Investor Advisors: Buy High, Sell Low
Jason Zweig has an interesting piece in the Saturday WSJ about the bad advice investment advisors give:
“Investment professionals are supposed to exercise independent judgment; in Warren Buffett’s words, they should be fearful when others are greedy and be greedy only when others are fearful.
It doesn’t always work that way. Corporate pension funds had 69% of their assets in stocks in 2007 as the market hovered at record highs. They have slashed that exposure to 45%, as my colleague E.S. Browning recently reported.
Advisers, too, have been buying higher and selling lower. Those who use TD Ameritrade had an average of 26% of clients’ assets in bonds and cash on Oct. 9, 2007, the day the Dow Jones Industrial Average hit its all-time high of 14164.53. By March 9, 2009, the day the Dow scraped rock bottom at 6440.08, the advisers had jacked up bonds and cash to 51%.”
The simple explanation is that advisors (or at least the bulk of them) are reacting emotionally to market swings. They are over-confident after markets have had big moves up, so that’s when they buy; they dump equity shares in a panic late in a down turn.
Yes, yes, Human primates are emotional creatures, especially in crowds; we are aware of this fact. Given that is a known variable, the more interesting question becomes why is this the case.
I can make 3 guesses:
1. The fee-based industry maxes out revenue by maintaining a fully invested, long only posture.
2. Advisors receive little in the way of training when it comes to asset allocation and portfolio management.
3. Risk Management and Capital Preservation is often confused with Market Timing, and therefore is frowned upon.
This brings me back to one of the very first things I ever published about investing: Its your money and your responsibility. (TBP mirror) Neither the Fed Chief, nor your advisor nor any guru nor blogger nor Jim Cramer. You are the one who is going to be either going to live in comfortable retirement, or eating cat food tacos.
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Source:
Have You Herd? Your Adviser Is Scared to Set You Straight
Jason Zweig
WSJ, OCTOBER 30, 2010
http://online.wsj.com/article/SB10001424052702304879604575582540743655262.html
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October 31st, 2010 at 1:25 pm
‘The simple explanation is that advisors (or at least the bulk of them) are reacting emotionally to market swings. They are over-confident after markets have had big moves up, so that’s when they buy; they dump equity shares in a panic late in a down turn.’
It was ever thus — sentiment extremes are the fundamental reason why market movements are ‘fat-tailed,’ not conforming to a Gaussian normal distribution.
A few born contrarians can fade sentiment on a seat of the pants basis. For the majority of investors who can’t, I’m an advocate of back-tested mechanical trading systems.
October 31st, 2010 at 1:42 pm
The theme is personal responsibility, and no one can argue with the basic premise.
However. Investment advisors are paid to perform a service. The problem is that they generally provide poor service. The better ones are obviously much more expensive.
If you operate daily in the realm of finance/investing, it is much easier to say “You have to take responsibility for you investments.”
But turn that argument to other professions – “You have to be responsible for fixing your own car, not a mechanic.” Or “You have to catch some armed robber breaking into your house, not some policeman.”
When Hank Paulson made his comment that investors should “educate themselves”, it was elitist arrogance. He was in effect saying “I’m doing it. You should do what I do for a living and also whatever else you happen to be doing for a living.”
Maybe he should have said “You should do what I do because then you can float CDO’s and take pension money from mechanics and policemen like you.”
October 31st, 2010 at 1:44 pm
The answer is simple, rising markets get people excited about investing assets, which are necessary to cover high investment fees. When markets decline investors pull money out and invest in CD’s and Treasuries instead of paying an adviser to do the same .
But again most investors and perhaps advisers do not fully understand conservation of capital or risk adjusted returns.
October 31st, 2010 at 2:13 pm
Barry while what you say is true:
“This brings me back to one of the very first things I ever published about investing: Its your money and your responsibility. ..You are the one who is going to be either going to live in comfortable retirement, or eating cat food tacos.”
I really think there ought to be a sane alternative to spending all your days watching the markets. Consider, a craftsman may wish more to pursue craftsmanship, a doctor may wish to pursue a vaccine for cancer, a lawyer may wish to make the equal protection clause of the 14th amendment really mean what it says. If they spend their day watching/reacting to the markets, their life’s work will suffer.
