If you are paying any attention to the media the last few weeks you know at least two things: China and the United States are having a tariff standoff, and the market (AKA all things tradeable) is having a rough end to the summer. On the latter point, why does volatility to the downside drive so much hysteria and so many prime time CNBC specials? I believe it is simply because we are all human.
If you are like me, you probably spend a lot of time marveling at and studying the likes of Amazon, Google, and even Facebook. Each is only about 20 years old, yet they each occupy a spot in the world’s ten most valuable companies. Casting aside the varying forms of backlash they have experienced recently, there is much to admire about each firm’s growth and ubiquity.
Topics: Advisor Practice Management
At Blueprint, we spend a lot of time articulating the ‘why’ behind our systematic, process-driven investment approach. Our communications with advisors frequently emphasize behavioral finance because we believe that having a transparent process and educating our partners about exactly what to expect leads to better investment outcomes for their clients. Today’s note focuses on another, equally emphasized subject of our writings: advisor practice management. Please read on.
(750 words and approximate reading time 3.5 minutes)
Which is more important?
How many times have you stopped and considered the real meaning of words used every day? More importantly, how often do you challenge your own notion of that meaning by looking it up? Recently, I heard a friend and father I respect tell his son that discipline is more important than motivation. He said, “Motivation can come and go, but discipline will take you where you must go, even when you are not feeling very motivated”. It was compelling enough to write down, and consider not only the meaning of the words but also the implications. It is great advice, and I thought I would share what I found. Read on.
In 1931, the New York Times, celebrating its 80th birthday invited eight American innovators to predict what life would be like in 80 years. Among them, Dr. William Ogburn, a sociologist, predicted that "people will become more nervous and mental disorders will rise for a time, but by 2011 mental hygienists will probably have the upper hand.” W.J. Mayo, the founder of the Mayo Clinic, said that by 2011, the average life span, then only 54, would rise to 70 (it was 78). As we have written before, market predictions are generally useless even when correct. Why is there such a fascination with predictions to begin with?
In 2009, few could have imagined a 10-year bull market, the longest in U.S. history. To the delight of multitudes of investors (those who remained invested anyway), here we stand, giddy from experiencing record-high stock prices and record-low volatility.
But will it last?
Research shows that two-thirds of institutional investors believe the bull market in stocks will reach its end this year. Further, they expect the next financial crisis to come in one to five years, according to a Natixis survey.
The eternal question for financial advisors:
How do you instill discipline in clients when they face emotionally charged environments?
Approximate Reading time: Three minutes and 30 seconds
Recently I was listening to an excellent podcast (link here) in which Michael Kitces was interviewing Manisha Thakor (founder of Money Zen) about building your own media brand in an authentic way. Yes, that is a buzzword-filled subject, but I was curious. For at least the first 30 minutes or so, they talked at length about being introverts, surprising given that they make their living speaking in front of people and both have huge relationship networks. This conversation spoke to me, as I am an introvert, so I thought I would share a few observations and recommend some followup reading. Enjoy.
Topics: Advisor Practice Management
On June 3, 2017, rock climber Alex Honnold completed the first-ever free solo (ahem, no ropes) of Yosemite National Park’s epic El Capitan.
Topics: Behavioral Finance
Blueprint believes a major preoccupation for investment advisors and financial planners has become their clients’ emotional quotient (EQ), as it surpasses the intelligence quotient (IQ) in the advisor value chain.
Advisors studying the Blueprint approach to systematic investing often ask the question of how Blueprint’s investment methodology differs from Smart Beta strategies that similarly rely on quantitative modeling.
Before answering this question, allow us to provide some context.
Nearly a year and a half ago, we published an original piece entitled “An Alternative to Liquid Alternatives.” At the time, we wrote: “many of the currently investible vehicles have not been truly tested in a dramatic drawdown environment like 2008.” Since publication, the investing landscape has changed substantially; interest rates are rising, the S&P 500 has endured a 20% drawdown, and the yield curve has inverted, to name just a few of the many notable developments.
