance furtively around the room.

That’s because payout grids are out of control. Wirehouses are “compressing” a simple equation—gross revenues times payout equals W-2 income—into 30-plus pages of mind-numbing, what-if scenarios:

What if you sell this? What if you sell that? What if your 2015 revenues fall short of last year’s numbers?That’s because payout grids are out of control. Wirehouses are “compressing” a simple equation—gross revenues times payout equals W-2 income—into 30-plus pages of mind-numbing, what-if scenarios:

Your grid is a numerical dump, and 30 pages may understate the complexity. One shop uses three separate documents, totaling some 70 pages, to explain how its financial advisers get paid. There’s the plan itself, an overview of the plan and, finally, a compilation of answers to frequently asked questions.

The article goes on to talk about how clients are ill-served when advisors are incented to offer certain products (like margin loans).  When comp plans change you either have to sell what the firm tells you, or see your compensation get cut.  Having been on the inside, many of us at Greenspring openly admit that this was one of the main reasons for leaving these firms.  I would venture to guess it is why these big firms have seen their ranks dwindling over the past several years as well.  Clients have been voting with their feet and when that happens it doesn't take long for advisors to follow.  From 2007 to 2013 big Wall Street firms share of high-net-worth assets dropped from 53% to 41%.  Clients finally have an option to work with an advisor that is not compensated to sell products, but to truly advise them on how to grow and protect their wealth.  With that paradigm shift gaining momentum, I don't see the trend reversing any time soon.

Warren Buffet’s Big Bet Against Hedge Funds

Seven years ago Warren Buffet threw down the gauntlet.  He bet any hedge fund that a simple Vanguard S&P 500 index fund would outperform the fund(s) of their choosing over a 10 year period.  The wager?  One million dollars would go to the winner's charity of choice.  Each put up half the money of the bet.  So where do things stand now, with only three years left on the bet?  Buffet is way ahead.  Fortune writer and Buffet biographer Carol Loomis sums it up:

Under the terms of the wager, Buffett is betting (with his own money, not Berkshire’s) on the stock market performance of an S&P 500 index fund while Protégé Partners, a New York money manager, is banking on five funds of hedge funds (the names of which have never been publicly disclosed) that Protégé carefully picked at the outset. Through the seven years, Vanguard’s 500 index fund, as represented by its Admiral shares, is up 63.5%. That’s the portfolio carrying Buffett’s colors. Protégé’s five hedge funds of funds are, on the average—the marker the bet uses—up an estimated 19.6%. (The “estimated” takes into account that not all of the five funds have final figures for 2014).

What's interesting about the bet is that it started in 2008.  Buffet was way behind from the onset since the S&P 500 lost 37% in that first year.  And there lies the genius behind Buffet's bet.  He knew that by making the bet a 10 year horizon, the odds were massively in his favor.  Why?

  1. Equity markets lose value about one of every three years, but when you go out to 10 years, they have a greater than 80% chance of gaining more than 5% and a greater than 50% chance of making more than 10%.  Buffet knew that time was his friend.
  2. Fees for the hedge funds would eat into returns- when you are paying management fees, performance fees and heavy trading fees the hurdle rate to keep up with the market can be difficult to overcome.  While anything can happen in one year, Buffet knew that if given enough time, the fees would prove to be their undoing.

There are many lessons that can be learned from this bet.  Probably the biggest one is that if you ever have the opportunity to wager $1 million with the greatest investor of all-time, you should probably pass.

Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.