It’s been a long time and I should not have left you without a dope blog to step to. More to follow friends!!
Once again I am back to share my thoughts with all of you. I have an uneasy relationship with the idea of blogging. Exposing yourself and your ideas for the world to read is never easy. Quite frankly I can’t think of a more uncomfortable thing to do. That being said I think now is the time to break out of what I have always considered my comfort zone. The quest for personal growth has lead me back to writing and if there was ever a time that I felt I should share my voice it is now. I hope you will all find what I have to say entertaining, relevant, and educational.
Now that we have that out of the way let’s dive into the meat of what I want to share with you.
This blog was designed by me to share some of my thoughts on the market and current events. And that is exactly what I am about to do.
This week marks the 5 year anniversary of the collapse of Lehman Brothers. Remember them? Over the course of these last 5 years there have been some dynamic changes to not only the market but society. The changes I speak of are quite obvious so I am going to rehash them. Today I feel like talking about the roller coaster ride that I have been on since the start of my career.
Please close your eyes and think back to a time when life was simple; the beers were colder, the market was hotter, credit was flowing like the rivers of Capistrano, I am talking about 2006. I came into the finance game as an intern at a great firm based out of Tampa, Florida. Wide eyed and dreamy I started down the same road as Bud Fox. I was going to make it big, I was going to be the highest flying, baddest ass, hardcore cold calling big money producer. I was ready for the high life, as they say I felt I was born to be a player. On day one I shined my shoes, ironed my shit and dressed myself in the finest Burdine’s $200 suit I could pick off the rack. I was going to get to work early, stay late, work hard, play hard, have sex with our administrative assistant. Things were looking up!. As I walked into an empty dark office and took a seat at my desk as sudden rush comes over me. This is what I have been waiting for, other than playing for the Yankees there was nothing else I would rather be doing. As the morning progressed and the office started to fill out I began to realize that after to all the years of waiting the day was finally here. I sat there and thought to myself “fuck the odds I am going to be a million dollar producer with in a year. No body will stop me”. After a cup of coffee a shot of espresso my boss walked in and started laying out the plan of attack for the day.. First things first make coffee for the entire office, ok so I figured there would be some bitch work. Second file this pile of paperwork, again I understood. After about an hour of filing like a mad man and making a damn good cup of Joe I walked in ready for the next assignment. All the while I was wondering where is the intensity, why is no one screaming at their phone, why are they not pitching the hot stock of the week. I mean money was to be made and we eat what we kill right? As I stood there waiting for direction something started coming pretty clear to me: This is not like the movies. There was no screaming, no yelling, no active trading, low stress and smiling faces. Begrudgingly I sat back down at my desk in the bullpen with my next assignment SCANNING, it was my job to take the entire office paperless. Needless to say I was dissapointed , but I began the project and powered through.
Moving forward about a year down the road I was called into the bosses office. After months of scanning, filing, coffee making, and technology servicing I heard the best thing a recent college grad could hear….”would you like a job”. Fuck yea I wanted a job the internship was lame but now I am an employee I can break this chain and begin to make some damn rain. Or so I thought….Now that I was employed with a giant $21,500 base salary I had to start producing revenue. Sounds great, sounds easy, and it sounds fun. I prepped for the 7 and figured I paid my dues and now it was my time. But a funny thing happened on the way to Thompson-Prometric, I was grossly under-prepared for the exam. I figured what the hell I am a smart guy I know some things about finance, how hard could it be? Well fuck it was very hard and I failed big time. So now my hopes, dreams and aspirations are on hold because of some stupid test. The 90 days will pass and I will take the test again and pass with flying colors…….wrong once again my ego and desire to have fun took over and I failed. It cant get much worse than this I thought. I am going to be a bar back forever; hopes and dreams are no longer on hold they are crushed. Well through the darkness comes light, it happens everyday. After some moping, a bout with self pity and doubt I was ready to start again. And that’s where the story begins…
My career had truly began when I took the risk and moved back home to NY to work with a family friend who was in the business. He was young, brash, fun and he produced. My role was to come in and be the junior adviser. I had gotten over the idea that the profession was like the movies, regardless of what they may say getting on the phone and cold calling is about a fun as watching paint dry and about as pleasurable as knee surgery. My role was defined, I finally passed the 7 and 63 and the race was on. All of this is taking place around the time words such as sub-prime, credit default swap, and mortgage backed security became part of our daily vernacular. For the first time in my life I began to understand the undertaking that being a financial planner truly is. News started to become worse, people were worried and answers were few and far between. All of a sudden this game does not seem like so much fun. One night during the mess I was watching Cramer on Mad Money and he was screaming buy buy buy in regards to Bear Sterns. Bear Sterns I mean is there a bigger and stronger player on the street? I guess so because within a week they were bankrupt and all hell broke loose. That was March, fast forward to September of 2008. Now we are in the midst of a historic election and a historic economic meltdown. As I sat in the conference room of the Chicago Hilton listening to Don Connelly talk about hard work the DJA and SP 500 collapsed. This was it our markets were melting down. Subsequently Lehman failed, the banks were bailed out, we went into recession, you know the rest.
