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Is Value Investing Dead?

 

Vitaliy Katsenelson CFA

Is Value Investing Dead?

***

MORE: http://www.msn.com/en-us/money/topstocks/value-stocks-are-trading-at-the-steepest-discount-in-history/ar-AACuYES?li=BBnbfcN

***

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

***

Finding high-quality companies; TODAY?

At attractive valuations

By Vitaliy Katsenelson, CFA

We are having a hard time finding high-quality companies at attractive valuations.

For us, this is not an academic frustration. We are constantly looking for new stocks by running stock screens, endlessly reading (blogs, research, magazines, newspapers), looking at holdings of investors we respect, talking to our large network of professional investors, attending conferences, scouring through ideas published on value investor networks, and finally, looking with frustration at our large (and growing) watch list of companies we’d like to buy at a significant margin of safety. The median stock on our watch list has to decline by about 35-40% to be an attractive buy.

But – maybe we’re too subjective

Instead of just asking you to take our word for it, in this letter we’ll show you a few charts that not only demonstrate our point but also show the magnitude of the stock market’s overvaluation and, more importantly, put it into historical context. 

***

 

 Finding High-Quality Companies Today

*** 

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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***

Some Book Reviews on Value Investing

Articles and Papers, too:

By Michael at: https://valuestockgeek.com

If you like want to learn more about value investing, below are some great resources.

***

***

 Resources

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

***

The Warren Buffett & Charlie Munger Show

More on Value Investing

By Vitaliy Katsenelson CFA

***

The Warren Buffett & Charlie Munger Show

Conclusion

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OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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***

How Physicians and All Investors Should Deal With the Overwhelming Problem Of Understanding The World Economy

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“What the —- do I do now?”

vitaly

By Vitaliy N. Katsenelson CFA

A SPECIAL ME-P REPORT

This was the actual subject line of an e-mail I received that really summed up most of the correspondence I got in response to an article I published last summer. To be fair, I painted a fairly negative macro picture of the world, throwing around a lot of fancy words, like “fragile” and “constrained system.” I guess I finally figured out the three keys to successful storytelling: One, never say more than is necessary; two, leave the audience wanting more; and three … Well, never mind No. 3, but here is more.

Before I go further, if you believe the global economy is doing great and stocks are cheap, stop reading now; this column is not for you. I promise to write one for you at some point when stocks are cheap and the global economy is breathing well on its own — I just don’t know when that will be. But if you believe that stocks are expensive — even after the recent sell-off — and that a global economic time bomb is ticking because of unprecedented intervention by governments and central banks, then keep reading.

Today

Today, after the stock market has gone straight up for five years, investors are faced with two extremes: Go into cash and wait for the market crash or a correction and then go all in at the bottom, or else ride this bull with both feet in the stirrups, but try to jump off before it rolls over on you, no matter how quickly that happens.

Of course, both options are really not options. Tops and bottoms are only obvious in the rearview mirror. You may feel you can time the market, but I honestly don’t know anyone who has done it more than once and turned it into a process. Psychology — those little gears spinning but not quite meshing in your so-called mind — will drive you insane. It is incredibly difficult to sit on cash while everyone around you is making money. After all, no one knows how much energy this steroid-maddened bull has left in him. This is not a naturally raised farm animal but a by-product of a Frankenstein-like experiment by the Fed. This cyclical market (note: not secular; short-term, not long-term) may end tomorrow or in five years. Riding this bull is difficult because if you believe the market is overvalued and if you own a lot of overpriced stocks, then you are just hoping that greater fools will keep hopping on the bull, driving stock prices higher.

More importantly, you have to believe that you are smarter than the other fools and will be able to hop off before them (very few manage this). Good luck with that — after all, the one looking for a greater fool will eventually find that fool by looking in the mirror.

Last Spring

As I wrote in an article last spring, “As an investor you want to pay serious attention to ‘climate change’ — significant shifts in the global economy that can impact your portfolio.” There are plenty of climate-changing risks around us — starting with the prospect of higher, maybe even much higher, interest rates — which might be triggered in any number of ways: the Fed withdrawing quantitative easing, the Fed losing control of interest rates and seeing them rise without its permission, Japanese debt blowing up. Then we have the mother of all bubbles: the Chinese overconsumption of natural and financial resources bubble. Of course, Europe is relatively calm right now, but its structural problems are far from fixed. One way or another, the confluence of these factors will likely lead to slower economic growth and lower stock prices. So “what the —-” is our strategy? Read on to find out. I’ll explain what we’re doing with our portfolio, but first let me tell you a story.

