Trovena Weblog

Individual Bonds...Not A Good Idea

I've always warned investors about buying individual bonds. Most folks don't understand the that the costs for these transactions are huge and hidden in something called the bid/ask spread. That's the difference between what the bond dealer paid for it and what they'll charge you. (Vice versa if you are selling to them)

Here's a story about how our friends at Morgan Stanley were marking up municipal and corporate bonds between 5 and 25%. Wow! Be smart, use bond funds or professional fiduciary bond advisors to get your bond exposure.

-Christopher

Finra fined Morgan Stanley $90K for unfair trading practices

By Sara Hansard

October 19, 2009

Morgan Stanley has agreed to pay a $90,000 fine to the Financial Industry Regulatory Authority Inc. to settle charges that it traded municipal bonds at unfair prices.

The fine covered 11 corporate-bond trades and three municipal-securities trades made in 2003. Markups or markdowns listed in Finra's complaint ranged from 5.25% to 24.3%. In addition to paying the fine, Morgan Stanley agreed to make restitutions to investors totaling nearly $41,000.

Morgan Stanley agreed to the settlement without admitting or denying the findings. The settlement was reached with Finra in August, but it was not announced by Finra until mid-October.

“We don't comment on regulatory matters,” said Eric Grossman, managing director at Morgan Stanley, when asked about the Finra fine.

Link to Investment News

Profits and Morality

I spend a lot of time in Austin and I love going to the Whole Foods corporate store in the downtown area. If you ever get to Austin, this is worth seeing. Anyway, John Mackey, Whole Foods' founder talks here about why he thinks business is, or can be, a moral thing.

I've never understood why people thought business was "greedy" or immoral in its pursuit of excellence. After all, business success just means that you've successfully solved some human problem. Money is the measure of your success but it isn't necessarily the end in and of itself. Mr. Mackey agrees and I admire his courage for actually speaking about it.

-Christopher

The Whole Foods founder talks about his Journal health-care op-ed that spawned a boycott, how he deals with unions, and why he thinks CEOs are overpaid.

By STEPHEN MOORE

"I honestly don't know why the article became such a lightning rod," says John Mackey, CEO and founder 
of Whole Foods Market Inc., as he tries to explain the firestorm caused by his August op-ed on these pages opposing government-run health care. "I think a lot of people who got angry haven't read what I actually wrote. There was a lot of emotional reaction—fear and anger. I just wanted to get people to think about whether there was a better way to reform the system." 

Read the full WSJ article "The Conscience of a Capitalist" »

What Would Sleeping Beauty Think?

In late September of 2009, Sleeping Beauty is awakened after a long 13 month slumber.  As a modern woman who has been left in charge of her family’s investment portfolio, among other responsibilities, she contacts her fee-only wealth manger, Trovena, to see how her investments have performed in the past year.

“Scott, I am sorry that I have not returned your calls over last year, but I was bewitched, again” Sleeping said, a little embarrassed.  “I am now back awake, and wanted to get an idea as to the value of my investments.”

To which Scott replied, “It is so great to hear from you, Sleeping.   We do not have the exact month end calculations yet, but it looks like your portfolio has gained about 3% in value while you were asleep.”

“Only 3%,” she replied, a little concerned.  “What happened since I have been asleep?”

“Not sure you are going to believe me, but here are the highlights,” said Scott. “As you may remember, before you went to sleep there was the beginning of some trouble around loans made to many homeowners, and there was talk of a recession.”

Shoot First, Ask Questions Later; and other common investment mistakes.

 

The following link is to a 20 minute presentation that looks at the reasons why so many individuals have terrible investment experiences.

Behavioral Biases

Description: Research indicates that humans are not naturally wired for prudent, long-term investing. Scott Bosworth, Vice President and Regional Director of Dimensional Fund Advisers, describes common forms of behavioral bias and discusses how these biases influence investment decision making. He also explains how knowledge and discipline can help investors control their instincts for a better investment outcome.

Why We Prefer Inaction and Loss Aversion to Action and Gains

Below is a link to an interesting article that helps to explain why people had trouble acting on the obvious opportunity that last March's low equity prices presented investors.

The article says that golfers make fewer birdie putts than par putts (adjustments are made for distance and other factors) and at the professional level cost themselves millions in winnings. Apparently, the fear of a bogey is greater than the desire to get a birdie. So, even though both putts mean the same to the golfer's score, they embarrassment of the bogey (loss) is much more motivating than the pleasure of the birdie. (gain)

The authors also cite a study of blackjack players which documents that the greatest cause of sub-optimal play is not taking additional cards that you should. In other words, doing nothing in order to avoid loss was preferred to taking additional cards to win the hand.

