Wednesday, December 4, 2019

Confessions of a Failed Santa Claus

During this most wonderful time of the year, it’s common to make an optimistic wish list. Children wish for lots of toys and investors hope for a magical advisor. Unfortunately, both parties are best served reverting to realistic expectations.
Taking my own advice, I knew if I wanted revel in an enchanting holiday pipe dream I would have to take a sabbatical from compliance laden investment advising.  So, I applied for a job as a department store Santa. The thought of kids giddy with joy in my presence was intoxicating. In stark contrast, most adults avoid investment advisors like the plague.
During a grueling interview process, I tried to convince the hiring managers of my Santa myth making ability. “I’ll make a great Kris Kringle,” I insisted. “My strengths include convincingly making empty promises that I do not have to deliver on,” I joked.  “With a straight face, I can tell the kids I know who is naughty and who is nice!” I would, however, have to conceal my lethargy so the precious little angels would believe I’ m fast enough to circumvent the globe in an instant.
The interview was progressing gloriously until my conscience intervened and I reluctantly admitted I’d make a horrible Santa Claus. Let me explain.

I work in a highly regulated industry that prevents me from making promises. It is flat out illegal to promise anything in my line of business. So if a little boy asks Santa Wicked Smart Investor for a toy truck I might say “A toy truck under the tree is possible. In fact, kids that ask for toy truck are more likely to receive one, but I can’t guarantee it.”  Tears and a significantly reduced queue may follow that Grinch like qualifier.

Next, the naugthy/nice judgment makes me uncomfortable. It’s not my place to pass judgment on clients’ behavior. My job is to examine their needs, goals and risk tolerance and manage their investments accordingly. Even if my clients put tacks on the boss’ chair or fly paper airplanes on Red Line trains it makes no difference to me. My advice is the same. Kids may surmise their behavior is irrelevant, as Santa skips the naughty/nice calculation.  I am very confident the parents would despise losing this hugely effective seasonal disciplinary leverage
Lastly, I may tell kids that Santa does not deliver gifts every December 25th just like the stocks end some years in negative territory. In fact, investors may liken the stock market to a Santa that gives great returns one year, only to take them back the next year. To top it off, he eats cookies and drinks milk anyway. Investors must realize that instant gratification is almost impossible. Money frequently needs years, not one night, to grow substantially. At this point, to avoid a public outcry, I’d be pink slipped.

Investment advisors are not magical Fathers Christmas, we are simply mere mortals. It is our job to help you achieve your reasonable goals using our knowledge of investing, tax law and estate planning. We are able to reduce some risks using diversification strategies, but taking risks is required to earn potential returns. Market volatility and uncertainty are ever present, so we do our best to work within those confines. You also must be patient; the stock market may take 10 years to deliver joyous returns.  The good news is that many investors can reduce risks, cut costs, and boost expected rate of returns using evidenced-based strategies.
That’s an adult size portion of realism. I hope you have a Christmas that is just as joyous as your childhood memories.

Saturday, November 2, 2019

A Revere Ware Horn of Plenty

As I walked in the door, I was greeted by my 90-year old mother and the scent of onions and peppers sautéing on the stove.  In a large copper-bottomed Revere Ware frying pan Ma is making roast beef hash using last night’s leftovers. “Are you staying for supper?” she asks because there is always room for one more at Ma’s house.

The frying pan was gift from her 1955 wedding to a Dorchester dentist. He had plans for a big career and an even bigger family, so she put her career as a neurosurgery nurse on hold and helped him launch his dental practice. As a doctor’s wife it was assumed she’d live the life of a suburban princess, but a big family eliminated leisure time. Long before that 1970’s Enjolie perfume commercial, Ma proved she could bring home the bacon, fry it up in a pan and…um…never mind.

Suddenly widowed with 13 kids under age of 18, her nursing cap proved more valuable than any princess’ tiara. Maybe the frying pan is her royal scepter.  At the very least it’s a culinary Swiss Army knife.