My Story

When I was a sophomore in college, I was taking five or six classes and had a full-time job and a full-time (more like overtime) girlfriend. I was approaching finals, I had to study for lots of tests and turn in assignments, and to make matters worse, I had procrastinated until the last minute. I felt overwhelmed and paralyzed. I whined to my father about my predicament. His answer was simple: Break up my big problems into smaller ones and then figure out how to tackle each of those separately. It worked. I listed every assignment and exam, prioritizing them by due date and importance. Suddenly, my problems, which together looked insurmountable, one by one started to look conquerable. I endured a few sleepless nights, but I turned in every assignment, studied for every test and got decent grades. Investors need to break up the seemingly overwhelming problem of understanding the global economy and markets into a series of small ones, and that is exactly what we do with our research. The appreciation or depreciation of any stock (or stock market) can be explained mathematically by two variables: earnings and price-earnings ratio. We take all the financial-climate-changing risks — rising interest rates, Japanese debt, the Chinese bubble, European structural problems — and analyze the impact they have on the Es and P/Es of every stock in our portfolio and any candidate we are considering.

Practical applications

Let me walk you through some practical applications of how we tackle climate-changing risks at my firm. When China eventually blows up, companies that have exposure to hard commodities, directly or indirectly (think Caterpillar), will see their sales, margins and earnings severely impaired. Their P/Es will deflate as well, as the commodity supercycle that started in the early 2000s comes to an end. Countries that export a lot of hard commodities to China will feel the aftershock of the Chinese bubble bursting. The obvious ones are the ABCs: Australia, Brazil and Canada.

However, if China takes oil prices down with it, then Russia and the Middle East petroleum-exporting mono-economies that have little to offer but oil will suffer. Local and foreign banks that have exposure to those countries and companies that derive significant profits from those markets will likely see their earnings pressured. (German automakers that sell lots of cars to China are a good example.)

Japan is the most indebted first-world nation, but it borrows at rates that would make you think it was the least indebted country. As this party ends, we’ll probably see skyrocketing interest rates in Japan, a depreciating yen, significant Japanese inflation and, most likely, higher interest rates globally. Japan may end up being a wake-up call for debt investors. The depreciating yen will further stress the Japan-China relationship as it undermines the Chinese low-cost advantage.

So paradoxically, on top of inflation, Japan brings a risk of deflation as well. If you own companies that make trinkets, their earnings will be under assault. Fixed-income investors running from Japanese bonds may find a temporary refuge in U.S. paper (driving our yields lower, at least at first) and in U.S. stocks. But it is hard to look at the future and not bet on significantly higher inflation and rising interest rates down the road.

untitled

[Moscow]

A side note:

Economic instability will likely lead to political instability. We are already seeing some manifestations of this in Russia. Waltzing into Ukraine is Vladimir Putin’s way of redirecting attention from the gradually faltering Russian economy to another shiny object — Ukraine. Just imagine how stable Russia and the Middle East will be if the recent decline in oil prices continues much further.

1447968781847

[Defense Industry]

Inflation and higher interest rates

Defense industry stocks may prove to be a good hedge against future global economic weakness. Inflation and higher interest rates are two different risks, but both cause eventual deflation of P/Es. The impact on high-P/E stocks will be the most pronounced. I am generalizing, but high-P/E growth stocks are trading on expectations of future earnings that are years and years away. Those future earnings brought to the present (discounted) are a lot more valuable in a near-zero interest rate environment than when interest rates are high. Think of high-P/E stocks as long-duration bonds: They get slaughtered when interest rates rise (yes, long-term bonds are not a place to be either). If you are paying for growth, you want to be really sure it comes, because that earnings growth will have to overcome eventual P/E compression. Higher interest rates will have a significant linear impact on stocks that became bond substitutes. High-quality stocks that were bought indiscriminately for their dividend yield will go through substantial P/E compression.

These stocks are purchased today out of desperation. Desperate people are not rational, and the herd mentality runs away with itself. When the herd heads for the exits, you don’t want to be standing in the doorway. Real estate investment trusts (REITs) and master limited partnerships (MLPs) have a double-linear relationship with interest rates: Their P/Es were inflated because of an insatiable thirst for yield, and their earnings were inflated by low borrowing costs. These companies’ balance sheets consume a lot of debt, and though many of them were able to lock in low borrowing costs for a while, they can’t do so forever. Their earnings will be at risk.

Charlie Munger speaks

As I write this, I keep thinking about Berkshire Hathaway vice chairman Charlie Munger’s remark at the company’s annual meeting in 2013, commenting on the then-current state of the global economy: “If you’re not confused, you don’t understand things very well.” A year later the state of the world is no clearer. This confusion Munger talked about means that we have very little clarity about the future and that as an investor you should position your portfolio for very different future economies. Inflation? Deflation? Maybe both? Or maybe deflation first and inflation second?

