Start the New Year off right: Resolve to read more

Solomon-(2)Brad Solomon, Junior Investment Analyst

Many New Year’s resolutions focus on developing healthy habits. An important one to keep is intellectual curiosity. In no particular order, below is a reading list for 2017. Some deal more directly with finance than others, but they each explore economic, sociopolitical, cultural and behavioral issues that are ultimately relevant to global markets.

  1. Nation on the Take: How Big Money Corrupts Our Democracy and What We Can Do About It. Wendell Potter & Nick Penniman, Bloomsbury Press, 2016.

Nation on the Take explores the evolution of lobbying in the United States and the increased role of money in politics following the Citizens United case of 2010. What is most satisfying about the book is the extent to which its authors manage to remain nonpartisan, calling out Republicans and Democrats alike. If your New Year’s resolution involves lowering your blood pressure, I advise against skipping over this suggestion.

  1. Hillbilly Elegy: A Memoir of a Family and Culture in Crisis. D. Vance, Harper Collins Publishing, 2016.

J.D. Vance’s Hillbilly Elegy details the disenchantment of Appalachia in a view that manages to be impartially critical but also remain in solidarity with the region. This book seems to be making its way onto every “essential reading” list, and deservedly so given its relevancy to the foundations of the new wave of populism that is still working its way across the globe.

  1. Nothing is True and Everything is Possible: The Surreal Heart of the New Russia. Peter Pomerantsev, Public Affairs Publishing, 2015.

While Charles Clover’s more recent Black Wind, White Snow overtly concerns itself with the Kremlin as its sole subject, Nothing is True is a wide-ranging, colorful firsthand account of the backwards elements of Russia’s culture. A poll of a certain political party recently showed that 37 percent of respondents view Vladimir Putin favorably, versus just 10 percent in July 2014. As America’s attitude towards Russia evolves, this book is a warning to think twice before offering such a seal of approval—a stark illustration of just how diametrically opposed many Russian norms are relative to those of the U.S.

  1. The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal. Ludwig Chincarini, John Wiley & Sons, 2012.

Chincarini’s The Crisis of Crowding could best be described as a mathematically detailed, focused version of Scott Patterson’s The Quants. The book analytically decomposes the 1998 collapse of Long-Term Capital Management and the 2008-09 Financial Crisis, exploring the common thread between them in that both resulted partly from incomplete pictures of risk in behaviorally erratic systems.

  1. Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat Casinos and Wall Street. William Poundstone, Hill and Wang, 2006.

Like the preceding choice on this list, Fortune’s Formula is a technical treatise of a subject that often gets “glossed over” despite its critical importance to markets. The author manages to explore the mathematically weighty Kelly criterion in a boiled-down, coherent, and practically applicable framework.

  1. Personal Benchmark: Integrating Behavioral Finance and Investment Management. Chuck Widger and Daniel Crosby, John Wiley & Sons, 2014.

Financial advisors do their clients a great service by educating them about investing best practices, but at times of volatility, logic is often thrown out the window. As the authors wrote in the book, “While investor awareness and education can be powerful, the very nature of stressful events is such that rational thinking and self-reliance are at their nadir when fear is at its peak.” The authors provide a framework for embedding good behavior into the investment process.

  1. The Laws of Wealth: Psychology and the Secret to Investing Success. Daniel Crosby, Harriman House, 2016.

And if you are looking for a list of rules to follow in the year to exercise good investing behavior, The Laws of Wealth helps keep you on the straight and narrow. The book provides clear, concise direction on what investors should think, ask and do.

Once you finish these books, more books can be found from the recommended lists by The Economist, Financial Times, and Bloomberg

Enjoy, and happy New Year!

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

 

 

Trump’s free lunch: Avoiding a painful indigestion

Solomon-(2)Brad Solomon, Junior Investment Analyst

The aphorism “there is no free lunch” is one of those handy phrases used ad-nauseam in Economics courses. The seductively tasty platter currently set in front of investors is a lightning-fast reallocation of assets towards stocks that should “clearly” benefit from a Donald Trump presidency. Often, however, it pays to be a skeptic. I’m not critiquing the efficacy of the policies themselves towards promoting Americans’ well-being; I’m talking about the need to unhurriedly assess the second-level investment implications of policy and whether they have already been discounted into asset prices.

