Three Uncelebrated Edges

May 19, 2018

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Three Uncelebrated Edges

There are many edges for the modern money manager or financial advisor who is willing to unlearn the way things had been done in the olden days, the time before information was ubiquitous and investors had grown terminally skeptical of the industry.

The three uncelebrated edges I’m going to mention below are all immediately adoptable and ready to put into practice right away. They are not edges you’ll hear celebrated in the media because their benefits take a long time to accrue to the practitioner and their employ does not involve the kind of acrobatic feats of alpha generation that captivates a large crowd of clickers and viewers.

But, I have found, incorporating them into one’s practice and philosophy can lead to a great deal of job satisfaction and lifestyle improvement. This is because a) they are truly helpful to the recipients of your advice and b) they are promises that can actually be delivered upon, in a business where the term “guarantee” is practically a four-letter word.

1. Be boring

I did a post about how a major bank was going to open up hedge funds, private equity and venture capital to the masses with a new minimum buy-in of $100,000 for these strategies – down from the original $10 million. One of the stated purposes of this was to “increase engagement” between the wealth manager and the clients. Which is roughly translated to “keep things interesting and give people stuff to talk about.” Another way of putting it: Asset management as a form of recreation.

This will work for a little while, until the annual results of this sort of entertainment start to pile up. We call these accounts cocktail chatter portfolios and they always look worse the morning after.

An advisor or money manager in search of an edge can simply avoid building up an expectation within his or her clients’ hearts that the work they’re doing for them will be exciting, stimulating or worthy of daily discussion. I don’t have a specific academic study to site here so you’ll have to take my word for this – it strikes me as impossible that a repeated program of making cool, new allocation choices to amuse and titillate the clientele (or the salesforce) is going to be additive to returns over time.

2. Tell the truth

The holy grail that all investors start off in search of is multi-faceted. For some, it’s the pursuit of returns that are greater than those being earned by a friend, a neighbor or a co-worker. “I’m better than him, and my investment results prove it.” For others, it’s the possibility of risk-free returns – all the upside, none of the downside. Or most of the upside and very little of the downside.

You can make yourself rich offering such a thing to an audience, except you’d better raise a lot of money fast, because you can’t obviously deliver such a thing reliably and over long stretches of time. You can disguise the risks necessary to achieve all of the upside and you can even transform them into different sorts of risks, but you cannot eliminate the risks entirely. The people who are counting on you to do this will soon be handed a first-class education in one of the most basic lessons in life: Risk and reward are related. They are interlinked, and the link cannot be permanently severed.

?One uncelebrated edge you can attain as a manager of other peoples money is to start off relationships by explaining this incontrovertible fact and then tailor the investment recommendations in complete accord with it. Rather than bullshit people about the risk that they must take in order to earn returns, you can relentlessly educate them about it. You can tell them the truth and then count on the message sinking in.

The thing is, you’ll have to do this more than once and in all types of environments. In great markets, you’ll have to explain why their balanced portfolio hasn’t gained more. In terrible markets, you’ll have the opposite conversation – here’s why you’ve borne some of the brunt of this decline. We like to say that diversification means always and never having to say you’re sorry. Not every update will be the Best! Talk! Ever!

But you’re going to be telling the truth, and the truth is that making money in three out of every four years ain’t so bad.

3. Add by subtracting

The natural inclination of a wealthy investor is to believe that more is more and that their status confers upon them some extra bells and whistles that they had not been worthy of in the past. “I have arrived.”

The large wealth management departments within the trust companies and Wall Street banks specialize in catering to this wholly understandable mindset. “You sir, are in the club now. Help yourself to a Fiji water while I assemble the team of experts that have flown in from all over the country to meet with you today.”

Showing people that all the extras are not always additive is a completely viable edge for the modern advisor who is adept at collecting data and arranging a persuasive presentation. Countering the luxury sales pitches with facts about the deleterious effects of turnover, taxes, performance fees, mean reversion, forecasts, persistence of performance, style drift, etc is only sustainable if it becomes a regular feature of the relationship. These facts, which can be found fresh-squeezed and in abundance on fine investment blogs around the country every morning, will not get through to everyone. But they will get through to most reasonable people if presented in the correct way.

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None of the three edges I’ve listed above are going to lead to instant wealth and success for any of your clients. In fact, quite the opposite – in the short-term they may actually force the adherent to miss out on some opportunities that end up working out. But the advisor’s job is not to enter the clients’ accounts into a performance derby and race against all other possible allocations to finish first. It is to keep wealthy people wealthy, and to arrange their assets in such a manner that they have the highest probability of staying that way, no matter what happens in the future.

Jeff Bezos and Warren Buffett had been friends for awhile and, according to Bezos, one day they got to talking about Buffett’s strategy. “You are the second richest man in the world and yet you have the simplest investment thesis. How come others didn’t follow this?” the Amazon founder asked.