Anecdote Alert:
I worked at a major engineering firm during the run up and crash of the .com boom/bust. We were working on an intercept missile that was meant to defend troop concentrations in areas at high altitude from incoming missiles. FYI, what was claimed for the Patriot Missile, but not accomplished [it's not fair to blame the Patriot missile, it was meant to shoot down aircraft]. The initial missile was failing almost every shot, our job was to redesign it and make it work.
The problem was, many, many, many engineers, designers, draftsman, managers and other white collar workers spent their days exalting/worrying about their riches in the stockmarket…it was nuts, we had a job to do. While technically we worked in private industry, we were really on the public dole and we needed to act like it and get the job done. In my group, the manager slowly winnowed out the stock market slackers, we went from 60 to 16 people with no loss of efficiency. That’s because these guys were spending their days watching stock returns, it’s a disgrace and I am sure it happened all across the country in white collar environments.
America will not prosper so long as people have a “lotto ticket” approach to life that markets encourage. There has to be an alternative for people with serious careers [who take them seriously] and workers who do not have access to internet at work. In age specialization, people should do what they are good at, not watch the markets. That said, in an age specialization, it is manifestly unjust and unproductive to have one segment of market watcher reap the vast majority of profits from free enterprise. Workers are also investors, with their labor, with their productivity improvements, with their wages [remember, people are not paid daily].
FYI, we did make the missile system work, it went from a kill rate of 1 of 12 to something like 39 of 39…arguably the most successful missile program in US history.
October 31st, 2010 at 2:21 pm
you mention Jim Cramer, he was one of the first people to write about capital preservation and staying in the game back in 2000, at the time he made me see that I was holding on to stocks that were likely going to zero, I had to just admit my stupidity and sell.
October 31st, 2010 at 2:30 pm
If the advisor in question had made absolutely no trades between october 07 to march 09, the portfolio would have had a cash and bond position of 44%.
Do the math.
October 31st, 2010 at 2:37 pm
Tarkus,
I was busy tapping away at my keyboard and posted before reading your comment…I agree, somebody actually has to add value before wall street palms it cut.
October 31st, 2010 at 3:23 pm
If an advisor is addicted to short-term (monthly or quarterly) performance (most are) as demanded by the industry performance machinery which drives where the investment business goes, then the advisor will most certainly become exactly as the emotional primates. There are a few advisors out there who forsake the machinery and therefore tend to be smaller boutique shops, but their performance is ironically quite good, thank you very much.
October 31st, 2010 at 3:42 pm
Ralph Wanger coined the problem best a number of years ago (and still just as true)…..
“Zebras have the same problem as institutional portfolio managers.
“Firstly, both seek profits. For portfolio managers above-average performance; for zebras, fresh grass.
“Secondly, both dislike risk. Portfolio managers can get fired; zebras can get eaten by lions.
“Thirdly, both move in herds. They look alike, think alike and stick close together. If you are a zebra, and live in a herd, the key decision you have to make is where to stand in relation to the rest of the herd. When you think that conditions are safe, the outside of the herd is the best, for there the grass is fresh, while the middle sees only grass that is half-eaten or trampled down. The aggressive zebras, on the outside of the herd, eat much better. On the other hand – or other hoof – there comes a time when lions approach. The outside zebras end up as lion lunch, and the skinny zebras in the middle of the pack may eat less well but they are still alive.”
October 31st, 2010 at 3:48 pm
S Brennan Says:
October 31st, 2010 at 2:37 pm
Tarkus,
I was busy tapping away at my keyboard and posted before reading your comment…I agree, somebody actually has to add value before wall street palms it cut.
———————————————————————
Agreed, we basically said the same thing, though yours was a much more interesting description.
In the regular world, “personal responsibility” is also applicable to the person selling a product or service. In the financial industry, there is often no accountability for the quality of that service.
What they are essentially saying is “You may be paying me a fee, but you have to do my job better than I do.”
October 31st, 2010 at 4:00 pm
Several comments suggest how much better it was when you had to go to a brokers office to see intraday quotes. For day end quotes there was the newspaper that you might look at once a week. The web has re-inforced the get rich quick casino nature of wall street.