Because with 13 kids ordering take-out was cost prohibitive, so Ma cooked dinner almost every night to keep the family finances in check. She cut coupons, shopped sales and used leftovers to make meals in that frying pan. The recipes were frequently improvised originals and we’d think up creative names for the unique dishes.  My smart alec brother Frankie dubbed one dish “choke and puke.”  He paid dearly for that. I laughed about it then, but looking back I realize that the meals were always nutritious with fresh vegetables and good cuts of meat. I grew to 6’3”, so something worked.

The frying pan also played a central role during birthday celebrations. Bakery cakes were too expensive so Ma combined a couple of Duncan Hines cake mixes in the frying pan and baked the cake simultaneously with the main dish. She was so busy working full-time and cooking meals she did not have time to do anything else. Frequently, the cake was burnt on the bottom and she’ll tell us to cut off the burnt part and it would taste fine. It never did, but I got used to my charcoal-flavored birthday cake. Her frugality also helped me to attend a pricey graduate school, so all is forgiven.

Thanksgiving is when the frying pan really shined. The Pilgrims invented Ma’s favorite holiday and she celebrated it in a highly traditional fashion.  In a Norman Rockwell like scene, we put the kitchen and dining room tables together in the living room, because Ma likes the meal served family-style. After devouring a turkey accompanied with homemade fixings, dessert was served.  Every year Ma made a large squash pie with homemade pie crust in that frying pan. As challenging as her life has been she was still thankful for everything.

Absolutely nothing was perfect in Ma’s house, how could it be? Is perfection really necessary?  We were not impoverished but Ma watched every penny because she had no choice. The saying goes “Watch your pennies, and the dollars will take care of themselves.” It worked, and Ma has been able to enjoy luxuries. She has walked across the Great Wall of China, visited the Hermitage and frolicked all through Europe. This and every one of us went to college!

When my friends ask me “How did you mother do it?” I struggle to answer. I was there, and I don’t know all her secrets. I can tell you this; she pinched pennies and made hash out of last night’s roast beef.

Happy Thanksgiving

Friday, October 4, 2019

Don't Fall Through the Convenience Trap Door

A talented horror story writer can masterfully turn a happy occasion into a bone chilling tale of terror. When you start a dream job, mismanaging your existing 401k can be the opening paragraph of another unnerving story.

Let’s consider a short story penned by Boston native Edgar Allan Poe, The Cask of Amontillado. Taking place in an unnamed Italian city during the festive Carnival celebration, this is a tale of fatal revenge. The narrator and murderer, Montresor, felt insulted by his “friend” Fortunado and lures him into the catacombs for a private wine tasting. The already inebriated Fortunado was so excited to sample the fine Amontilldo sherry he could not resist the invitation – but Montresor quickly chained him to the wall, and built another wall enclosing Fortunado in the space, effectively burying him alive.

Similar scary stuff can happen to your legacy 401k if you are not careful. Maybe you’re imagining I will recite this gory tale: You travel down a corridor to the Haunted Human Resources Department. While the ground fog and eerie organ music alerts your survival instincts you are unable to speak.  A ghoulish, Lily Munster looking benefit manager hands you some parchment document written in terminated employees’ blood and demands you sign it. Once you have passed the point of no return you fall through a trap door while being tortured with bloodcurdling sound of an evil witch’s laugh. (That’s the VP cackling.)
It does not happen this way

Usually the start of a new job is a time of great optimism. You got a raise and you’re looking forward to new challenges. The company is happy to have you and they want to keep you happy. The human resources manager is not a financial planner but it is their job to be the cheerleader for the company’s 401k plan. With good intentions, they may offer to roll your old 401k into the new company plan to reduce paperwork and make your life easier.  After all you’re at a good company with a great benefits package; you simply assume the firm has a great 401k. So you fall into the “convenience trap” and move your existing retirement fund there.

Most likely this is a big mistake and years later it will sully this happy occasion. When you leave a job you have the opportunity to move your 401k fund to an IRA account without tax consequences.  You have the choice of almost anything from the universe of mutual funds. The new company’s plan is limited to a much smaller amount of choices. It will be tough, if not impossible, to build a portfolio that takes advantage of low investment costs, a broad range of asset classes, and global diversification.  Proven factors like these provide optimal returns over the long run. If you simply fall into the “convenience trap” and roll it into the new company’s s plan you have somewhat buried this money alive. It will be stuck in that plan until you leave the company. The opportunity costs could be huge. For example, $100,000 with an annualized return of 6% totals $320,714 after 20 years.  Getting an extra 2% annual return is possible, and if this calculated risk pays off, you could accumulate $466,096. The difference is about $145,000, nothing to Boo! at.