As we came out of the recession and began to pick up the pieces I started to dawn on my that everything has changed. Markets, politics, psychology, policy would likely never be the same. I sit here today writing this post not because I feel like I am a profound sage of knowledge but because as things always change they always remain the same. We seem to be getting on track economically, the markets are at an all time high, I am finally becoming the producer I thought I would but even with all that I sometimes sit back and think have we learned anything from the past five years.
As we continue on lets be clear of one thing the only constant in life is change. My idea’s about finance changed, the dynamics of our economy changed, and our world has changed. As many look to days gone by as the good times I look forward and inspired by the potential of my generation. We can and will save the country. We can save our economy as the previous generation dies hopefully we can inspire those who are coming up behind us to rise. Hopefully they come in with the same wide eyes that I did, what we can do without are the white lies.
After a long time away from blogging I decided that it was time for me to get back at it and share my insights with the world. In the time that I have been away alot has changed. I have advanced in my career,the market has bounced up and down like a Walbaums Super Ball, I have hired, fired, and hired a new assistant, and I have become more in tune with myself and the world around me, yes change is everywhere and change is good.
I will start my rant with somethings that have not changed over the last 10 months. Greece is Still a Mess, unemployment is still high, there are record outflows from equity mutual funds, Parks and Recreation is still the best show on TV, the US has not fixed any of the structural issues that we have been facing, The Jets are still a joke, and of course Barak Obama is still the President of the USA.
Now for things that have changed………….ok so not much has changed over the course of the last 10 months. The changes we are seeing are happening on a micro level. Local and personal changes are the ones that make the most impact. I suppose I can go on and on about some of the issues I have dealt with over the months but I will spare the details. All that you must know is that I am back, better than ever, ready to knock the cover off the ball and have a great time doing it.
Another day another bang up earnings report. So far this week we have seen AAPL, CAT, NFLX, SBUX all outperform analyst estimates. Regardless of these great earnings reports stocks are still underowned across the board. With the large outflows from equity mutual funds over the last few years many investors are sitting in fixed income at the moment. Obviously the last few years has driven a generation of investors out of the market. The fear has been palpable, but as we talked about yesterday fear can crush your portfolio. In the current environment the risk is to the upside. Though the Fed is planning on keeping rates low through 2014, essentially begging investors to jump back into risk based assets, many are keeping it safe and staying in fixed income. Unfortunately for these investors current yields on fixed income are very low, many are eating into their principal just to get the necessary income to live their lifestyle. Generating yield in this environment is tough. On one hand the events of the last few years have had investors running scared for a safe place to put their money, which strictly from a psychological point of view makes sense. On the other hand however,yields in these “safe” assets are so low that you almost have no chance to outpace inflation. Whats an investor to do? Current trends suggest that at current levels the market is a bit over bought. Ok, so if you are a trader now may be a good time to take profits from your long positions. If you are investor however now may be the time to over come your fear and rebalance your portfolio. Look for companies/funds that pay a solid dividend and have solid earnings to give you stability and income. If the earnings reports of the last week are any indication companies are becoming lean, mean, earning machines.
Once upon a time long long ago the average person would work 30 years for the same company, retire at 65 with a gold watch and a pension. Life was grand and the “average investor” was not worried about VIX readings, QE 1,2,3, Apple Earnings, High Frequency Trading, or any other financial buzz word for that matter. But all of a sudden pension obligations became to hot to handle and BOOM retirement saving is now up to you the individual.
Beginning in the 80’s employers left the margin squeezing pension programs on the shelf and began introducing the much discussed 401(k) plan. The advent of the 401(K) plan has turned the “average investor” into a willing or “unwilling market participant. All of a sudden the stock market was no longer just for the wealthy, the wicked or the gambler, now the market is for everyone. Over time the shift from an entitlement society to a self-sufficient society has brought millions of new market participants and a sea change in the psychology of the investor.
There are no shortage of theories, research papers, and books on investor psychology, many have tried to pin down what causes investors to react and how you as an advisor, trader, broker, or asset manager can capitalize on it. Whether its monthly market sentiment charts, VIX readings, or surveys there is a billion dollar industry trying to figure out how the investor feels. In my opinion trying to quantify how the investor feels is fools gold. It’s not hard to tell that the world is at a cross roads. Between the crisis of 2008 here in the States or the current situation in the Euro Zone there has not much for investors to feel good about the last few years.
Many like to say that the last 10 years has been a lost decade in the market. The .SPX and the NASDAQ are about where they were at the turn of the century. In between 2000 and 2011 the market has been a cyclical bear market. Too often the average investor will react to the news they here on Fox or CNBC, they don’t see a distinction between an investor or trader. When the market is driven down 3% in a day by traders many average market participants feel like they must get out before it’s too late and they lose everything.When the market is driven up 3% by the same traders the average investor feels like they have to jump into the pool head first or they will miss their opportunity to become rich. This is obviously a flawed logic.