Given the path of global markets since Oct 2017, there has been ample opportunity for liquid alts to prove their mettle, so we thought it was time to update the data for one of our most popular blogs. Let’s look at the revised story…
“The three greatest risk to investors: Behavior biases; loss of compounding from large portfolio losses; and the opportunity cost of being too conservative.”
- Jon Robinson, Systematic Investing And The Rise Of Emotional Intelligence -
As most know, investors notoriously underperform the market by aggressively buying at the highs and selling at the lows. In fact, a DALBAR study released this week shows the average equity fund investor experienced twice the loss of the S&P in 2018. However, it is possible to conquer this reactive fear and respond effectively to the inevitable presence of market volatility.
Topics: Behavioral Finance
The race to zero in the ETF world has its first winner. On February 25th, online personal financial services company Social Finance, Inc. (SoFi) announced the industry's first zero-fee ETFs. The filing consists of four ETFs in total, with two of the funds (SFY, SFYX) having fee waivers in place until at least March 27, 2020, effectively bringing their total fund expenses to zero for the first year of operation. But much like a buy one get one free offer, it is not immediately evident that a zero fee ETF is always a good value. We believe there is more to the story, and make the case below.
As anyone who has read Blueprint insights over the last few years knows, we believe in two types of diversification. First, asset diversification is a keystone of investing and we embrace the benefits. Second, we add time diversification using trend following techniques to mitigate the vagaries and cycles of markets. Why? Because, historically, when given enough time (say 20 years), asset diversification (buy and hold) has been almost unbeatable. However, humans do not naturally invest or even think that long term and struggle with staying the course when the market inevitably course corrects either in a short-lived correction or sustained drawdown. This in turn reduces the probability of achieving their long-term financial objectives. Please allow me to elaborate.
Topics: Systematic Investing
Execution is everything
Do your job. This simple three-word phrase has served as the mantra for the New England Patriots and their long-time coach Bill Belichick during their incredible run since 2000. Being from North Carolina, I’m proudly a Panthers fan, but I have always respected and appreciated the ‘Patriot way.’ Six Super Bowl wins in nine appearances is a spectacular achievement, particularly in a sport theoretically geared to ensure parity and discourage dynasties.
Topics: Advisor Practice Management
Here we go again. All the market analysts and prognosticators have been forced by convention to rub the old crystal ball and suggest they can predict the future for the next year. They even make fun of themselves with clever art that illustrates the lunacy of the exercise – such as below. Given the fact that predictions are merely educated guesses, why does this ritual occur every year? Attention? Arrogance? Or is it a component of the human emotional bias that drives the markets overall?
Topics: Behavioral Finance
The active vs. passive debate reached a fever pitch on Monday when Jeff Gundlach referred to passive investing as a ‘mania.’ As expected, Vanguard quickly defended passive index funds by saying that “the data simply does not support his claims.” There is certainly nothing new about this debate. It’s been escalating since the first index funds were launched in the mid-70’s. However, moments like this remind the Blueprint team why we utilize passive index funds in the first place –they are the tools we use to build portfolios on behalf of our clients.
Now that I have your attention - who really thinks they get enough sleep? Many CEOs now indicate adequate rest is critical to their success! Who prioritizes rest over work or even exercise? For years, I have been obsessed by my sleep, or lack thereof. Recently my wife and I had the privilege and the pleasure of hanging out over cocktails in Laguna Beach with our new friend Dr. Michael Breus, Ph.D., known internationally as The Sleep Doctor. According to Dr. Breus, how you manage your sleep is as important as how long you sleep! This is called sleep hygiene. Read on to learn what else I discovered.
The movie “Moneyball” has an interesting scene in which General Manager Billy Beane is debating his scouts on how to best replace two key players lost in free agency given the team’s limited budget. The scene contains a back and forth between Beane and several scouts discussing and clearly disagreeing about “the problem.”