Avoid the convenience trap, invest some time into researching the best options and maybe you’ll be giggling through an earlier retirement picnic on the lush lawns of Castle Island. I’d be careful though, Poe  was stationed at Fort Independence and he based “Cask” on a legend taken place within those gloomy walls.

Saturday, September 7, 2019

A Blunt Question, a Somewhat Blunt Answer

Last month, The Wicked Smart Investor sat down with a complete stranger and educated him on an investment philosophy supported by oodles of Nobel Prize winning academic research. He quickly invested. And if you believe this tall tale, you probably think you can actually park a car in Harvard Yard. It just doesn’t work that way. Frequently, the prospective client’s facial expression reads “If you know so much about investing, why aren’t you a multi-millionaire?”

Sometimes they even ask this question aloud.

Don’t you just love the stereotypical directness of Bostonians?  If you do, keep reading this article because I’m about to get extremely candid. First of all, there is competition everywhere in the investment business. Also, despite pretenses, many people simply don’t have money to invest. Those two factors shrink the target market dramatically.

But the biggest hurdle I face as an investment advisor is that facts simply don’t change people’s minds. If I’m asking someone to change their long held, but erroneous, beliefs about investing, it’s certainly an uphill battle. People believe what they want to believe.

I bet you have used that phrase before.

Harvard economist J.K. Galbraith explained things much more eloquently. He wrote: “Faced with a choice between changing one’s mind and proving there is no need to do so, almost everyone gets busy with the proof.”

It is hard to admit we’re wrong; it is only human to stubbornly cling to our beliefs despite being confronted with evidence to the contrary. Behavioral economists, the scholarly type who study the effect of our hard wired human behaviors on our investment decisions, call this confirmation bias. This psychological phenomenon is very dangerous; it frequently leads to poor investment decisions. The existence of confirmation bias is also supported by a mountain of Nobel Prize winning academic research. It is all available at no cost on the internet or your public library.

The sad thing is that many people will not review this research because planning for your financial future is a yucky, scary thing. So maybe they invest in CD’s for their retirement 20 years from now, purchase high cost annuities for the guarantee, or hire a planner far too eager to tell them what they want to hear.  Others may turn to their friends and family and ask for advice. This could be a good thing, as long as these people actually know what they are talking about.

The recommendations of friends and family are also the best way to defeat confirmation bias. Imagine this scenario: Dear old Uncle Joe has been a constant in your life. He changed your diapers and gave you tons of birthday presents. Maybe you don’t completely agree with all of his political opinions but you have a permanent soft spot for Uncle Joe. You also know that Uncle lives a comfortable retirement despite modest earnings throughout his career. So when you ask him for financial advice and he directs you to his financial planner, you will likely hire that planner.

The reason for your decision is a well-researched, hard wired psychological phenomenon: human’s herd mentality. As humans are social animals, our desire to be loved by others trumps just about everything else. Herd mentality explains teenage peer pressure, religious cults and book clubs. Life is much easier when you stick with the crowd; hard core contrarians are frequently ostracized.

I utilize herd mentality to build my business. When I am referred by an existing client I most likely get that business.  Client referrals take time, that’s why I am still working on my first million.

Monday, June 10, 2019

A Big Name is not the Secret Ingredient

Consumers of many products or services are frequently offered a choice; go with the little guy or the big, branded behemoth.  This is true whether you’re baking blueberry muffins or hiring an investment advisor. Before you succumb to the will of marketing myth makers, let’s examine your choices in both decisions.

Let’s talk about the legendary Jordan Marsh blueberry muffin. Mention these treats to Bostonians of a certain age and you’ll likely evoke blissful memories of downtown shopping trips with Grandma. If children behaved they were rewarded with muffins glistening with crunchy sugar on the top and slightly tart, juicy blueberries in the middle. At the right time of day the appetizing scent of the muffins baking even overpowered Grandma’s Jean Nate’ perfume. The muffins were so good, amateur bakers eagerly sought out the recipe. Yet the recipe was a closely guarded secret and many were misled by the counterfeit concoctions of parish cookbooks and handwritten index cards.