I keep coming back to Japan because it is further along in this experiment than the rest of the world. The Japanese real estate bubble burst, the government leveraged up as the corporate sector deleveraged, interest rates fell to near zero, and the economy stagnated for two decades. Now debt servicing requires a quarter of Japan’s tax receipts, while its interest rates are likely a small fraction of what they are going to be in the future; thus Japan is on the brink of massive inflation. The U.S. could be on a similar trajectory.

Let me explain why

Government deleveraging follows one of three paths. The most blatant option is outright default, but because the U.S. borrows in its own currency, that will never happen here. (However, in Europe, where individual countries gave the keys to the printing press to the collective, the answer is less clear.) The second choice, austerity, is destimulating and deflationary to the economy in the short run and is unlikely to happen to any significant degree because cost-cutting will cost politicians their jobs. Last, we have the only true weapon government can and will use to deleverage: printing money. Money printing cheapens a currency — in other words, it brings on inflation. In case of either inflation or deflation, you want to own companies that have pricing power — it will protect their earnings. Those companies will be able to pass higher costs to their customers during a time of inflation and maintain their prices during deflation.

On the one hand, inflation benefits companies with leveraged balance sheets because they’ll be paying off debt with inflated (cheaper) dollars. However, that benefit is offset by the likely higher interest rates these companies will have to pay on newly issued debt. Leverage is extremely dangerous during deflation because debt creates another fixed cost. Costs don’t shrink as fast as nominal revenues, so earnings decline.

Crystal ball

Therefore, unless your crystal ball is very clear and you have 100 percent certainty that inflation lies ahead, I’d err on the side of owning underleveraged companies rather than ones with significant debt. A lot of growth that happened since 2000 has taken place at the expense of government balance sheets. It is borrowed, unsustainable growth that will have to be repaid through higher interest rates and rising tax rates, which in turn will work as growth decelerators. This will have several consequences:

  1. First, it’s another reason for P/Es to shrink.
  2. Second, a lot of companies that are making their forecasts with normal GDP growth as the base for their revenue and earnings projections will likely be disappointed.
  3. And last, investors will need to look for companies whose revenues march to their own drummers and are not significantly linked to the health of the global or local economy.

The definition of “dogma” by irrefutable Wikipedia is “a principle or set of principles laid down by an authority as incontrovertibly true.” On the surface this is the most dogmatic columns I have ever written, but that was not my intention. I just laid out an analytical framework, a checklist against which we stress test stocks in our portfolio. Despite my speaking ill of MLPs, we own an MLP. But unlike its comrades, it has a sustainable yield north of 10 percent and, more important, very little debt. Even if economic growth slows down or interest rates go up, the stock will still be undervalued — in other words, it has a significant margin of safety even if the future is less pleasant than the present.

Final bits

There are five final bits of advice with which I want to leave you:

  1. First, step out of your comfort zone and expand your fishing pool to include companies outside the U.S. That will allow you to increase the quality of your portfolio without sacrificing growth characteristics or valuation. It will also provide currency diversification as an added bonus.
  2. Second, disintermediate your buy and sell decisions. The difficulty of investing in an expensive market that is making new highs is that you’ll be selling stocks that hit your price targets. (If you don’t, you should.)

Of course, selling stocks comes with a gift — cash. As this gift keeps on giving, your cash balance starts building up and creates pressure to buy. As parents tell their teenage kids, you don’t want to be pressured into decisions.

Assessment

In an overvalued market you don’t want to be pressured to buy; if you do, you’ll be making compromises and end up owning stocks that you’ll eventually regret. Margin of safety, margin of safety, margin of safety — those are my last three bits of advice. In an environment in which the future of Es and P/Es is uncertain, you want to cure some of that uncertainty by demanding an extra margin of safety from stocks in your portfolio.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

[PHYSICIAN FOCUSED FINANCIAL PLANNING AND RISK MANAGEMENT COMPANION TEXTBOOK SET]

  Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™ Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

[Dr. Cappiello PhD MBA] *** [Foreword Dr. Krieger MD MBA]

***

Downhill Racing Meets Value Investing

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More on Value Investing

vitaly

By Vitaliy Katsenelson CFA

I wrote this article in May. Every time it was destined to be published in the pages of Institutional Investor, it got bumped by another, more timely one I had written. Finally, when a space opened in September, the market had taken a major dive, and what was supposed to be an “evergreen” article was suddenly out of touch with reality.

Here is the irony: This piece addresses complacency, but its author was complacent too. The X-mass market has recouped its summer losses, and this article is relevant again.

