Investment Advice That Will Pass Time’s Test


I hope you had a wonderful weekend! Today is “National Chocolate Chip Day!”

LRPC’s Monday Morning Minute for this week, “Investment Advice That Will Pass Time’s Test” (presented below) comes to you courtesy of Bob Seawright, Chief Investment Officer, Madison Avenue Securities. As an independent, objective Registered Investment Advisory firm, Lawton Retirement Plan Consultants, LLC has access to research from many sources. Be assured that I will share enlightening, useful information with you each week.

I read a lot of articles on how to invest. This is one of the better ones I have read recently.

Have a wonderful week!


Investment Advice That Will Pass Time’s Test

By Bob Seawright, Chief Investment and Information Officer, Madison Avenue Securities

Every year Wall Street’s strategists offer careful, nuanced and even compelling investment advice for what will happen in the markets and in our world in the coming year. But whenever I look back at how those various predictions turned out, I have found that they are like August humidity in the South — consistently and astonishingly dismal. Moreover, when one of them does get a forecast right or almost right, that performance quality is not repeated in subsequent years.

My friend Morgan Housel, a columnist for Motley Fool, looked at the average Standard & Poor’s 500 stock index forecast made by the 22 chief market strategists of the biggest banks and brokerage firms from 2000 to 2014. On average, these annual forecasts missed the actual market performance by an incredible 14.6 percentage points per year (not 14.6%, but 14.6 percentage points!).

Alleged experts miss on their forecasts a lot and miss by a lot, a lot. Let’s stipulate that these alleged experts are highly educated, vastly experienced, and examine the vagaries of the markets pretty much all day, every day. But it remains a virtual certainty that they will be wrong often, and often spectacularly wrong. On account of hindsight bias, we tend to see past events as having been predictable and perhaps inevitable. Accordingly, we think we can extrapolate from them into the future. But the sad fact is that we can’t buy past results. We cannot predict the future.

The market predictions offered by experts (and others) and the thought processes underlying them can be very entertaining. They are indeed the engine that drives much of what pretends to be financial and business television. But none of us should take them seriously. Your crystal ball does not work any better than anyone else’s.

Sadly, such dreadful forecasting performance is indicative of dreadful investment performance. The vast majority of investment strategies are predicated upon the ability to forecast the future. These results are no better than the forecasts. As longtime chair of the Yale Endowment Charles Ellis outlines it, research on the performance of institutional portfolios shows that after risk adjustment, 24% of funds fall significantly short of their chosen market benchmark and have negative alpha, and 75% of funds roughly match the market and have zero alpha, while well under 1% achieve superior results after costs — a number that is not statistically significantly different from zero, largely because of fees.

Hedge failures

To pick one particularly egregious example, hedge funds — despite (and partly because of) enormous fees — have badly underperformed. Since 1998, the effective return to hedge-fund clients has barely been 2% per year, half the return they could have achieved simply by investing in Treasury bills.

Thus, per Nassim Taleb, successful managers have risen “to the top for no reasons other than mere luck, with subsequent rationalizations, analyses, explanations, and attributions.” In other words, we desperately pull money from our latest poorly performing strategy to put it into some new approach that has been doing great, only to see the same pattern repeat itself.

Sound familiar? John Paulson achieved great notoriety for betting against the real estate markets ahead of the 2008–09 financial crisis and accumulated billions of investor dollars into his hedge fund as a result, only to get crushed in 2014, losing 36% in his Advantage Plus fund despite a very strong market environment.

Not only is it really hard to beat the market overall, but when you do make a smart investing move (purchasing an investment that will actually outperform, however, you define that), its impact is reduced every time somebody else follows suit. It is axiomatic in the investment world that as an asset class becomes more popular, it suffers from both falling expected returns and rising correlations. Crowding occurs because success begets copycats as investors chase returns. General mean reversion only tends to make matters worse.

In other words, the more smartness there is in the aggregate, the less you can profit from it. Michael Mauboussin describes it as the paradox of skill: “As skill improves, performance becomes more consistent, and therefore luck becomes more important.” Accordingly, those (very) few funds and managers that have a successful long-term track record end up outperforming their peers by precious little indeed.

On the other hand, the impact of bad decision-making stands alone. It isn’t lessened by the related stupidity of others. In fact, the more people act stupidly together, the greater the aggregate risk and the greater the potential for loss, which grows exponentially. Think of everyone piling on during the tech or real estate bubbles. When nearly all of us make the same kinds of mistakes together — when the error quotient is really high — the danger becomes enormous.