Actually John Boogle’s advice of buy and hold broad based index funds (low cost also). It says you can’t beat the market all the time. So don’t even try.
Reading more money than god it is interesting how a hedge fund may come up with a new idea and do quite well, until people from there move elsewhere with the same strategy, and the fund gets big enough (in conjunction with those who copy its strategy) to affect the market. At which time the music stops.
October 31st, 2010 at 4:06 pm
Hedge Funds outperformed index funds via the magic of leverage. With leverage down, they cannot support their 2/20 fee structure and many are shutting down and scaling back.
October 31st, 2010 at 4:13 pm
“3. Risk Management and Capital Preservation is often confused with Market Timing, and therefore is frowned upon.”
I like this observation. Portfolio sizing is the a key level of risk control, but the line between market timing and resizing positions to adjust for unattractive risk characteristics can be a bit blurry. I have never felt that market timing is impossible (though I acknowledge that it is a difficult thing to do and the jury is still out on whether it can be done reliably), I have never had a big issue with drawing the distinction. I will be more conscious about that now.
October 31st, 2010 at 6:15 pm
>Advisers, too, have been buying higher and selling lower. Those who use TD Ameritrade had an average of 26% of clients’ assets in bonds and cash on Oct. 9, 2007, the day the Dow Jones Industrial Average hit its all-time high of 14164.53. By March 9, 2009, the day the Dow scraped rock bottom at 6440.08, the advisers had jacked up bonds and cash to 51%.”<
Doesn't asset class performance account for most of this allocation? With stocks down 60% and bonds up 30% in March 2009 I think it isn't that bid a deal….
October 31st, 2010 at 6:29 pm
Well said, Barry. And…….ohhhhh, cat food tacos???? Good image.
October 31st, 2010 at 7:55 pm
How many investors left their advisor in 98, 99, or 2000 because their advisers were too conservative? I don’t have personal experience with this as I only started in the industry in 2002.
I did hear stories from advisers ‘client made 40% last year but (insert adviser/mutual fund) made 80% last year and transferred their account’
I also heard from clients (first hand) coming back to our firm saying they should have never left, why did I chase that hot (insert adviser/mutual fund)?
October 31st, 2010 at 8:18 pm
Barry point 2 is the best part of your comment – and it’s oh so true. However, advisors like myself take our responsibility seriously and spend countless hours away from our firms to make sure we are as unbiased and informed as possible. Beginning in January of 2010, after seeing you at the IMCA conference, The Big Picture is my first read of the day. Good advisors have a heck of an opportunity to capture new assets from those less informed and reactive advisors.
October 31st, 2010 at 8:27 pm
If they were jacking up bonds on March 9th, 2009, that was the way to go. I’ll further bet Ritholtz had more than 51% in cash on that day. All in all the article is bogus because only an idiot would have been fully in stocks on that day.
November 1st, 2010 at 4:41 am
As an advisor, why would you assume the bad timing is the fault or ‘call’ of the advisor? When a fearful or greedy client calls, no matter how hard I try to get them to stay the course at the bottom or let go near the top, there are always some who insist on doing the wrong thing at the wrong time. All I can do is advise them. It is THEIR money, therefore it is THEIR decision in the end. Also, since most advisors are just regular folks, albeit with more knowledge of the markets than their clients, yet with “monkey brains” (i.e. wired to lose). Why would anyone expect advisors to perform better than anyone else? Whatever the reason they chose the occupation, they didn’t become advisors (nor were they selected by their firms) because of some kind of extraordinary investing skill. I don’t think their lack fo being extraordinary should be sneered at (unless making false claims, e.g. pretending to know the future or touting stocks).
November 1st, 2010 at 10:56 am
The key here is “fee based industry”, which creates an inherent lack of complete trust. I’ll bet every single reader of this blog is holding at least one investment recommended by his/her advisor. It’s all a big game, period. As most people learned, advisors can’t see anything coming down the pipe better than anyone else. Think I’m wrong, just ask people if their advisor moved them out of stocks in mid-2007….