The Skier

I am a skier. When someone says this, you assume he or she is good. Well, I thought I was good. I was not Lindsey Vonn, but I had the technique down. I’d be the fastest person going down the mountain, always waiting for my friends at the bottom. Then, at the beginning of last season, I went skiing with my kids at Vail. It had snowed nonstop for a few days. Vail is a very large resort, and the mountain crew could not keep up with the snow, so I found myself skiing on unusually ungroomed slopes in powder more than knee-deep. Suddenly, something changed. I could not ski. I could barely make turns. I was falling multiple times per run. My kids, including my nine-year-old daughter, Hannah, were now waiting for me as I dug myself out of pile after pile of snow. My technique — along with my confidence — was gone. The discomfort froms constant falling turned into fear. I was ready to go back to the hotel after only two hours on the slopes. I was devastated. It was as if I had never skied.

The Ski Instructor

So I talked to a ski instructor about this incident. He told me that I’m a “good skier” on groomed slopes because they allow me to go fast without trying hard. Speed covers up a lot of mistakes and lack of skill. Skiing in powder requires different skis — not the skis I had — but more importantly, it slows you down and makes you rely on skills that I thought I had but didn’t.

The FED

During the past six years, the Federal Reserve neatly groomed, manicured and then finely polished investment slopes for all asset classes by lowering interest rates to unprecedented levels — providing a substantial accelerant that indiscriminately drove valuations of all assets higher. But ubiquitously rising valuations cover up a lot of mistakes and often a lack of skill. Whether you had a rigorous investment process or were throwing darts, over the past six years it hardly mattered — you made money. Bull markets don’t last forever, and this one is not an exception. Stock valuations (price-to-earnings) are just like a pendulum, swinging from one extreme to another.

Modernity

Today the stocks in the S&P 500 index trade at about 50 percent above their average valuation (if you adjust earnings down for very high corporate margins). Historically, above-average valuations have always been followed by below-average ones — taking away the riches that the previous years provided.

In other words, at some point it is going to snow and snow hard. Just as I, the great skier, found myself overconfident and unable to deal with the new terrain, investors will find themselves doing face-plants when the stock market turns from bull to bear. But here is great news:

Now the stock slopes are still finely groomed with stocks near all-time highs, and we all are given a unique opportunity to make adjustments to our portfolios and investment process. You should start by carefully analyzing each stock position in your portfolio. No drooling over how each of them did for you in the past. Drawing straight lines from the past into the future is very dangerous.

The Future

Instead, focus on the future — a future in which average stock valuations will likely be lower. Returns for a stock are driven by three variables: earnings growth, change in P/E and dividend yield. You should impartially examine each variable to determine if a stock deserves to be in your portfolio.

Then make one of three decisions: buy (more), hold or sell. Just remember, hold is a decision. If you choose not to sell an overvalued stock, one that has low or negative expected returns in the long run, that is a decision. We must all reexamine and future-proof our investment process. Six years of rewards and no risk will loosen the process of even the most disciplined investor.

Finally, if you are feeling very confident about your investment prowess today, take a moment to relive that gut-wrenching feeling you had the last time the stock market took a 20 percent dive. This will reset your confidence to the appropriate level and help you to avoid the mistakes that come from focusing too much on reward and too little on risk.

***

penn station

***

P.S. I took the kids skiing at Beaver Creek a week ago, for the first time this season. My daughter Hannah, who will be ten in a few weeks, has magically improved over the summer. However, Jonah, who is an amazing skier, has completely lost his form. He grew five or six inches since last spring — he’s 14 and pushing 6 feet now. His center of gravity has shifted, and he is still adjusting his technique to his new, oversized body.

Assessment

As a father, I smile when I see Hannah beating Jonah down the slope. Jonah, like any teenager, needs to be humbled. My skiing? The slopes were perfectly groomed. I was awesome! I just hope it doesn’t snow.

***

ABOUT

Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of Active Value Investing (Wiley 2007) and The Little Book of Sideways Markets (Wiley, 2010).

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

***

[PHYSICIAN FOCUSED FINANCIAL PLANNING AND RISK MANAGEMENT COMPANION TEXTBOOK SET]

   Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™ Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

[Dr. Cappiello PhD MBA] *** [Foreword Dr. Krieger MD MBA]

***

On Value Investor Guy Spier

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What I Learned from Value Investor Guy Spier 

By Vitaliy N. Katsenelson CFA

***

A few months ago I was asked by the CFA Institute to give talks to CFA societies in London (October 27), Zurich (October 29) and Frankfurt (November 3). I enjoy giving occasional talks (but only a few a year, otherwise they become a chore). I also love Europe — history, old buildings and cultures, museums, sometimes a mild adventure. But this offer was much more interesting — I was asked to give a joint presentation with Guy Spier.

About  Guy

Guy Spier is a tremendous value investor who happens to be a good friend whose company I truly enjoy. He is the most cosmopolitan person I know. He was born in South Africa, spent his childhood in Iran and Israel, received his bachelor’s degree from Oxford and MBA from Harvard, lived in New York and in 2008 got sick of the New York hedge fund rat race and moved with his family to Zurich. His wife, Lory, is Mexican, so in addition to being fluent in languages of all the above-mentioned countries, he romances in Spanish.