The ascendancy of the Trump administration and the degree to which President-Elect Trump will remain wedded to his campaign rhetoric have a number of moving parts. Now may be an opportune time to patiently exercise what Howard Marks of Oaktree Capital calls “second-level thinking”:

First-level thinking says, “It’s a good company; let’s buy the stock.” Second-level thinking says, “It’s a good company, but everyone thinks it’s a great company, and it’s not. So the stock’s overrated and overpriced; let’s sell.”[1]

At Brinker Capital, we believe that second-level thinking is best nurtured by asking questions. Trump’s vision is to “transform America’s crumbling infrastructure into a golden opportunity for accelerated economic growth.” The number touted by greatagain.gov is $550 billion, and a recent paper by senior Trump advisors, Wilbur Ross and Peter Navarro, calls for spurring $1 trillion in privately-financed infrastructure investment over the next decade through use of tax credits.[2]  Buy infrastructure seems to be the screamingly obvious investment implication, but here are a few less obvious questions:

Is our infrastructure actually “crumbling?”

The American Society of Civil Engineers (ASCE) gave America’s infrastructure a “D” in its 2013 report card.[3] But coming from a professional trade organization of civil engineers, that’s probably akin to asking the cows from the Chic-fil-A commercials whether they prefer beef or chicken. Policy analyst Mark Scribner calls this the “Great Infrastructure Myth” and notes that the number of structurally deficient bridges has been declining for over two decades while pavements have become smoother in aggregate.[4]  A recent piece by Deutsche Bank Research[5] argued that infrastructure spending in the U.S. is not, as commonly assumed, lacking:

  • When using infrastructure-specific price indices, the share of real government investment to output has been stable for much of the last three decades.
  • After taking into account compositional changes in private capex, business investment has also remained steady as a percent of output.

How much “leakage” is there to the transmission mechanism by which government spending boosts profits in the private sector?

Investors would be wise to examine the intended and realized consequences of President Obama’s $840 billion American Recovery and Reinvestment Act (ARRA) of February 2009, much of which was directed towards infrastructure. Michael Grabell’s 2012 piece “How Not to Revive an Economy” provides a sobering look at what led President Obama to admit that “there’s no such thing” as a shovel-ready project.[6]

Which subsectors are winners of increased public spending on infrastructure?

Infrastructure is a blanket term that encompasses a large array of systems: energy, transit, ports, aviation, levees, dams, schools, roads, inland waterways, public parks, rail, bridges, drinking water, and waste treatment. Twelve of the 16 sectors reviewed on the ASCE’s 2013 report card received a grade of “C” or worse. Narrowing in on two subsectors, what evidence exists that Trump will favor oil and gas over renewable energy, for instance, and will he possess the means to undo the renewable energy investment tax credit (ITC) that was recently renewed in December 2015?

Okay, you’ve decided to buy an infrastructure fund. What’s under the hood?

There are 18 open-end funds focused on infrastructure and 15 ETFs with “infrastructure” in their name. Let’s say that you’ve set your sights on one of the larger ETFs in the group focused on income-generating infrastructure equities. By sector, utilities comprise 49% of the ETF, not uncommon for other members of the group. Is that an allocation you’re comfortable making? The Committee for a Responsible Federal Budget projects that the Trump administration’s plans will increase the national debt by $5.3 trillion, to 105 percent of GDP by 2026.[7] Profligate deficits tend to have the effect of raising benchmark interest rates, and high-yielding utility stocks have traditionally been rate-sensitive instruments.

The investment world lends mythical status to the “contrarian” who takes out-of-favor positions. But standing out from the crowd is also possible simply through exercising patience and requiring a fully fleshed out view as precedent for making a judgment.

Our founder, Chuck Widger, provides timeless advice in his New York Times best selling book entitled, Personal Benchmark: Integrating Behavioral Finance and Investment Management, that helps advisors and investors stay the course in times such as these:

What this boils down to is that advisors must develop and oversee the execution of an investment strategy that anticipates the inevitable potholes and stays the course of efficiently compounding the investment portfolio to create purchasing power. This requires both the management of the investment portfolio and the management of investor behavior. Skilled, experienced advisors know that one of their most important responsibilities is to help investors avoid making emotional decisions when volatility is high or when markets are irrationally exuberant.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor. 

[1] Marks, Howard.  “It’s Not Easy.”  Oaktree Capital Management.  September 2015.

[2] Ross, Wilbur & Peter Navarro.  “Trump versus Clinton on Infrastructure.”  October 2016.  Specifically, the paper assumes projects are funded by debt and equity at a ratio of 5:1 and proposes to award a tax credit to the equity investor at 82% of the equity contribution or 13.7% of the project cost, and then tax the labor component of construction and the contractor’s pretax profits to bring the program towards revenue neutrality.

[3] American Society of Civil Engineers.  “2013 Report Card for America’s Infrastructure.”  March 2013.

[4] Scribner, Marc.  “The Great Infrastructure Myth.”  Competitive Enterprise Institute.  November 2016.

[5] Tierney, John.  “America’s Fiscal Consensus—A Bridge Too Far.”  Deutsche Bank Research.  October 2016.

[6] Grabell, Michael.  “How Not To Revive an Economy.”  The New York Times.  February 2012.