“You’re not even looking at the problem”, Beane declares.
We at Blueprint are excited to share with our readers and friends a fantastic interview with Jon Robinson and Tommy Mayes by Forbes contributor Peter Hans. In it, Jon, Tommy, and Peter discuss systematic investing, emotional intelligence, liquid alternatives, and more. Blueprint's story and background is also explored, providing valuable insight into how and why we do what we do. We are immensely grateful for the opportunity to have this discussion with Peter, and hope that you enjoy reading it as much as we enjoyed telling it.
At Blueprint, we utilize tactics based on the fundamentals of Trend Following, attempting to smooth the investment ride and to keep compounding high for our advisor clients. We generally do this using passive instruments such as index-based ETFs and Mutual Funds for two reasons:
Late last year, it was clear to us as we listened to our clients that a correction in the US markets was a primary concern. There also seemed to be a prevailing wisdom that such a correction, if it occurred, could likely lead to a bear market. While we do not allow the news or anyone’s feelings about markets to influence our investment decisions, we do use them to inform what we analyze and write about. This led to a question. (In my best Dwight K. Schrute voice) “Question: do sharp declines in US Equities act as a precursor to bear markets? False!” The data says they do not.
I returned from a nice long visit to Paris last week, relaxed and without a care in the world. Then I read the news. Yesterday, an investment banker told me he was worried about the Four T’s - Trump, Tariffs, Trade and Turkey. Blueprint is not a macro firm and makes no economic pronouncements, but if your investment portfolio has been riding the wave of up-vol and peak beta (yes, volatility goes in both directions), it is time to make sure that your portfolio includes strategies that will buffer the down-vol, because it is inevitable. A former colleague likes to call these “shock absorbers”. Have you ever ridden in a car without good shocks? It is not comfortable.
The announcement by Fidelity Investments on August 1st provided the culmination of a trend long in the making. Coincidentally, it is also an idea we have discussed privately for many years, and publicly in this blog since last year – FREE BETA. In what is being hailed as a shocking move, Fidelity has announced the unveiling of two new index funds with a ZERO expense ratio. Vanguard and Blackrock have been offering practically free beta through their ETFs and index funds for years now - but practically free is not free!
Last May’s blog, in which I shared our observations about the Robo industry, if you can call it an industry, is proving to be on target. You cannot charge a fee for something that should already be free (Beta), and ignore the one thing that you can charge for, advice and a human touch! The list of robos in the graveyard is the proof.
Like the networks in the summertime who replay their episodes to recycle good material, I thought a revisit of the much discussed and maligned DOL Fiduciary Rule was in order due to its recent vacating by the 5th Circuit Court in New Orleans. With or without the rule, it is time for the industry to step up!
Ok, now we have seen it all. Maybe.
Imagine if you will, it is again February 2009. The market, perhaps the world, is in a freefall. And you see an incoming call from your brokerage firm that you are relieved to receive, because you really need proactive advice and wise counsel.
I am what some would call a nerd – but don’t feel bad for me, I wear this as a badge of honor. As such, I am not normally afraid to work with data and perform deep analysis. However, there was one time where the thought of diving deeper gave me pause for fear of what I might find. In hindsight, my hesitation seems silly given the critical truth I was overlooking. Nevertheless the anxiety was real. For fellow nerds, this is also known as Confirmation Bias, but I digress.
Back in the dark ages when I started my career in banking, the pace of work and communication was entirely different. Imagine a world with no mail other than what came with a stamp on it or in an interoffice envelope (who remembers those?). Your phone messages came on a pink slip of paper and you dictated your memos. You could actually choose to leave your work at the office. Of course, the biggest change today is that you literally carry your office around in your pocket or a backpack. (Briefcases are gone as well.)