Last year Guy published a book, The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment. It is not a traditional investing book. In fact, I’ll say that differently: This is the most untraditional book on investing you’re likely to run into. It is a self-effacing memoir of Guy’s transformation from a Gordon Gekko wannabe who believes that his Ivy League education entitles him to Wall Street riches to a committed follower of Warren Buffett and his sidekick, Charlie Munger.

It must have taken a lot of guts and self-confidence (overcoming a lot of self-doubt) to write this book. To be honest, I am not sure I could have written it. It is one thing to strive for intellectual honesty; it is another to unearth and expose one’s own greed, arrogance and envy. Many of us are trying to hide such character traits in plain sight, never mind telling the world about them in a popular book.

After all, Guy is not writing about a fictional character; he is writing about himself. The humility he displays is what makes the book so effective — you can clearly follow the deliberate transformation of a cockroach (the Wall Street version of a caterpillar) into a butterfly.

This memoir is able to achieve something that many other investments books don’t (including my own): It reveals the real, practical, behavioral side of investing, not the way you read about it in behavioral finance textbooks but the raw emotions every investor experiences.

There are a lot of lessons we can learn from Guy. The first one — and, for me, the most important one — is that environment matters.

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value

[Eye for Value]

Enter Dan Ariely PhD

Dan Ariely PhD, the well-known behavioral economist, was interviewed on Bloomberg Television and asked, What can one do to lose weight? He said, Start with the environment around you. If you come to work and there is a box of doughnuts on your desk, losing weight is going to be difficult. Also, look in your fridge: All the stuff that is probably not good for your diet is staring you in the face, whereas the fruits and vegetables that are essential to healthy eating are buried in the hard-to-access bottom drawers.

The same applies to investing: We may not notice it, but the environment around us impacts our ability to make good decisions. Guy writes, “We like to think that we change our environment, but the truth is that it changes us. So we have to be extraordinarily careful to choose the right environment — to work with, and even socialize with, the right people.”

I have found that checking the prices of stocks I own throughout the day shrinks my time horizon, impacts my mood and wastes my brain cells as I try to interpret data that have very little information. I am getting better; I am already down checking prices only once a day. My goal is to do it just once every few days.

Guy is ahead of me: He checks them once a week. Recently, I put in price alerts for stocks my firm owns or follows. If a stock price changes more than 10 percent or crosses a certain important (buy or sell) point, I’ll get an e-mail alert.

Guy finds that he isn’t effective when he gets to the office because of external distractions. In his Zurich office he has a quiet room that he calls the library. It doesn’t have phones or computers, and this is where he reads, thinks and naps. Here in Denver, I have a lawn chair (bought at Costco for $50) that I take outside to sit on, put on headphones, and listen to music and read. My friend Chris goes to Starbucks or the local library in the morning for four hours before he goes to his office, and that’s where he does his reading. The key is to figure out what works for you and try not to fight your external environment.

Another lesson I have learned is that misery loves company. I was talking to Guy about his book, and he told me that people who love the book appreciate the fact that he is so honest about the emotions that consume him when he is struggling in the stock market. As investors, we often put on a brave face, but if we aren’t emotionally honest, our opinion of ourselves, our self-worth, may fluctuate with the performance of our portfolio.

Personally, I can really relate to this. When I read Guy’s book the first time (I’ve read it twice), I was going through a tough time with my portfolio. I found this book extremely therapeutic. In fact, I recommended it to a friend of mine who was going through a similar rough patch.

Another lesson:

Surround yourself with the right people. Friendships matter. I’ve been blatantly plagiarizing Guy on this for years. Guy created a conference called VALUEx Zurich, a gathering of like-minded people who get together and share investment ideas. I attended the very first one in 2010, and since then I have hosted a very similar event, VALUEx Vail, every year in June.

Guy has a latticework group of eight investors that meets every quarter and discusses the stock market, the investment process and personal issues. I’ve copied that, too. Four of us got together in Atlanta in October. We visited a few companies and debated stocks, industry trends, diets, women . . . okay, you get the point. That was our first latticework event, but I hope we’ll meet a few times a year.

Attending Guy’s conference in Zurich and organizing VALUEx Vail have resulted in enduring friendships. These conferences allowed me to create a large network of like-minded investors I talk to regularly. Every member of my latticework group I met at VALUEx Vail.

(A short side note: One of the most important things we can do as parents of teenage kids is to make sure they have good friends. That’s paramount. We as parents lose influence on our kids when they become teenagers. Their friends have a disproportionately larger impact on their choices than we do. We can influence the environment around our kids by helping them select friends.)