[7] Committee for a Responsible Budget.  “Promises and Price Tags: An Update.”  September 22, 2016.

Personal Benchmark was Made for Days Like This

Crosby_2015Dr. Daniel Crosby, Executive Director, The Center for Outcomes

Chuck Widger and I released our New York Times bestselling book, Personal Benchmark: Integrating Behavioral Finance and Investment Management, on October 20, 2014. Although the book was published in 2014, the writing process began in 2013, and Chuck’s original idea for a goals-based investing system is much older still. Both 2013 and 2014 were great years to be invested, with the S&P 500 returning 32.39% and 13.69% respectively. But although Personal Benchmark was crafted in a time of prosperity it was created with an eye to days just like today.

What is needed during times of fear is an embedded solution that helps clients say “no” to short-termism and say “yes” to something bigger.

As we wrote in the book, “While investor awareness and education can be powerful, the very nature of stressful events is such that rational thinking and self-reliance are at their nadir when fear is at its peak.”

Financial advisors do their clients a great service by educating them about investing best practices, but at times of volatility, logic is often thrown out the window. What is needed during times of fear is an embedded solution that helps clients say “no” to short-termism and say “yes” to something bigger.

When presented with an extremely complicated decision, it is human nature to seek simplicity, something psychologists refer to as “answering an easier question.” Rather than deeply consider and weight the relative importance of social, economic and foreign policy positions, voters tasked with choosing a Presidential candidate tend to instead answer, “Do I like this person?” Confronted with a complex dynamic system like the stock market, the easier question that we ask ourselves is, “Am I going to be OK?” Part of the power of the Personal Benchmark solution is that it helps clients answer this important question in the affirmative.

bookOur book discusses the human tendency to engage in “mental accounting”, the psychological partitioning of money into buckets and the corresponding change in attitudes toward that money depending on how it is accounted for. Page 154 features the story of Marty, a Philadelphia-area gang member who separated his money into “good” and “bad” piles depending on whether it was honestly or ill-gotten. Marty would tithe to his local church using the good money, but reserved his bad money for reinvestment in his criminal pursuits. Although we are hopefully all more civic-minded than Marty, we are no less likely to label our money and spend, invest and think about it relative to that label. One huge advantage of Personal Benchmark the solution is that it sets aside a dedicated “Safety” bucket for days just like today. When a client asks herself, “Will I be OK?” she can take comfort from the fact that her advisor has accounted for her short-term needs. Being comforted in the here-and-now, she will be less likely to put long-term capital appreciation needs at risk.

“While investor awareness and education can be powerful, the very nature of stressful events is such that rational thinking and self-reliance are at their nadir when fear is at its peak.”

Besides helping clients say “no” to short-termism, Personal Benchmark also helps advisors paint a more vivid, personalized picture of return needs. Page 203 of Personal Benchmark tells the story of Sir Isaac Newton, who lost a fortune by investing in what we now refer to as the “South Sea Bubble.” Newton invested some money, profited handsomely and eventually sold his shares in the South Sea Company. However, some of his friends continued to profit from their investment in South Sea shares and Newton was unable to sit idly by and watch people less gifted than he accrue such fantastic wealth. Goaded on by jealousy, he piled back in at the top and lost almost everything, saying after the fact, “I can calculate the movement of the stars, but not the madness of men.” Newton’s failure is a direct result of anchoring his benchmark to keeping up with his friends instead of attending to his own needs and appetite for risk. If Personal Benchmark’s Safety bucket is for providing comfort today, then the Accumulation bucket is a vehicle for rich conversations about the dreams of tomorrow. As clients simultaneously manage their short-term fears and identify their long-term goals, they are able to experience the best of a goals-based solution.

Personal Benchmark was created in a time of comfort and even complacency on the part of some investors, but was done so with a perfect knowledge that there would be days like this. At Brinker Capital we believe that an advisor’s greatest value is providing “behavioral alpha”, increasing returns and mitigating risk through the provision of sound counsel. Our goal is to be your partner in that sometimes-difficult journey and Personal Benchmark is evidence of that commitment.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Investment Insights Podcast – July 10, 2015

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded July 7, 2015):

What we like: Harvard study shows when there’s debt relief as part of the solution, countries tend to recover and thrive more quickly

What we don’t like: The emotional impact the Greek crisis has on investors, chiefly contagion and anger

What we’re doing about it: Touting behavioral finance; investors shouldn’t allow this anger or fear to dictate their investment decisions; encouraging the themes found in Personal Benchmark: Integrating Behavioral Finance and Investment Management 

Click here to listen to the audio recording

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change.

 

Managing Emotions During Life’s Disruptions

Sue BerginSue Bergin, President, S Bergin Communications

It seems like a new survey comes out daily revealing how ill-prepared Americans are for retirement. Well, to reference one, now there is a study that shows two-thirds of those who have saved for retirement may still fall behind.