One hundred million users in the US, a market size of almost $70 billion, and growth rates ranging from 4.8% to almost 10% - these sound like the descriptive statistics of a thriving and successful industry[i]. Perhaps, but consider that the underlying problem this industry is trying to solve is getting worse, not better. I’m talking about the weight loss and diet industry.
I have the benefit of an insider’s view of many different businesses associated with my family office and private equity work. I sit on a few boards, spend significant time coaching and strategizing with executives, and actually have a few direct private investments myself where I am actively involved in business strategy and development.
The other day I was speaking with my brilliant friend Liam about the snap back in the market from the almost historic down move, and he reminded me of the question I asked in a blog last November: Do Behavior Bubbles Exist?. I think we have our answer, and in fact, we may have had the then-discussed Minsky Moment. However, it was only a moment, and patient investors sidestepped the market shock and were reminded that a healthy stock market does include a version of volatility that is not always up.
With global equity markets continuing to trade at all-time highs, most astute advisors are seeking downside protection. The recent bull market in U.S. stocks entered its 10th year and the concern over a large drawdown or even an overnight price shock is also reaching tangible levels. As systematic managers, we rely on the data to cut through the emotional biases of such environments and provide context and balance to the situation. After over a decade of examining data on many different assets from equities to bonds, metals to agricultural products and even used-auto prices, one of the constants is that we believe there are two distinct forms of market declines – sustained declines in value and temporary price shocks. Sustained declines in value can take several months or years to develop before reaching an eventual trough. On the other hand, we define a shock to be a rapid decrease in the price of an asset, usually over a few days or, at most, a few weeks.
This seldom happens: Equities, bonds, and credit being similarly expensive at the same time. "A condition that is going to translate into pain for investors". (Full Article Here)
Major drawdowns in 60/40 portfolios averaged 26% in real terms, lasted about 19 months, and took almost two years to return to previous peaks.
A few weeks ago, I attended a family office conference on the West Coast that, as in the past, was comprised of a crowd of industry experts (writer excluded of course), including family office advisors, executives, and top minds from all corners of the investment universe. Being a lifelong member of the East Coast clan, it is always refreshing to have the mix of more traditional thinkers with those far less constrained minds of California.
Topics: Behavioral Finance
For the updated version of this blog, click here.
In the aftermath of the Great Recession investors have sought greater diversification for their portfolios. One set of instruments that investors have used to achieve this goal is liquid alternatives (aka ‘liquid alts’). Investors are seeking out these strategies in an effort to reap the potential portfolio benefits of:
For the last several weeks I have been pondering the notion of radical transparency – personally, professionally, spiritually, etc. Much is written about the notion of authenticity in terms of living a life that, in all respects, reflects who you are. Yet we often live in different modes of life where the ‘authentic’ version of us is nuanced for the situation. Transparency, on the other hand, might imply that no matter the place or time, we are sharing our true selves, the details of our lives, and allowing the trust and engagement to build with everyone around us. Add the word radical as an adjective, and you imply that you want your level of transparency to be so thorough that it is transformative in all aspects of your life.
Episode 3: The Conclusion - Exploit Their Weakness
For the final episode of the Rise of the Machines trilogy, we will dig deeper and get a bit more technical to make our point – that elite advisors will see this evolution as an opportunity, not a threat. As you recall, in Episode 1 we discussed the power of objectives-based financial advice, and that embracing investment technology is a component of the path to successfully confronting the changing landscape and retaining the human advantage. In Episode 2 we defined advisor’s advantages over robots, what sets engaged human advisors apart, and what the advisor “deliverable” looks like.
Episode 2: Define Your Superiority
In Episode 1, we discussed how elite Advisors are focused on achieving client goals while living in a rapidly changing environment – today many investment services that were once high value are now freely/cheaply available. (To read Episode 1, click here.)
In Episode 2, we want to describe what sets Advisors apart from the robots, and highlight client motivations for investing (with people!). Most importantly, we offer ideas for how Advisors can cement their advantage over the robots by improving the overall client experience.