Stock market psychology to me is not an acute science, quite honestly if you read the news headlines on any given day you can get a sense of the average investor feels. The biggest driver of this psychology; fear. Am I going to retire? Will I survive my retirement? How am I going to pay for college? These types of questions are what keep the average investor up at night. These questions are what drives an investor to buy and sell with the market. These are the types of questions that cause an investor to be a failed investor or an investor no more. Ideally investors would not have an emotional, visceral reaction when dealing with their investments. Unfortunately this is not the case. Investors who lost 40% of their portfolio’s are fearful that it will happen again. Investors who timed it perfect and doubled their money are convinced it will happen again as well, it’s all a matter of perspective.
When it’s all said and done fear and greed are the biggest drivers of the market for the average investor. Will this change? Probably not, all we can do is sit back and watch as generations of investors continue to make the same mistakes time and time again. Everytime the market corrects or the economy sputters you hear the words “this time its different”. Bullshit, the only thing that is different are the characters. They will get in and out of the market too late or early. Many will say that investing is a scam and that they will never get into the market again. In fact close to 35% of Generation Y (born between 1980-1990) have said they will never invest in the stock market. Thats fine, we don’t need them, if the fear of losing money in a bad market forced you to forego investing all together you’re clearly not cut out to be an investor. But you must remember that you do not save for retirement, you invest for retirement. They say those who don’t know history are bound to repeat it, I can only hope this turns out to be false, otherwise we are going to have years of volatility to come.
One of the more interesting conversations I get to have with my clients is how we are going to generate income for their retirement. With so many solutions available this tends to be a loaded question. In my experience many clients have no idea how to live off of their money when retirement comes calling. The income distribution phase of financial planning is the ugly step sister compared to the fun asset accumulation phase. No longer are we talking about generating alpha, beta coefficients, and performance. Rather we are talking about IRA distributions, RMD’S, and yield.
Many brokers turn to annuities for income, some will utilize mutual fund portfolios’, others will use laddered bonds, while others rely on dividend paying stocks. Needless to say there are a million ways to generate income in retirement . For me and my clients there is no magic bullet. Introducing an income plan that stays in line with the needs and risk tolerance of the client is paramount. I personally believe in using a diversified approach to investing as well as generating income.
While some variable annuities promise to pay income for life no questions asked I am quite skeptical. Most companies hedge their reserves against the 10 year treasury and you all know what the 10 year in currently yielding. I am just as guilty as any other broker/advisor using these products. At the time they seem like a great idea, especially in the market environment of the last 3 years.Guranteeing principal, income or both while participating in the market is great,but I have a sneaking suspicion that the glory days of these investment vehicles is behind us.
Others will use REIT’S and only REIT’S to generate said income. Many times older and undereducated investors will be sold these programs believing they are stable and safe. One firm in particular is guilty of misleading sales practices regarding these investments. Older investors are herded into a banquet hall and promised the moon: 8% income, no risk, stable principal, and liquidity only to find out that the entire story is fiction. I suppose Poppy is not who you thought he was. I am not here to say all REITS are bad, I use them in my practice for 5-10% of my high net worth clients portfolios. In no way however am I promising the moon, when used as a diversifier REITS (non traded) can smooth out volatility and provide a generous income. They should not be your only source of income however.
All in all the most important thing I can do is educate and inform the general public about whats out there. There are tons of investment programs available to the public and by and large most are on the up and up. However many in my industry like to abuse or misrepresent what they are proposing to clients. Generating a solid income stream for a client is not rocket science. Listen to your clients, understand their goals, risk tolerance and time horizon. Its amazing what you can accomplish when you actually listen. I was told early on in this business you want to be interested not interesting.
As my business moves forward and grows I am always looking into ways to improve both my service and performance as an advisor. One of the most asked questions I get from my clients is what is the difference between Mutual Funds and ETF’S.
According to Investopedia a mutual fund is:
A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.
As ETF’S explode onto the scene I am faced daily with the decision of indexing vs the active management of the mutual fund industry. As 2011 comes to a close I am beginning to see many of the benefits of moving away from the mutual fund model. While performance is important for my clients, diversification and keeping the portfolio in line with the objectives is more important.
As the year is coming to a close I am having a hard time justifying the fees involved in the mutual fund model. Most equity managers trailed the benchmark or are in line with the benchmark. While there are some exceptions to this most funds have underperformed across the board.
ETF’S do provide a cheaper and more liquid access to many of the same things and frankly if the fund managers do not get there act together the industry will go out of business. While I am not quite ready to jump ship on the fund industry as a whole, incorporating ETF’S will be a part of my re balancing act going into 2012. As far as I am concerned the additional diversification and added liquidity will only enhance the portfolio’s I manage.
Hopefully many of the fund managers I have trusted for years will get back on track this year, many are calling 2012 a stock pickers market. If that is the case I suppose we can chalk it up to bad luck. If not the fund industry is going to have a hell of a time raising capital and keeping outflows at a minimum.