And then there are thank-you cards. Over the years Guy has written tens of thousands of them. He is indiscriminate about them — at one point he wrote to every employee at a boutique hotel he stayed in. All right, maybe he took it too far that time. But, writing a thank-you card to value investor Mohnish Pabrai changed his life. He attended Pabrai Investment Funds’ annual meeting in Chicago. After the meeting he sent Pabrai a thank-you note. A few months later Pabrai came to New York and invited Guy to dinner. This was the start of the Spier-Pabrai bromance. Thank-you cards work because so few people write them. They leave a lasting impression on the receiver because they say, “I like you. You are important to me.”

***

stock-exchange

[Stock-Exchanges]

Mentors

The last point is, Be yourself. Having mentors is important. For many value investors, Buffett and Munger are our north stars. There are lots of things we can learn from them. But we also have to realize that we must be ourselves, because we are not them. I remember reading a long time ago that Buffett did not do spreadsheets. That impacted me for a few months — I stopped building models and creating spreadsheets. I thought, If Buffett doesn’t do it, I shouldn’t do it either. Wrong.

Buffett is a lot smarter than I am; he is able to analyze companies in his head. He is Buffett. I have found that spreadsheets work for me because they help me think. When Buffett and I look at a company philosophically, we are looking for the same things, but I need a computer to assist me, and he doesn’t.

Mohnish Pabrai owns just a handful of stocks. Guy, on the other hand, knows that he would not be able to be a rational decision maker if he had only a handful of stocks. There will be a significant overlap between Guy’s and Pabrai’s portfolios, but Guy’s will have two or three times as many stocks.

Assessment

Dear ME-P Readers, I spoke with your Editor-in-Chief Dr. Dave Marcinko a few weeks ago, and as you can tell from this ME-P essay, I am a very biased book reviewer. I am not even sure this qualifies as a book review. Despite my biases, I can safely say that The Education of a Value Investor is one of the best books I’ve read in 2015. (I promise you that it is not the only book I’ve read this year.) Before you commit your time and money to this book, watch Guy’s presentation on Talks at Google.

ABOUT

Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of Active Value Investing (Wiley 2007) and The Little Book of Sideways Markets (Wiley, 2010).  His books have been translated into eight languages.  Forbes called him – the new Benjamin Graham.

Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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***

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners(TM)

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Knowing the Difference Between Stock Value and Price

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A Motley Fool Interview

vitaly

ABOUT

Vitaliy N. Katsenelson CFA is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of Active Value Investing (Wiley 2007) and The Little Book of Sideways Markets (Wiley, 2010).  His books were translated into eight languages.  Forbes Magazine called him “The new Benjamin Graham”.  

The Motley Fool,

Our own Editor Dr. Dave Marcinko recently spoke with Vitaliy, as well as The Motley Fool’s James Early and Rana Pritanjali. Vitaliy explained how he helps investors see the difference between a stock’s value and its price, as well how he assesses macroeconomic trends when investing.

Assessment

Plus, Vitaliy predicted the next category Apple will disrupt: the automotive industry.

You can listen and read the full interview here.

PS: You can read Manifesto – The Values of Value Investing, here.

I hope you enjoy it  – Ann Miller RN MHA [Managing Editor]

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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How Emotional Intelligence Can Make You a Better Investor

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IQ versus EQ

vitaly

By Vitaliy Katsenelson CFA

Your knee hurts, so you pay a visit to your favorite orthopedist. He smiles, maybe even gives you a hug, and then tells you: “I feel your pain. Really, I do. But I don’t treat left knees, only right ones. I find I am so much better with the right ones. Last time I worked on a left knee, I didn’t do so well.”

Though many professionals — doctors as well as lawyers, architects and engineers — get to choose their specializations, they rarely get to choose the problems they solve. Problems choose them. Investors enjoy the unique luxury of choosing problems that let them maximize the use of not just their IQ but also their EQ — emotional intelligence.

Let’s start with IQ

Our intellectual capacity to analyze problems will vary with the problem in front of us. Just as we breezed through some subjects in college and struggled with others, our ability to understand the current and future dynamics of various companies and industries will fluctuate as well. This is why we buy stocks that fall within our sphere of competence. We tend to stick with ones where our IQ is the highest.

Though we usually think about our capacity to analyze problems as being dependable and stable over time, it isn’t. It might be if we were characters from Star Trek, with complete control over our emotions, like Mr. Spock, or who lacked emotions, like Lieutenant Commander Data. This is where our EQ comes in.

I am not a licensed psychologist, but I have huge experience treating a very difficult patient: me. And what I have found is that emotions have two troublesome effects on me.

First, they distort probabilities; so even if my intellectual capacity to analyze a problem is not impacted, my brain may be solving a distorted problem.

Second, my IQ is not constant, and my ability to process information effectively declines under stress. I either lose the big picture or overlook important details. This dilemma is not unique to me; I’m sure it affects all of us to various degrees.