I personally met with dozens of investors during the March period who, while aware of the opportunity in the market and for the need for change in their own portfolio, could not "pull the trigger". In their minds, no matter the state of their own portfolio, doing nothing was the preferred course of action.

I took it personally at the time that these folks couldn't move forward with my recommendations. Now that I've read this article though, I realize it had more to do with human nature than my communications skills.

-Christopher

Investing Lessons from Golf and Blackjack Players

By Robert Huebscher

The Lehman bankruptcy, which occurred a year ago today, was the nadir of a financial crisis brought on by excessive risk-taking throughout the investment industry.  Naturally, reigning in risky behavior has been in vogue since, and regulators are hard at work trying to do just that wherever possible. Sometimes, however, the problem is not too much risk, but too little. Indeed, research confirms that individuals are hard-wired to avoid certain risks at crucial times—even when, in so doing, they impose costly economic penalties on themselves.

Read the full Advisor Perspectives article "Investing Lessons from Golf and Blackjack Players" »

The Vaunted "Endowment" Investment Model Flops As Predicted

For the better part of ten years I've been hearing about stock brokers using the "endowment model" to build client portfolios.  They would smugly mention this to me when they found out that I was a passive investor who accepted the market rate of return using simple low cost no load mutual funds. "We're Merrill Lynch (now bankrupt and owned by a bailed out bank) and we follow the Yale/Harvard endowment model.", they would haughtily mention on the golf course.

The "endowment model", was espoused by David Swensen,  Yale's endowment head, in his book "Pioneering Portfolio Management". Swensen advocated getting away from traditional public securities like stocks and bonds and allocating more money into illiquid and "non-traditional/alternative" asset classes. (Which conveniently generate much higher fees which explains why stock brokers loved this marketing ploy) 

He argued that Yale had both a long term investment horizon and access to "special" investment opportunities like hedge funds and private equity. Therefore, it lived in an alternative, unique investment universe that beckoned with market-beating returns. Of course, we know that we all live in the same investment universe and risk and return are related in that universe.

So, for Swensen to have better returns, he was probably taking lots more risk. For the fiscal year ending June 30th, we found out just how much risk that was. For both Harvard and Yale, their endowments had a return of -30%  over that period. That was more than double the loss a traditional pension allocation of 60% stock and 40% bonds would have had over the same period. (-13%)

Now the Ivys will argue that their ten year average return was better than a traditional approach.  But, growing money is about compounding returns. Getting out of this hole, from a compound return perspective, is going to be difficult. I think a simple index fund approach would have a been a lot better and a whole lot less work.

-Christopher

Harvard, Yale Are Big Losers in 'The Game' of Investing

By JOHN HECHINGER

It's a tie in the Harvard-Yale investment game. Both schools were thrown for colossal losses.

The universities on Thursday said their endowments, higher education's two largest, each lost 30% of their value in the year ended June 30. Combined, the pair of investment pools shrank by a staggering $17.8 billion.

Read the full Wall Street Journal article "Harvard, Yale Are Big Losers in 'The Game" of Investing" »

Active Management and Dilbert!

Here Dilbert takes a shot at the shell game that is the active investment management industry. Sadly, he's dead right.

Christopher

Thanks to The New York Times

That's not something I say very often but I have to give Mr. Lieber kudos for this video with some good advice about what to look for in an advisor.

Christopher

What a Financial Planner Can Do for You

The first of a series with Ron Lieber, the Your Money columnist for The Times, about simple tips you can take to improve your financial standing.

View the video "What a Financial Planner Can Do for You" »

I Hate To Say So But...

...the S&P 500 is up 52% since March. That is the best 6 month performance for that benchmark since 1933. Nearly all of our clients maintained their equity positions through this crisis and they are to be commended! Doing so wasn't easy for any of us.

Where are we going from here? According to this CNBC article, "...the Dow has trended higher 69% of the time 6-months after a 6-month gain higher than 30%, while the S&P 500 has posted further gains 57% of the time. Since 1933, there has been 273 instances, when the Dow and S&P posted gains greater than 30% in a 6-month period."

I wouldn't say that is conclusive evidence of anything but at least it doesn't indicate that the rally is over and you need to reduce equity exposure.

Christopher

Read the full CNBC article "Market Performance After the Strongest 6-Month Rallies Since 1933" »

"Expert" Advice is Costly

Q:  How do you end up owing the stock market $6,000 after one of the best market rallies ever?

A:  You start with $10,000 and follow the advice of Citigroup or Bank of America.

The following link is to an article from Bloomberg titled, "Talking Wall Street Advice in Rally Means Owing $6,000."  At least when the crooks do things like this they go to jail.

Bloomberg Article