By John Reizner |
Many investment advisors, mutual fund managers and hedge fund managers on Wall Street often fail at their primary task: preserving and/or growing their clients’ capital over time.
Such managers may suffer from the "institutional imperative" or "group-think" - where the players in the market may be blinded by the raw emotion (bullish or bearish) of the stock market’s movement or trend and who act in tandem accordingly along with the will of the investing herd.
For example, when the stock market rises strongly, this may create excitement among money managers: enticing the majority of these market participants to be caught up an institutional buying panic. Group think hinders independent thinking and creativity that is so crucial to achieving success on Wall Street.
Advisors and investment committees may lose sight of the bigger picture or just may not stick to a well-defined proven discipline of picking stocks of companies representing value in the market.
An example of this was in the great technology bubble of the late 1990’s, which like many stock fads, ended badly. Many investment managers were caught up in the euphoria of ever increasing technology stock prices: some may not have sold before the ensuing bear market that began in March 2000 which decimated many technology issues. The offending technology stocks probably should not been bought in the first place.
Have investment advisors today succumbed to a similar siren song in regard to today’s IPO market? The IPO spigot in 2014-15 has been turned again on with over 80% of new companies trading for the first time in 2014 losing money. Many of these companies base their business model on a profitless expected stream of ever-increasing revenues. When the stock market deflates in time and access to the public markets by cash-hungry companies is not available, many such companies may simply run out of cash and fold – and may have to let their employees go.
Profitless companies’ IPO’s represents in my opinion a potential bubble in the current stock market environment and evoke a similar story at least in form to the dot/com mania of the late 1990’s. However saner heads may prevail this time around as mostly speculators journey into the ethereal world of investing in high PE companies with no hint of potential profitability in sight. But rest assured, there may be a modicum of investment advisories/ gunslingers who will happily risk your money for a one-percent of assets fee.
Does your investment advisor realize that there may be a potential bubble in IPO’s and in some property markets in the U.S. which may have a direct effect on your stock portfolio and consequently your life?
Real estate mania has gripped cities such as San Francisco, Silicon Valley and New York as Chinese buyers bid up the price of homes ever higher. Renting one room in a home in a city like San Francisco goes for $1500 and up – necessitating living with two, three or more other housemates for many individuals. When only millionaires and the newly minted wealthy “dot-com” workers may afford to buy a house – this has all the earmarks of a potential bubble in the property market in these cities.
As employees of many startup companies in San Francisco buy or rent homes and those firms may be unprofitable – the holders of that real estate are weak hands and could be forced out of their homes during an inevitable economic and stock market downturn.
The question is – how strong is the economy? At the time when economic growth peaks in a business cycle and everything looks and feels good (or as good as it can get), it may be time to get out of the stock market or protect your downside. The risk of a bear market in stocks occurring is always present.
Is your investment advisor prepared for a downturn in the stock market? Are you a long-term investor who plans to hold stocks during a potential bear market? Are you able to stomach a downturn and wait for the potential resumption of the uptrend in the equities market as history has shown to occur?
Does your financial advisor have a plan to build your wealth over the span of your working life? If you may be near or at retirement – is your advisor potentially taking too much risk – or is he or she risking a substantial drawdown in your portfolio as some mutual fund managers of various target date funds did who were caught naked during the financial crisis investing their near-retirement age client’s money too aggressively.
Today advisors, market pundits, speculators and investors are enamored of the Federal Reserve rising interest rates bubble – whereby the participants are glued to their television screens – waiting for Godot (the Fed raising rates) as it were, waiting for Fed speak, beige books and Fed meetings – hoping their positions will be favored by the policy statements of Chair Yellen et al. The players are either taken out and shot or made whole. The resourceful and sanguine advisors and investors remain above it all – adhering to their favored investigations and equities. Is your advisor one of them?
Investors are wise to do a thorough investigation of a potential financial advisors’ track record and character. Character counts – there are bad apples out there - so check on advisors’ compliance records. There are both good, bad and mediocre financial consultants. Some are very good – some are very bad (I know this personally!). Others simply may be towing the company line when it comes to stock picking.
A superior stock picker may not necessarily be the best public relations person and should not be expected to cater to your whims beyond good stock picking. Beware of advisors who wish to be a “one-stop-shop” for your needs beyond just giving investment advice, such as doing your taxes (that’s another fee) or getting your family tickets to a hit play.
Providing investment advice is usually a fee business – and investors should beware of advisors making monkey-business of their portfolios.
Beware of financial consultants who may offer a complicated solution to your problems.
Examine advisors track records in bull and bear markets over preferably two or more market cycles. Look for resilient performance in difficult markets.
A relatively painless way to avoid paying investment advisory fees is to carefully select well-managed mutual funds (you will pay a management fee through the funds themselves), invest and simply forget about them. Just look at your statement once a month. Allow your investment to compound over time. I would avoid ETF’s because if there is ever another flash crash (many ETF’s traded down to pennies during that market event) those vehicles may not hold up well.
So if by reading the mutual fund ratings and interviews with fund managers published in periodicals as Money or Forbes – investors may find the best fund managers without playing a game of Russian roulette lite with their money selecting a financial advisor – and they may be better off.
(This article is an update of John Reizner's 2009 post on the subject of investment advisors).
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