The higher my EQ with regard to a particular company, the more likely that my IQ will not degrade when things go wrong (or even when they go right). There is a good reason why doctors don’t treat their own children: Their ability to be rational (properly weighing probabilities) may be severely compromised by their emotions.

Example:

A friend of mine who is a terrific investor, and who will remain nameless though his name is George, once told me that he never invests in grocery store stocks because he can’t be rational when he holds them. If we spent some Freudian time with him, we’d probably discover that he had a traumatic childhood event at the grocery store (he may have been caught shoplifting a candy bar when he was eight), or he may have had a bad experience with a grocery stock early in his career. The reason for his problem is irrelevant; what is important is that he has realized that his high IQ will be impaired by his low EQ if he owns grocery stocks.

There is no cure for emotions, but we can dramatically minimize the impact they have on us as investors by adjusting our investment process. First and foremost, investors have the incredible advantage of picking domains where they can remain rational.

For instance, I would not be able to keep a cool head if I owned gold. I can recite the arguments for and against gold (lately, with negative interest rates in certain European countries, the “for” arguments have started to make even more sense). But, intellectually, I cannot reconcile the fact that gold is an asset that generates no cash flows, and thus to me it has no financial center of gravity. I have no idea what it is worth. The very idea of owning gold bothers me, and therefore I know that if I did own it, my EQ would be low. I’d be buying high and selling low.

Now, as a value investor, when I buy a stock and it declines 30 percent, I want to buy more of it (assuming its business has not changed). I wouldn’t trust that I could do this in the gold market.

To be a successful investor, you don’t need Albert Einstein’s IQ (though sometimes I wish I had Spock’s EQ). Warren Buffett undoubtedly has a very high IQ, but even the Oracle of Omaha chooses carefully his battles; for instance, he doesn’t invest in technology stocks.

***

masks

Our Luxury

Investors have the luxury of investing only in stocks for which both their IQ and EQ are maximized, because there are tens of thousands of stocks out there to choose from, and they need just a few dozen.

Assessment

Meanwhile, I hope when I go see the doctor, he will tell me, “I don’t do left knees,” because the best result will come from a doctor who while treating me will utilize both IQ and EQ.

ABOUT

Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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Written by doctors and healthcare professionals, this textbook should be mandatory reading for all medical school students—highly recommended for both young and veteran physicians—and an eliminating factor for any financial advisor who has not read it.

The book uses jargon like ‘innovative,’ ‘transformational,’ and ‘disruptive’—all rightly so!

It is the type of definitive financial lifestyle planning book we often seek, but seldom find.

LeRoy Howard MA CMPTM [Candidate and Financial Advisor, Fayetteville, North Carolina]

http://www.CertifiedMedicalPlanner.org

Video on Hedge Fund Manager Michael Burry MD

In The Subprime of His Life – My Story

By Dr. David Edward Marcinko MBA, CMP™

[Editor-in-Chief]

I am a long time fan of financial industry journalist Michael Lewis [Liars’ Poker, Moneyball and others] who just released a new book. The Big Short is a chronicle of four players in the subprime mortgage market who had the foresight [and testosterone] to short the diciest mortgage deals: Steve Eisner of FrontPoint, Greg Lippmann at Deutsche Bank, the three partners at Cornwall Capital, and most indelibly, Wall Street outsider Michael Burry MD of Scion Capital.

They all walked away from the disaster with pockets full of money and reputations as geniuses.

About Mike

Now, I do not know the first three folks, but I do know a little something about my colleague Michael Burry MD; he is indeed a very smart guy. Mike is a nice guy too, who also has a natural writing style that I envy [just request and read his quarterly reports for a stylized sample]. He gave me encouragement and insight early in my career transformation – from doctor to “other”.

And, he confirmed my disdain for the traditional financial services [retail sales] industry, Wall Street and their registered representatives and ‘training’ system, and sad broker-dealer ethos [suitability versus fiduciary accountability] despite being a hedge fund manager himself.

I mentioned him in my book: “Insurance and Risk Management Strategies” [For Physicians and their Advisors].

http://www.amazon.com/Insurance-Management-Strategies-Physicians-Advisors/dp/0763733423/ref=sr_1_2?ie=UTF8&s=books&qid=1269254153&sr=1-2

He ultimately helped me eschew financial services organizations, “certifications”, “designations” and ”colleges”, and their related SEO rules, SEC regulations and policy wonks; and above all to go with my gut … and go it alone!

And so, I rejected my certified financial planner [marketing] designation status as useless for me, and launched the www.CertifiedMedicalPlanner.org on-line educational program for physician focused financial advisors and management consultants interested in the healthcare space … who wish to be fiduciaries.

And I thank Mike for the collegial good will. By the way, Mike is not a CPA, nor does he posses an MBA or related advanced degree or designation. He is not a middle-man FA. He is a physician. Unlike far too many other industry “financial advisors” he is not a lemming.

