Happy Thanksgiving! Guess who passed the CFP ® Exam?

Happy Thanksgiving!! Short post this week given all that is going on.

I’ve been quiet the past couple of weeks as I went into final prep mode for the CFP ® exam. I already have the CFA designation, so many will ask……that must have been easy, right? No, mostly different material with a different emphasis.  I’ll get into that in another post, but for now, thankful that we passed!

Also time to sit back and be thankful for all that has gone right in life. I often think we spend too much time focusing on the negatives.  If you only look at the evening news, you can easily become depressed.

So back away from the TV (unless it is football or basketball) and take a few moments to appreciate life’s little gifts.  Our time is short, enjoy the ride, and be sure to take time to smell the roses!!



Morningstar Troubles: Market Efficiency on display.

This past week featured an interesting event……..the plunge and rebound of Morningstar’s Stock price. It’s all related to the value of their highly regarded Star system for mutual funds.

Is this new? To those of us who believe in Market Efficiency (the concept that all public news is reflected in current stock prices. To beat the market, you will need material non-public information – an activity which is illegal.)……this was a non-event. There is a wealth of research showing that markets are efficient.

So why the fuss? Turns out many in the investing public do not believe and/or understand the concept of market efficiency. If they did, they would be skeptical of ratings and not let them hold sway over their investment decisions. But they don’t. The ratings do have a meaningful impact on investment activity. So when the WSJ did some analysis and found the predictive power of the ratings to be …er….um……..not as powerful as many believe, it caused the value of Morningstar’s Stock to fall. (and it bounced back the next day – who is going to remember this stuff in 6 months anyway?)

For an individual the lessons are clear:  if professional managers have trouble beating a market on a consistent basis, what chance does a part-timer (individual investor with another job) have? I’d say very little.

However, Capitalism and our financial markets are a great creator of wealth. Spend your time focused on issues that have a greater probability of increasing your wealth.  In other words….make a budget, save a fixed % of your earnings year after year, invest in an efficient manner (this will mean avoiding looking at active mutual fund Star rankings), and get an advisor who can help coach you through these issues. Life is short, get out and enjoy it!



Market Too Expensive? – Reversion to the Mean at work. Déjà Vu version.

As the Dow rolled past 23,000, once again the pundits are sounding the alarms.  They will eventually be right (a broken clock is right twice a day), but until then,  I still think you should keep the following in mind……….

As the Dow Jones Industrial Average hits new highs, there are many claiming it to be “over-valued”, “ready for a correction”, or “expensive”.  Most of these explanations share the same basic premise – reversion to the mean.

Reversion-to-the-mean (RTTM) simply implies that there is some “true” or “appropriate” level for valuations in the stock market.  Most of these values are derived from historical analysis.  Pundits compare today’s values to some sort of average (or mean) .  They then conclude that the market will be headed back towards its historical value in the future – hence the use of the term reversion.  So, the concept is that the market is off its long-term average value, and will be drawn back to this value over time.

Two big problems with these arguments.

1.  What is the “force” that drives the market back?  The RTTM concept works well in physical sciences where all behavior of particles is driven by the four fundamental laws of physics.  What fundamental law is at work here?  It’s just us humans using our minds. (Kind of scary I know.  What limits human creativity?)

2. The whole argument rests on the notion that we know what the “correct” or “appropriate” level is.  In statistics, they use sampling techniques to estimate what the “mean’ value is for a given population.  Works well if the population being studied is normal, follows fundamental physical laws, and the size of your sample relative to the size of the overall population is known.

But what do we know about the history of capitalism?  Will it continue for another 100 years? 500?  What makes us think what we have seen in the past is indicative or typical?  Maybe it was just an abnormal episode?  Do we want to look at the “mean” of an abnormal episode?

The best example of how these arguments can lead us astray was our last “great recession”.  We had only seen a national home price decline of large magnitude during the great depression of the 1930s.  We assigned AAA values to securities because we thought we knew the range of possible outcomes by looking back at history.  We were not ready for the national home price decline we ended up experiencing which was worse than implied by looking at the stats.  Oops.

All this to say that you need to know what you do not know.  We really do not know the “correct” or “appropriate” values for the stock market.  History can serve as a guide at times, but it does have fundamental flaws that will never be solved.  Be wary of the RTTM arguments that pop up every time we are above some long-term average – it really does not tell you much about where we are headed next.


Gun Violence: Your Investments Can Speak.

The recent events in Los Vegas can be depressing for two reasons; first, the tragic loss of life is horrific. On top of that is the realization that common-sense gun control is a political long-shot for the moment.

Is there anything one can do? Yes – two ways. Continue on with conventional political pressure – call your congressperson, senator, or any representative and let them know your views. At the same time – look at your investment portfolio.

Over the past several years there has been tremendous growth in SRI – Socially Responsible Investing. The premise is that investments must pass through Social Responsibility filters before they can be included in your portfolio. Currently, there are a wide variety of funds that do not invest – or limit investments – in gun manufacturers. I will not go into them here, I just want to touch on some common objections to SRI.

Objection #1 – Your returns will suffer. The magnitude of this issue will vary by manager and their investment style. If they run a concentrated portfolio and a social screen would kick-out one of their favorite investments, the impact could be meaningful.