TD Ameritrade’s 2015 Financial Disruptions Survey shows that unexpected events have cost Americans $2.5 trillion in lost savings. [1] Typical scenarios involve unemployment or having to take a lower-paying job, starting a family and/or buying a home, assuming a care-taking role, experiencing poor investment or business performance, suffering an accident/illness or disability, divorce, separation, or becoming a widow or widower.

No surprise that any one of these events would cause stress. As explained in the best-selling book, Personal Benchmark, Integrating Behavioral Finance and Investment Management, stress triggers a move away from a rational and cognitive decision-making style in favor of an effective style driven by emotions. Research also has suggested that we experience a 13% reduction in our intelligence during times of stress, as valuable psychophysiological resources are shunted away from the brain in service of our ability to fight or flee. [2]

When under stress, emotional decisions tend to be myopic. We privilege the now and forget about the future. Decisions made under stress are also reactive. Since our body is being signaled that something dangerous is imminent, we tend to react rather than reason. Reacting is great for swerving to miss a car, but not such a great impulse to follow when it comes to setting a course that will traverse the next five years.

What we learn from the study is that the average length of the disruption was five years. These weren’t one-time events or blips on a radar screen. They were prolonged periods over that necessitated several financial decisions.

84% of those who suffered from disruptions indicated that prior thereto, they had been saving $530 per month for long-term financial goals/retirement. During the “disruption” savings were reduced by almost $300, which had a cumulative adverse impact on their long-term goal, on average of over $16,200.

Interestingly, the TD study asked how they could be better prepared for the unexpected. The vast majority focused on what authors of Personal Benchmark suggest in helping to manage emotions during stressful times, which is to focus on matters within their control. The top five responses included:

  • save more (44%)
  • start saving earlier (36%)
  • better educate self on investments (26%)
  • consult with a financial advisor (19%)
  • pay closer attention to investments (15%)

There are two key takeaways from this study. Expect the unexpected by doing as much advanced planning and saving as possible. And, when life does throw you a curve ball, manage your emotions by focusing on matters with personal significance and those that are within your personal control.

[1] http://www.amtd.com/files/doc_downloads/research/Disruptor_Survey_2015.pdf

[2] Dr. Greg Davies, Managing Director, Head of Behavioral and Quantitative Investment Philosophy at Barclays Wealth

The views expressed are those of Brinker Capital and are for informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

Two Ways Advisors Can Help Clients Reduce Financial Stress

Sue BerginSue Bergin, President, S Bergin Communications

While all of your clients are unique when it comes to financial outcomes, they are likely to share one unifying factor—money being the top cause of their stress.

The American Psychological Association, which releases figures on stress, documented in their final report for 2011 (published in 2012) that, “More adults report that their stress is increasing than decreasing. 39% said their stress had increased over the past year and even more said that their stress had increased over the past five years (44%). Only 27% of adults report that their stress has decreased in the past five years and fewer than a quarter of adults report that their stress has decreased in the past year (17%).”

The same report shows that the top source of stress is money (75%), with work coming in a close second (70%) and the economy getting the bronze (67%). These results were validated by another study in which 63% of survey respondents indicated that they had some financial stress and another 18% rated their stress level at high or overwhelming[1].

It has been well established that stress triggers a move away from a rational and cognitive decision-making style in favor of a style driven by emotions. As the book Personal Benchmark: Integrating Behavioral Finance and Investment Management states, “Research also has suggested that we experience a 13% reduction in our intelligence during times of stress, as valuable psychophysiological resources are shunted away from the brain in service of our ability to fight or flee.” Experts suggest that emotionally-charged decisions are myopic (nearsighted), reactive, and associative.[2] All three of these predictable responses to stress are powerful ingredients for disastrous investment results.

Advisors can help clients manage emotion and associate stress in two ways:

  1. Manage the volatility in their portfolio. As the highs and lows of investments are brought under tighter control, so too will the emotions of the investors that hold them.
  2. Refocus clients’ attention on the appropriate things, such as matters with personal significance and those that are within their own control. Far too often, clients worry about externalities that have no direct impact on them or their wealth but which create a sort of vague anxiety that can never be truly calmed.

“By managing volatility as a means for controlling emotional extremes and by focusing on germane financial matters within personal control, investors can reap the benefits of appropriate stress without the paralyzing effects of excessive worry” (Personal Benchmark).

[1] http://www.financialfinesse.com/wp-content/uploads/2014/05/Financial-Stress-Report_2014_FINAL.pdf

[2] Dr. Greg Davies, Managing Director, Head of Behavioral and Quantitative Investment Philosophy at Barclays Wealth

The views expressed are those of Brinker Capital and are for informational purposes only.