Friday’s Random Thought

My 3 p.m. meeting was cancelled today, freeing up some time for me to catch up on some reading.  While perusing my bookmarked financial blogs, I came across a quote (from a money manager whom I hold (held) in high regard) that made me stop in my tracks.  So much so that I had to re-read the paragraph three times to make sure I wasn’t missing something.  I’ll leave the manager’s name out of this discussion, but here is the quote:

“As a money manager, my portfolio model remains currently fully invested. The problem is that I am grossly uncomfortable with that allocation given the risks that currently prevail. However, as I have stated many times previously, I must follow the trend of the market or I will suffer “career risk” as clients move money elsewhere to chase market returns.”

How can so much “wrongness” be packed into one short paragraph?

  •  “…my portfolio model remains currently fully invested” and “I am grossly uncomfortable with that…”  That’s kind of like a doctor who keeps prescribing a medicine, even though he knows the prescription is elevating the risk of an adverse reaction or death.  I think I’d ask for a second opinion!
  • “I must follow the trend of the market…”  Here’s a tip from one money manager to another:  VFINX follows the “trend of the market” quite nicely; and does it for 0.17%.  What are your management fees?
  • “I will suffer ‘career risk’ as clients move money elsewhere to chase market returns.”  Career risk?  Seriously?  One of the things I learned early on in my career was that longevity was much more likely when you put the clients’ best interests ahead of your own.  Sometimes that means taking a call in the evening or on a weekend.  Sometimes it means driving out of your way when the client needs to meet you at their convenience.  But ALWAYS, ALWAYS, ALWAYS it means treating their money with as much care as you treat your own.  And, unless you’re insane, you are not likely going to invest your own money in a way that exposes it to known or perceived risks.  Besides, I must have glanced over the part of the contract where the clients signed up to be my personal annuity.

Those who know us know we manage money in an uncorrelated fashion with an eye on consistency of returns.  Following the trend is not our thing.  As such, we’ve had clients leave us since 2009.  It started with some of our wholesalers for whom it was easier to replace us with the “hot dot” than to have a serious discussion with the end client about where we fit in terms of risk and reward.  Other clients stayed for a few years more, but ultimately succumbed to the Sirens’ song of seemingly riskless riches.  I maintain friendships with many of those who left, as I understood that everyone is driven by their unique emotional makeup, there was nothing personal about their business decision, and I wasn’t going to change the way we manage money.

Fortunately, we adjusted our business in anticipation of expected redemptions.  We reduced our cost structure, moved our broker/dealer relationship to a more efficient chassis, entered into new market segments, and brought in a second portfolio manager to help insure that our investment process and security selection was as good as it could be.  We also recognized that, in a persistently rising market, we had to strip costs to the client down to the minimum.  So that’s what we did.

Now, five years later, we’re as healthy as we’ve ever been.  Our client base has been diversified.  We learned to be more efficient.  Our clients enjoy lower costs.  We have a new and experienced portfolio manager/business partner.

It’s ironic that, because we chose to embrace “career risk, ” we’ve become a better organization.

Still, it makes me wonder how much of the stock market rally can be attributed to the mentality expressed by that money manager/blogger.  I fear it’s more than a little.  When the fire alarm sounds, there are going to be a lot of people trying to get out of too few exits – not so good for the clients, but at least many careers will remain intact. – LL