One of the funny things about running an asset management shop is that you get to see how other firms assemble portfolios. They range from good to bad to terrible. If they were all that good, we probably are not seeing much of them, for those clients are happy to stay where they are.

Hence, what we do see is therefore self-selected towards the terrible.

Amongst the bad we see are a broad range of questionable decision making. Some portfolios must have been assembled in the heat of emotions; some make classic investing errors, while others are built around predictions (that have not come true). We see a lack of any sell discipline, as folks have rode the Blackberries and the Dells of the world down to near nothingness.

Then there are the Muppet portfolios.

These are not alternative approaches to reducing risk, improving performance, lowering drawdowns or reducing volatility. Rather, these are portfolios that seem to be assembled for the sole purpose of maximizing commissions to the retail broker. Period.

If you read Josh’s book, Backstage Wall Street, you are familiar with the myriad ways that financial predators take advantage of unsuspecting investors. While we don’t get to hear those telephone conversations, we do know what occurred in Ye Olde Wall Streete, a place that supposedly no longer exist, but based on these portfolios, still does.

While we cannot eavesdrop on the calls, we do get to see the net results of that sales nonsense — the portfolios that get assembled in that sausage factory. Lemme tell you, the Head Cheese of investing is pretty ugly.

When new accounts come into our office, @michaelbatnick is the person in our office who deals with these old holdings. He works in the front lines of finance, and has the responsibility of liquidating the positions as cheaply as possible (TD allows a new portfolio liquidation at no cost to the client). But Mike also sees all of the junk that comes in. Lately, it is some rather ugly assemblages of futility, bordering on theft.

We were discussing yesterday how 1 in 10 of our new accounts come in with portfolios holding literally 100s of positions. Mind you, this is not a family office with $150 million dollars, but rather a portfolio 1% of that size. There is no rational reason for these sorts of assemblages to be holding 100+ positions.

How do these happen? Simple: A broker gets invited to lunch by some wholesaler, where they hear a presentation about some new or old product/fund/private. They get back to the office, see what cash is lying around, and proceed to sell this turd to every client in their book. Over the course of 5 or so years, with a “free lunch” once or twice a month, you get portfolios like these. For the cost of  rubber chicken, plus a 5% commission, the customer is sold down the river.

I don’t want to paint with too broad a brush, and as I mentioned earlier, if the portfolios are doing well or are rational or have some intelligence behind them, we are much less likely to see them. People typically don’t say to their advisers “You are managing my risk and have decent returns and a real thought process behind my investments. You’re fired!” So what we see are portfolios that lack those elements.

Mike sent me this last night:

“What is the purpose of an account holding GLD and a Gold miners fund? Not to pick on the gold bugs, but are these two instruments not representing the same exact asset class? I suppose one can make the argument that GLD is levered to the price of Gold, while the miners seemed to be levered to gravity. The Australian dollar? Aside from the fact that it has been a terrible investment, who needs to own the Aussie in their portfolio? Even if the Aussie doubles, which is highly unlikely, that would add 40 bps to this particular portfolio, seems like rewardless risk.”

Returnless risk is not how you manage to assemble a decent retirement.

Category: Investing, UnGuru

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

22 Responses to “Muppet Portfolios”

  1. ByteMe says:

    Ok, I’ll byte: why the use of “muppet” in the phrase?

    • Greg Smith resigned from Goldman Sachs via a New York Times editorial titled “Why I Am Leaving Goldman Sachs.” It introduced the word “Muppets” into the lingua franca of finance.

      Smith was not only disturbed by how Goldman’s clients were being “ripped off,” but how these same clients were being referred to as “muppets.” They were dummies, sock puppets, right for the plucking. Goldman investigated, did some soul searching, and found no evidence of Muppeteering. Sure, they may have allowed some clients to create portfolios designed to implode, and then sold those portfolios to other clients, never disclosing the true nature of them. Buy hey, that’s just Bidness.

      You cannot prevent muppets from buying this junk from Goldman Sachs. After all, Muppets will be Muppets, right?

      • Frwip says:

        Sure, they may have allowed some clients to create portfolios designed to implode, and then sold those portfolios to other clients, never disclosing the true nature of them.

        Barry, didn’t you get the memo from Goldman Sachs?

        “Other clients” ? No. The proper term is “Counterparties”. It’s very different. Very different :-)

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  3. scone says:

    And they wonder why Jack Bogle pushes for a fiduciary standard. This sort of crap ought to be criminalized, but given that Washington is just another muppet to Wall Street, I’m not holding my breath.

  4. Bill_H says:

    Reminds me of “The Stock Tip” episode of “Seinfeld.” George exhorts, “I’m going down with the ship!”

    I would not invest money in Goldman with a rented hooker.

  5. peterkrause says:

    One of your best freebies is the little peeks like this into OPM. What is even more shocking to me is that, if someone has hundreds of positions in a single portfolio, one would think they’d have approximated the market and therefore participated fully (minus fees) in the 140% plus rise of the last four years. I’m aasuming they didn’t. If a monkey throwing “hundreds” of darts literally misses the board that much, you put him down.

  6. robertso2020 says:

    Hi Barry- will you be able to advertise performance with the recent passage of the JOBS Act?

    • We are not a hedge fund, so the JOBS act is mostly irrelevant to us.

      We run separately managed accounts, bond portfolios, tactical holdings, concentrated equity, and balanced index accounts (meaning Stocks/Bonds). The tricky part on our end is that we can report the average of all of that (which is a meaningless comparison — bond brought up by the tactical and equities brought down by bonds).