Episode 1: Understand Their Appeal
Elite Advisors focus on one thing – achieving their client’s financial goals.
Particularly now, when market returns and basic portfolio optimization techniques have become commoditized and are no longer competitive advantages, it is critical that Advisors deliver on this promise for their clients. From a wealth management perspective, it is not good enough to simply buy and hold a portfolio of investments, whether expensive and actively-managed mutual funds, or cheap and passive ETFs. If the average investor can achieve a market return for essentially nothing, then shouldn’t the elite advisor instead provide the highest probability of meeting or exceeding the financial goal as their investment deliverable?
After more than 25 years in the financial advice world it appears to me our industry is finally growing into adulthood. For the first time, all financial advisors must now conduct business in a manner appropriate to the incredible responsibility allowed us by our clients. Simply put, the industry will require itself (thanks for the nudge Uncle Sam!) to put a client’s interests first in the recommendation and implementation of financial strategies and plans. Seems pretty straightforward right? Apparently only if this level of diligence DOES NOT get in the way of the advisor making his Mercedes lease payment (name your indulgence here). I have been asked many times by friends and clients – ‘hasn’t this always been a rule?’ Well no, but it should have been.
In 1998, during the peak of the dot com boom and only a few short years after Al Gore invented the internet, I was an executive in the private bank of a large financial institution in the Southeast. We were staring at the opportunity to begin to utilize technology as part of our client service delivery, and at the same time intimidated by the change that would lie ahead. I led a team that created one of the first integrated wealth management strategies in the industry, and our business model has been replicated many times over in the last 20 years or so.
The investment industry is facing a “60/40 problem”. Over the past several decades, advisors have leaned on the 60/40 portfolio to deliver a less-volatile, but still relatively reliable return for balanced investors due to their lack of tolerance for the volatility and drawdowns of a pure equity allocation. While the addition of bonds to an otherwise non-diversified portfolio of equities does indeed reduce the beta of the overall portfolio, the correlation to equities remains high given that “the 60” has been 3 times as volatile as “the 40.” In our view, the 60/40 problem boils down to an underestimation of future risks for both bonds and stocks. Rather than solving a new problem with an old solution, Blueprint has considerable evidence of a better way.
In November, The Ringer’s Danny Chau published an article about the unique abilities of NBA superstar James Harden, whose absurd level of play this season has made him an MVP favorite. In the piece, Chau recounts a conversation with Dr. Marcus Elliott of P3 Applied Sports Science, a performance facility that uses advanced technology to test the physical capabilities of athletes. According to Elliott, “Harden is barely average in almost every metric we look at related to athleticism, except for deceleration metrics. And in those he’s one of the best athletes we’ve ever measured in any sport — in soccer, football, or basketball.” In other words, Harden is world-class at slowing down. The Houston Rockets’ All-Star guard does not need to out-run, out-lift, or out-jump his opponents to beat them off the dribble- Harden’s preternatural ability to stop on a dime allows him to create the space he needs to score while his defenders fly into the first row of the stands.
Topics: Behavioral Finance
The Wall Street Journal recently published a profile piece about Will Danoff, the manager of Fidelity’s Contrafund (FCNTX), which got us thinking. As stated in the piece, the $108 billion Contrafund has averaged a 12.7% annual return since Danoff took over the fund in September 1990, outperforming the S&P 500 index by 2.9 percentage points per year. Contrafund’s performance has indeed been tremendous, as shown in the following graph when compared to the S&P 500:
Topics: Systematic Investing
As media outlets, governments and markets react to the continuing troubles of Deutsche Bank (NYT, BBC, Bloomberg, Atlantic), our research staff was both eager and curious to examine the potential impact of adding a trend following system to DB’s stock, as well as to those of fellow sector firms Credit Suisse and Citigroup. The recent woes of these companies should come as a surprise to few – consider the following graph of cumulative returns since September of 1997, paying particular attention to the last 3 years:
Topics: Systematic Investing