Just updated these charts with some interesting points…. holding short below 1,195….
http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3274981
November 1st, 2010 at 12:30 pm
An important fact not yet mentioned. People – i.e. advisors often do what is easiest. Even if all the above issues were not true, herd mentality, incompitence, poor training etc. It is much easier for an advisor to sell/maintain a strategy that isnt counter intuitive to the clients guts and fears. Being counter their guts means regularly having to rejustify your strategy and is more work. Most advisors do a decent job the simplest way they can. Being wrong with the herd carries less risk as well. – 15 yr advisor perspective.
November 1st, 2010 at 3:25 pm
Barry
I think its more venal and less subject to fixing than your three guesses
here are my guesses actually form mid 2008, chapter in a book i work on
THE BUY SIDE–YIOUR FRIENDLY BROKER LOOKING OUT FOR YOU
I am also thinking that my model of slick sell side stuffing the ignorant buy side may be too one-sided. The buy side may also be co-operating…. Maybe they do not want to know on purpose, because they will also make big money, withdrawing some of the illusionary capital gains as their own profits and bonuses. I see this partly in data I am working on. The government treats fund managers and investment companies and pension funds as passthroughs. It is the final fund investor that has the position. Meanwhile they pull out their compensation. This shows as a “loss” by the sector most years. These numbers are huge. In the tens of billions every year, $71 bio one year just for the Regulated Investment Companies or RICs, for this sector “managing” your 401ks and other fund type investments. Then also account for the hedge funds, life insurance, pensions, and other non-passthrough investment managers’ incomes. So figure adding on some big dollars for them, —and passing less to you, more than $100 billion PER YEAR less. If they have a system that ramps up reported values and prices for a decade, why not go with that?
….So while there are a number of buy side companies showing genuine fiduciary interest, there are also a lot of them that are eagerly abetting the overvaluation. They put their customers into questionable “credit”assets, structured products, and stock prices inflated by questionable practices. The income, bonuses, and profits pulled out by some of the buy side are evidently enough for them to be OK with this.
IBGYBG Ill be gone you’ll be gone? That can be the sell side talking with the buy side. Siphoning off a lot for themselves in the good times. And soothing you to stay with them in the bad. “How could we have known?”… “We’ll make it back, give us another chance.” My view is moving to this is their main role in the investment world. If so, they will be equally opposed to asking for more “transparency” or fixing their own ignorance. Hell of a free market
Or you could listen to Jack Bogle
“The faith of investors has been betrayed. How so? Because the returns generated by our corporate stewards have often been illusory, created by so called financial engineering, …and produced only by the assumption of massive risks.
(many) professional money managers failed to act as vigilant stewards of the money…played a major role in allowing our corporate managers to place their own interests ahead of …shareholders” .
November 1st, 2010 at 10:17 pm
If an investment adviser is operating in a separate account structure without client influences, you can hold them to the fire for bad timing. However, the typical investment adviser at TD Ameritrade Institutional is not operating in a vacuum and has to contend with significant influence from their client.
A few thoughts on the larger allocation to bonds at TD:
1) Investment advisers, who operate under the wealth management model and manage non-discretionary accounts, may be responding to clients asking them to make their portfolios safer.
2) TD Ameritrade’s Institutional group has benefited from significant outflows from the big wirehouses. It would be interesting to see the demographics of these clients. It’s possible the average age of TD Ameritrade Institutional’s clients is now older.
3) A large number of investors have been forced into early retirement and/or may be unemployed. These types of clients typically ask for greater protection of capital and income from their investments.
It would not surprise me if some of the shift to bonds was poor market timing by advisors. Large institutional investors with theoretically more training and better resources have fallen victim to making this mistake. David Swenson discusses, in one of his Charlie Rose interviews, the fact that after the 1987 crash it took more than a decade for Universities to reach their pre-crash allocation to stocks.
My firm custodies with Schwab and Fidelity, which are very similar to TD Ameritrade Institutional. For the average retail client, and that is who TD Ameritrade Institutional serves, life events can be the main drivers behind asset allocation. A 55 years old who is out of work and uncertain about his employment future will likely request that their investment adviser protect their capital until they are employed again. This would likely mean a reduction in stocks. From an investment standpoint the timing may be bad, but in such a case, the change in asset allocation has nothing to do with timing the market.