      The other element is that we focus on client defined goals, not absolute returns. In other words, the client tells us what they want/need to see over the next few decades, and we show them the options as to how to achieve it.

      Its quite different — and more successful — than the usual Alpha chase, as detailed here

  7. JoseOle says:

    Sensible as usual, though a couple of quibbles:

    >> as folks have rode the Blackberries and the Dells of the world down to near nothingness

    I’ve no idea if these two names will turn around, but 9 months ago both BBY and HPQ were in the same boat. Sometimes it pays to just hold on.

    >> while the miners seemed to be levered to gravity.

    Unless one thinks GDX is going to zero, there must be some price at which if offers an attractive risk/reward proposition. The gold miners were a terrible investment a year ago, obviously. But does that mean one should liquidate today? Same could be said for coal.

    I recognize your larger point is that Joe and Jane investor are still getting hosed. Not surprising given that neither the incentives nor human nature has changed. Anyway, just quibbles.

    • Iamthe50percent says:

      Yes, I would liquidate coal. Coal’s days are numbered. It will be legislated out of existence. It might linger for a while as a chemical feedstock, but coal-fired plants are dinosaurs. Yes, I know they are cheap and efficient, but they will be closed for environmental reasons.

  8. rd says:

    I think the biggest single myth for 95% of the population is that investing is a complex business. That is the myth that Wall Stret sells and makes their money off of. The two biggest lessons I have learned over the years are:

    1. Keep it simple and cheap. A simple one-stop fund like the Vanguard Lifestrategy Funds will outperform most professional portfolios at very low cost and with no active management. You can get better performance by adding a handful of other components, but they must perform a real function in controlling volatility, increase income, or increase the capital base to justify them. The benefits of adding more components dwindle rapidly once you have more than a half-dozen components in a portfolio.

    2. For most of us, the real goal is to generate lifelong income once we reach a certain stage in life. The income production of a portfolio has a much lower volatility than its capital value. A stock market that drops 50% in value will likely now generate 4% dividends instead of 2% so its actual income production is still roughly the same. To a certain extent, the same is true with bonds (the rollover of principal to lower or higher yields over the long-run is the main difference here). One of the benefits of having Pride and Prejudice on an endless loop on the TV while my daughters were growing up is that it was frequently repeated that somebody’s worth was their ability to have an annual income instead of a big pile of capital. I have found that changing the perspective of a portfolio to its ability to generate adequate lifetime income and away from a focus on its total pile of money value leads to very different decision-making in saving and investing.

    We are slowly seeing progress towards information reaching the consmumer about the importance of costs, simplicity, and lifetime income generation. Many of the new 401k and IRA tools being rolled out by providers are focused on these issues. As more people understand this, I think Wall Street is going to have more and more difficulties selling their Muppet products and the better off we all will be..

  9. large J says:

    Sorry but I have to comment on this. Firstly you missed the point of the Muppet — the clients have a hand shoved up their a$$ and repeat what the GS salesman has told them thus — acting like a Muppet.

    More importantly while i agree there is no excuse for holding over 35 – 40 max positions in a portfolio there is absolutely no reason not to hold GLD and a fund that holds miners…they are both expressing a bullish outlook on gold (one position more leveraged than the other). Ritholz is a great blogger but please don’t talk smack about being a contrarian investor when you are unwilling to understand the upside in a position that is currently out of favor – it diminishes your credibility. Yup — I am long gold.

  10. auden5 says:

    Two comments: 1) AUD is down almost 3% as I write this. Did Barry single-handedly cause the decline? :-) 2) PIMCO has some ‘splaining to do. Both AUD and CAD haven’t paid interest/dividends last month. In AUD’s case, no dividends for two months. I’ve emailed PIMCO and have received no response as of the time I write this comment.

    Having said all that, assuming AUD continues paying dividends, doesn’t it have a decent dividend rate for the level of risk involved?

  11. [...] How cluttered portfolios get built.  (Big Picture) [...]

  12. large J says:

    Ramstone — a levered position can occur due to the structure of the underlying assets or company specific balance sheet — this is different than a synthetic security that is by definition conducting a slow liquidation of itself. I think you probably knew this but chose to go for the irrelevant comparison anyway. Owning a basket of gold miners is but one way that a bullish outlook on gold can be expressed. Shorting the US Dollar — that might be another. (I do not recommend shorting the US Dollar)

    There are an infinite number of ways to express long US equities…I think that’s where Barry started the conversation. Good luck to you.

  13. TennesseeCPA says:

    Your guy that disassembles the old portfolio may doing the client the best favor ever. So much overlap and concentration of risk. Two things that perpetuate the problem: no periodic calculation of return vs. the market, and that broker’s “Pepsodent” smile.

    Here’s a thought: If your wife is gonna be your portfolio successor (80% of the time), how do you show her what she needs to avoid in investment shenanigans.

  14. auden5 says:

    Speaking of the Aussie dollar, check out AUD today–down over 2%. Both AUD and CAD have not paid dividends/interest last month. In AUD’s case, no dividends/interest in the past two months. Very strange. I emailed PIMCO, but have received no response yet. Having said that, I’m surprised anyone would still be negative on the Aussie dollar or bonds–seems like a potential value play, no? (Disclosure: I own both AUD and CAD.)

  15. biotrekker says:

    “Head Cheese of investing”….heh, heh, heh. I may steal that one from you.