Perhaps worst of all, the returns achieved by investors are even lower than those obtained by managers because we are enslaved by our emotions and poor decision-making. When something isn’t right (or doesn’t seem right), our default response is to do something. And what we do is to insist on buying what was just hot and selling what has just underperformed, guaranteeing that we buy high and sell low, which is exactly what we shouldn’t do.

Reducing mistakes

We all want “high leverage” ideas — the ideas that will make the biggest impact on our portfolios and our lives. But the best ideas available are not still more investment recommendations about hot sectors, hot funds, hot strategies and hot managers. There is no reason to think anybody can do that anyway.

The best ideas I can offer relate to our besetting mistakes, mistakes we make over and over again. My high leverage idea for this year and beyond is to get off the merry-go-round of the next new thing and to eliminate obvious mistakes first and foremost. As Charley Ellis famously established, investing is a loser’s game much of the time, with outcomes dominated by luck rather than skill and high transaction costs. Thus if we avoid mistakes we will generally win.

To paraphrase the philosopher Immanuel Kant, the first task of reason is to recognize its limitations. Every rational person acknowledges having made many errors. Even so, nobody offers current examples. We all want to think that our mistakes are in the past, that we’ve learned from them and that now we’ve set things right.

We desperately want to believe that our new approach, new strategy or new portfolio will — finally — be the magic elixir that will make us very good, if not great, investors (or at least that we can find those great investors).

Best ideas

Since we can’t forecast the future, it is imperative that our investment approaches resist the temptation to build our investment platforms on future forecasts. Accordingly, here is a quick summary of my top investment ideas for this year (or any other year), none of which is dependent upon prophecy.

1. Einstein wisely advised that we keep things as simple as possible, but no simpler. Overly complicated systems, from financial derivatives to tax systems, are difficult to comprehend, easy to exploit and possibly dangerous. Simple rules, in contrast, can make us smart and create a safer world.

2. Out of our general fear, we all too frequently bail on our investments and our plans and fail to invest altogether. But if we’re going to succeed, we need to invest, continue to invest and stay the course. Multiple studies have shown that those who trade the most earn the lowest returns. Remember Pascal’s wisdom: “All man’s miseries derive from not being able to sit in a quiet room alone.”

3. The Uniform Prudent Investor Act stated: “Because broad diversification is fundamental to the concept of risk management, it is incorporated into the definition of prudent investing.” Fortunately, a well-diversified portfolio captures most of the potential upside available with much lower volatility. On the other hand, a well-diversified portfolio will always include some poor performers, and that’s hard for us to abide. Do it anyway.

4. The idea that an investor ought to be aware and nimble enough to avoid market downturns or simply to find and move into better investments is remarkably appealing. But nobody does it successfully over time. We’ve all seen and done this: we find a hot new approach or hot new manager and, because what we own hasn’t been doing so well, we switch, only to find that the hotness that caused us to buy has cooled. We need to get off that merry-go-round.

5. The leading factor in the success or failure of any investment is fees. In fact, the relationship between fees and performance is an inverse one. Every investor needs to count costs.

6. Multiple studies establish what we should already know: a manager who has a significant ownership stake in his fund is much more likely to do well than one who doesn’t. Make sure to look for “skin in the game” from every money manager you use.

7. Don’t be afraid to ask for and get help. American virologist David Baltimore, who won the Nobel Prize for Medicine in 1975, once told me that over the years (and especially while he was president of Caltech) he had received many manuscripts claiming to have solved some great scientific problem or overthrown the existing scientific paradigm to provide some grand theory of everything. Many prominent scientists have drawers full of similar submissions, usually from people working alone and outside the scientific community. As Dr. Baltimore emphasized, good science is a collaborative, community effort; crackpots work alone.

A smart investor looks for what can be done that offers the greatest opportunity to achieve success in the markets. Finding and implementing these best ideas is deceptively easy conceptually yet monumentally hard to put into practice. Let’s start by systematically eliminating our most obvious mistakes. The more we do that, the better this year can turn out to be, irrespective of what the markets do — no predictions required.


About LRPC’s Monday Morning Minute

Lawton Retirement Plan Consultants, LLC (LRPC) Monday Morning Minute is crafted to provide decision-makers with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to retirement plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or or visit the firm’s website at Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.