One day, the culinary cliffhanger was almost solved. The food section of the Boston Globe featured a recipe formulated by pastry chef Nick Malgier. It seemed the secret ingredient was buttermilk, the acid in it helps keep the muffins moist. The Wicked Smart Investor used this recipe a few times enjoying great adulation from all that devoured my muffins. Imagine my dismay years later when Jordan Marsh baker John Pupek revealed the true recipe with absolutely no buttermilk! I felt like a fraud, passing my muffins off as legit Jordan Marsh when they were just another fake. Dejected but determined, I baked muffins using both recipes and held a few blind taste tests. The muffins baked with buttermilk won by an overwhelming majority.  This may rock Bostonians right to their “R” dropping core but just because it is a Jordan Marsh blueberry muffin does not mean it is the best blueberry muffin.

So, are investment advisors from big institution better than the small independent outfit? That is a question for you to decide. Since I’m independent I obviously have a bias. Let me do my best to educate my readers objectively.

First, you do not lose any fraud protection with an independent advisor when a third party has
custody of your money. Usually a large outfit, this custodian offers many checks and balances that assure your advisor never has physical custody of your funds or the reporting function. You receive statements directly from the custodian bypassing the advisor.

Next, an independent advisor usually has more freedom of investment choices. If your advisor works for a firm with proprietary products it is very likely you’ll be placed in those products even if they are not best for you. Or, the advisor may have a quota for certain third party products that also fall short.   Don’t be fooled into thinking that advisors from big firms have the best research and better returns will likely follow. The internet has democratized investment research, small players have access too.

Finally, larger firms also tend to be publicly traded and/or have layers of expensive management. The constant pressure to produce growing revenues and pay large salaries reduces the ability for larger firms to be fee competitive. Frequently, advisors at these firms are paid less, fueling high turnover. You may never speak to the same advisor twice.  Smaller firms usually enjoy less turnover.

The stock market simply does not reward investors based on the size of their advisory firm. The myth makers be damned.  I recommend choosing a fee based advisor offering great service and held to the fiduciary standard. That’s the crunchy sugar on top.  

Tuesday, April 2, 2019

When the Investing Lightning Strikes

A small passing of time can change the course of history and the value of your investments. Events occurring in minutes have toppled regimes and installed new ones. The stock market has suffered huge declines and enjoyed strong advances within a few trading days.
Let’s discuss what may be the most important minute in US history, the night of April 18, 1775 at our Old North Church. Two colonial rebels, Robert Newman and Captain John Pulling Jr. were on a mission to alert fellow rebels of the British Army’s advancement route through Boston. After keeping watch for hours they spied troops putting boats in the Charles River.  Newman and Pulling burst into the church, climbed a series of staircases and ladders, bringing two lanterns to the steeple eight stories above. Executing a pre-planned strategy, the two hooligans hung the lanterns facing Charlestown to signal the Sons of Liberty members that George III’s troops were taking a water route through Boston. It was the beginning of the Redcoats’ journey to Lexington where they intended to destroy the rebel’s armaments. The lanterns were only displayed for 60 seconds, but that began an immensely consequential series of events as the final catalyst to the American Revolution.

Riders scattered across the region and warned colonists of the British advance. The most famous horseman, Paul Revere hollered “The Regulars are coming” throughout present day Somerville, Arlington and Medford. Gathering a sizable militia in Lexington, the rebels surprised the British the next morning. The “shot heard round the world” was fired and the War of Independence had begun. Only 60 seconds set the “colonies” on the course to separate from Britain and eventually became a world superpower.