If your manager utilizes broad diversification and factor tilts, the impact is lessened, as other investments can serve as substitutes. The result is just a negligible impact on performance (if at all).

Objection #2 – SRI is expensive. Yes, there is extra work for an SRI fund and it will raise costs somewhat. This issue is always present in investments, and can be mitigated by looking to the fund families that worry about costs. Vanguard, Dimensional Fund Advisors and TIAA (amongst others) are managers that have SRI offerings and worry about the final cost to investors.

The bottom line is that you can deploy your investment funds in a manner that is more closely aligned with your values. The SRI universe is much more developed and accessible today. It is maddening to feel there is little you can do to affect change, but knowing your capital is deployed in investments you can be proud of might help.



Sad truth: Picking stocks is bad for you, but picking the stock market is good for you.

Sorry the title of this post is so long. That means it will generate little internet traffic. 6 to 8 words is the sweet spot – my bad. However, this is an important idea that does not get all the press it deserves. So I am here to help out.

The New York Times re-visited an interesting topic the other day. You can get the direct link here:  NYT Link . The basic message is that much of the wealth created by the stock market is the result of just a few tremendously well performing stocks. The average stock is more likely to be a dog. So, if you are building your own portfolio, you better hope you choose these super-star stocks that propel the entire market higher. (and do not sell even after it has quadrupled etc. etc.). If you don’t, the article explains, often you would have been better off in a one month T-Bill. (itself a pretty poor long-term performer).

One way to be sure you catch these Super-nova stocks is to buy the entire market. i.e. Passive Investing. Guaranteed to catch all the winners, losers, and the super-stars that help us all build wealth. Nothing magic about these concepts – it is simply that the range between best and worst performing stock is far more extreme than we are used to seeing in everyday life. That guy that speeding on the freeway? Likely he was going 20% faster than you, not 2000% faster.

The chances of picking a super-nova stock? The same as the chances of picking the worst stock out there. By buying all of the stocks in the market, (and tilting the weights to favor value, small cap, profitability etc.) you are guaranteed to capture the next rising star. You catch the wonder that is Capitalism and its ability to create wealth by taking on risk.

So, do the smart thing. Resist the temptation to pick individual stocks, and pick the smarter strategy – pick the stock market. Your retirement will be glad you did.

5 Key Concepts for the 25 Year Old Investor. (or any investor really)

1.  Wealth Accumulation is Doable.

Even in today’s messed up world, you can still retire comfortably.  Spending less than you earn, exposing your savings to the various risks in the stock market, and doing it for a long time is a recipe for success.  These three factors will interact mathematically to determine what you can accumulate during a 40 year career.  You’ll be surprised at what you can achieve all on your own.

2.  Taxes Matter.

Our economy needs both Labor and Capital.  It rewards the suppliers of both.  The government taxes earnings on both. Inefficient tax planning will greatly diminish your after-tax savings. Be smart with tax-deferred and tax-free investment opportunities. Take them to the max!

3.  Your ability to stick to your investment plan is more important than the investment plan itself.

Robo-advisors on the internet can give you a decent plan for pennies, but will you have the ability to stick with it? This is the critical question/behaviour.

4.  Investments are Easy.

The internet is full of great advice for the retail investor. Compare this to how you would have acquired the same info 30 years ago. This is the great age of the retail investor!

5.  Financial Coaching is a positive NPV expense.

Yes, getting advice and coaching around concepts 1 through 4 above is imperative. It may hurt to pay that bill, but a coached investor will beat an uncoached investor. Which do you want to be? $$ rich, or $$$ rich. I’ll take the extra unit of $ please!



Golf proposes new rules to limit coaching; the opposite of what an individual investor should do.

Golf season is about to pick up for me. The Chapel Hill Country Club is re-opening after a 8 week conversion to Bermuda greens. The greens look great and I cannot wait to get back out there!

In March 2017, the USGA and R&A (golf’s rules making bodies) put forth a series of proposed changes to the rules of golf that are scheduled to be in place on Jan 1, 2019. One of the key changes is what a caddie or partner can do for a golfer on the course.  The actual language is cut’n’pasted below from the USGA website. (I added the underlining, and left out some text to keep things short.)

Proposed Rule: Under new Rule 10.2b(3):

The current prohibition would be extended so that, once the player begins taking a stance for the stroke and until the stroke is made, the player’s caddie must not deliberately stand on or close to an extension of the line of play behind the ball.

Reasons for Change:

Although a player may get advice from a caddie on the shot to be played, the line of play and similar matters, the ability to line up one’s feet and body accurately to a target line is a fundamental skill of the game for which the player alone should be responsible.

They do not want a caddie helping a player with alignment on the golf course. Why? The coaching/advice helps the player be a better golfer. This is a competition, so they want to test the skill of the player not the caddie and the player.

Investing is not a competitive sport. You are free to get your alignment advice from wherever you want. In fact an entire industry exists to sell you all sorts of advice.

The modern investor seeks advice on tax related matters, education planning, retirement planning and risk management. Good coaching, in these areas, will have a large impact on his/her financial life.

So please, take advantage of what you are allowed to do in the investing world…………get yourself properly aligned with someone you think will help you achieve your financial goals.