Did You Hire The Right 401k Investment Adviser?


PSI Newsletter and Website Header 10.2.15

By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC

As a 401k plan sponsor, you are probably aware that there are some new fiduciary regulations going into effect in April of 2017. You probably have spent some time wondering (worrying?) whether these regulations affect your relationship with the investment adviser or investment advisor who works with your 401k plan. They might. Here’s how to tell. [Read more…]

Four Things You Should Know About Your Broker


MMM Newsletter and Website Header 10.2.15I hope you had a great weekend and a happy May Day!

LRPC’s Monday Morning Minute for this week, “Four Things You Should Know About Your Broker” (presented below) comes to you courtesy of Investment Advisor Magazine. As an independent, objective Registered Investment Advisory (RIA) firm, Lawton Retirement Plan Consultants, LLC has access to research from many sources. Be assured that I will share the most relevant information with you each week. This is a short piece I believe everyone can read in less than 60 seconds.

LRPC is a RIA which is much different from a brokerage firm. In the article below, the author, who also works for a RIA, outlines some of the differences between the two types of firms. I think you will find the differences surprising.

Have a wonderful week!


Four Things You Should Know About Your Broker

By Bob Clark, Investment Advisor Magazine

As I’ve written many times, I’ve come to believe that a financial advisor’s job is to protect clients from themselves (succumbing to greed and fear in their investment decisions, and procrastination in their saving decisions), from the financial service industry and the financial media, by extension. Once again, I’m not saying that everyone in the financial services industry is a bad actor; but, as we all know, there are powerful financial incentives to put their own interests ahead of their clients’, and some folks can’t seem to be able to resist the temptation.

Now, the traditional client/advisor communications are usually effective in saving clients from their inclination to buy high and sell low. But in my experience, the biggest reason that retail investors need to be protected from the financial services industry is because they don’t understand how it really works.

And while most advisors do (I say “most” because it’s my observation that it takes an advisor between 5 years and 10 years of industry experience to figure out what’s really going on), they rarely make a formal effort to transfer this insight to their clients — which is a shame, as this understanding is the real key to financial success.

Here’s what I tell my clients these days: [Read more…]

How To Tell If You Are Receiving Good Investment Advice


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By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC

How do 401k plan sponsors know if they are receiving good investment advice? That question is more difficult to answer for plan sponsors than it is for individual investors since plan sponsors need to be more concerned about process than performance. It is not necessary for plan sponsors to offer the best performing funds in their 401k plans. Rather, they should be more concerned that the process used to select and monitor the investment options offered is compliant and sound. With that in mind, outlined below are some ways plan sponsors can tell whether they are receiving good investment advice. [Read more…]

Five Ways To Tell If You Are Getting Great Advice


MMM Newsletter and Website Header 10.2.15
I hope that you had a great weekend!

LRPC’s Monday Morning Minute for this week,“Five Ways To Tell If You Are Getting Great Advice” (presented below) comes to you courtesy of Steve Tobak. As an independent, objective Registered Investment Advisory firm, Lawton Retirement Plan Consultants, LLC has access to research from many sources. Be assured that I will share the most relevant information with you each week. This week’s piece is short and something I believe can be read in less than a minute.

Steve Tobak is a management consultant, executive coach and former senior technology industry executive. He’s managing partner of Invisor Consulting, a Silicon Valley-based strategy consulting firm. Mr. Tobak writes on management consulting for Inc. magazine and appears often on Fox Business. I hope you are getting great advice. Read on below to learn how to tell if you are.

Have a wonderful week!


Five Ways To Tell If You Are Getting Great Advice

By Steve Tobak

When you hear it, advice is just that, advice. You only know if it’s great after the fact. Wouldn’t it be great if you knew in advance?

The father of my college girlfriend once told me that digital electronics–semiconductors, to be specific–was going to be huge. That was in 1978. I had nothing better going on at the time so I went back to school, got a masters degree in electrical engineering, got into the high-tech industry, and the rest, as they say, is history.

Great advice can be priceless. The only problem is, when you hear it, it’s just plain advice. You only know if it’s great after the fact. Sometimes, as in the case of my college story, a very long time after the fact. Wouldn’t it be great if you could tell if the advice you’re getting is good or not? Well, you can. There are just certain factors I’ve learned to pay attention to. Some are logical; others are instinctive.

[Read more…]