With a lot less fanfare, a relatively small amount of time has changed the stock market. Let’s remember that unlike history, we tend to forget many somewhat seismic shifts in the market. To most people, (except numbers nerds) stock market history is really not that interesting. But bear with me as I discuss a few great days on Wall Street. It happened soon after the Dow Jones reached its lowest level following the 2007-2008 financial crisis. That revolting close was 6,547 on March 9, 2009. On March 23, 2009 the Dow shot up 6.84%. While the huge increase is impressive by itself, it followed increases 5.8% March 10th, 3.4% on March 12 and 2.5% on March 17. Yes, there were some losses between March 9 and March 23, 2009, but that is an awfully good run in a few short trading days. In fact, when the Dow closed at 7,776 on March 23, 2009 that represented an almost 19% gain in 10 trading days. Experts say this was the start of a great bull market. If you were on the sidelines because of fear or inertia, you lost out.

There is a lesson here for average investors. As many steep increases frequently occur at the start of bull markets and in short periods of time, it behooves you to always stay invested. You’ll lock in your losses if you sell when the market is low then buy when the market is high. Wicked Smart Investors win when the lightning strikes because they are always invested. There will be no horseman wearing a three corner hat riding on Wall Street yelling “The bull market is coming.” We only know that in retrospect.

You will see three corner hats and other colonial era costumes at the Annual Lantern Event at the Old North Church April 14th. The placement of “One if by Land, two if by Sea,” a phrase coined by Henry W. Longfellow will be reenacted.

Tuesday, January 29, 2019

Safeguarding your Sports Memorabilia

It was a simple headband but it caused such a stir. Long ago, at the opening of the Boston Symphony Orchestra, Isabella Stewart Gardner notoriously wore a headband that read “Oh you Red Sox.” The fuddy-duddies had a fit, such a bunch of hoity-toity wet blankets!  If the headband still exists today, I bet it is a valuable piece of someone’s sports memorabilia. Let’s hope the owner is doing a better job protecting this artifact than the Gardner Museum did protecting its creator’s art collection.

If you were a stick in the mud, Mrs. Gardner was easy to dislike. Descending from early Scottish royalty, she was born to a wealthy New York family. After years of studying art, music and dance she married a wealthy Bostonian, John Lowell Gardner, the offspring of old money, and a true Boston blue blood. The clannish upper crust did not instantly warm to the woman they called “Mrs. Jack.” Some of her antics, like walking her pet lion down the street on a leash, caused her to be branded cuckoo for cocoa puffs. She took it all in stride and gave her adopted city a wonderful gift. She created the museum from her Italian Palazzo home and huge collection of priceless art. It’s open to everyone including pimply faced teenagers doing projects for Mrs. Parz’s art class. The Wicked 
Smart Investor was one of the students, acne and all.

By sending us to the museum, Mrs. Parz was simply doing what great teachers do. She opened up our world. Our assignment was to write a 5 page paper about our visit. At a security guard’s suggestion, I wrote a paper on the painting “The Storm on the Sea of Galilee.” It’s the only seascape of Dutch artist Rembrandt. The painting depicts Christ and His apostles crossing the sea in a sailboat during a violent storm.  You can see the panic on some faces, determination on others, and one face getting ready to vomit. The brush strokes in the painting were incredible. I almost felt sea spray on my face from the life like seascape. Sadly, this was the last time I would see this painting.

In the early morning of March 18, 1990 thieves dressed as policemen infiltrated the museum, tied up the guards and stole 13 works of art including Rembrandt’s seascape. A lax security system and improper training of the security guards contributed to this travesty. While it is hard to believe, the museum only had a couple of locked doors and one silent alarm securing the collection. Since the artwork was priceless, it was uninsurable.

Let’s be clear; the thieves did not just steal the paintings from the museum, they stole them from humankind.

I hope such a travesty does not happen to your sport memorabilia collection. It is up to you to take preventative measures. You should certainly buy insurance coverage, but it is prudent to physically safeguard the items as well. Helmet, baseballs, hockey pucks, baseball bats etc. should be
displayed in a case with UV protection. Jerseys should be framed. If you have paper items, protective sleeves are a good idea. Overall, keep your collection away from sun, water, food, and small children. While you’re at it, keep an eye on the pimply-faced teenagers too.  With proper protections, your memorabilia can be enjoyed for years to come.

Mrs. Jack’s missing artwork is represented by empty frames on the museum walls.  I say those empty frames
represent an open wound on the soul of the great City of Boston. If you have any information on the missing art, please contact the FBI immediately