IOW: We are not salesman. We are out-of-the-box thinkers, innovators and contrarians by nature. www.MedicalBusinessAdvisors.com

From a Book Review

According to book reviewer Michael Osinski, writing in the March 22-29 issue of Businessweek.com, Lewis is at his best working with characters and Burry is rendered most vividly.

A loner from a young age, in part because he has a glass eye that made it difficult to look people in the face, Burry excelled at topics that required intense and isolated concentration. Originally, investing was just a hobby while he pursued a career in medicine. As a resident neurosurgeon at Stanford Hospital in the late 1990s, Burry often stayed up half the night typing his ideas onto a message board. Unbeknownst to him, professional money managers began to read and profit from his freely dispensed insight, and a hedge fund eventually offered him $1 million for a quarter of his investment firm, which consisted of a few thousand dollars from his parents and siblings. Another fund later sent him $10 million”.

“Burry’s obsession with finding undervalued companies eventually led him to realize that his own home in San Jose, Calif., was grossly overpriced, along with houses all over the country. He wrote to a friend: “A large portion of the current [housing] demand at current prices would disappear if only people became convinced that prices weren’t rising. The collateral damage is likely to be orders of magnitude worse than anyone now considers.” This was in 2003.

“Through exhaustive research, Burry understood that subprime mortgages would be the fuse and that the bonds based on these mortgages would start to blow up within as little as two years, when the original “teaser” rates expired. But Burry did something that separated him from all the other housing bears—he found an efficient way to short the market by persuading Goldman Sachs (GS) to sell him a CDS against subprime deals he saw as doomed. A unique feature of these swaps was that he did not have to own the asset to insure it, and over time, the trade in these contracts overwhelmed the actual market in the underlying bonds”.

“By June 2005, Goldman was writing Burry CDS contracts in $100 million lots, “insane” amounts, according to Burry. In November, Lippmann contacted Burry and tried to buy back billions of dollars of swaps that his bank had sold. Lippmann had noticed a growing wave of subprime defaults showing up in monthly remittance reports and wanted to protect Deutsche Bank from potentially massive losses. All it would take to cause major pain, Lippmann and his analysts deduced, was a halt in price appreciation for homes. An actual fall in prices would bring a catastrophe. By that time, Burry was sure he held winning tickets; he politely declined Lippmann’s offer”

And the rest, as they say, is history.

Link: http://www.businessweek.com/magazine/content/10_12/b4171094664065.htm

My Story … Being a Bit like Mike

I first contacted Mike, by phone and email, more than a decade ago. His hedge fund, Scion Capital, had no employees at the time and he outsourced most of the front and back office activities to concentrate on position selection and management. Early investors were relatives and a few physicians and professors from his medical residency days. Asset gathering was a slosh, indeed. And, in a phone conversation, I remember him confirming my impressions that doctors were not particularly astute investors. For him, they generally had sparse funds to invest as SEC “accredited investors” and were better suited for emerging tax advantaged mutual funds. ETFs were not significantly on the radar screen, back then, and index funds were considered unglamorous. No, his target hedge-fund audience was Silicon Valley.

And, much like his value-hero Warren Buffett [also a Ben Graham and David Dodd devotee], his start while from the doctor space, did not derive its success because of them.

Moreover, like me, he lionized the terms “value investing”, “margin of safety” and “intrinsic value”.

Co-incidentally, as a champion of the visually impaired, I was referred to him by author, attorney and blogger Jay Adkisson www.jayadkisson.com Jay is an avid private pilot having earned his private pilot’s license after losing an eye to cancer.

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Mike again re-entered my cognitive space while doing research for the first edition of our successful print book: “Financial Planning Handbook for Physicians and Advisors” and while searching for physicians who left medicine for alternate careers!

In fact, he wrote the chapter on hedge funds in our print journal and thru the third book edition before becoming too successful for such mundane stuff. We are now in our fourth edition, with a fifth in progress once the Obama administration stuff [healthcare and financial services industry “reform” and new tax laws] has been resolved

http://www.amazon.com/Financial-Planning-Handbook-Physicians-Advisors/dp/0763745790/ref=sr_1_1?ie=UTF8&s=books&qid=1269211056&sr=1-1

Assessment

News: Dr. Burry appeared on 60 Minutes Sunday March 14th, 2010. His activities with Scion Capital are portrayed in Michael Lewis’s newest book, The Big Short.  An excerpt is available in the April 2010 issue of Vanity Fair magazine, and at VanityFair.com 

Video of Dr. Burry: http://www.cbsnews.com/video/watch/?id=6298040n&tag=contentBody;housing

Video of Dr. Burry: http://www.cbsnews.com/video/watch/?id=6298038n&tag=contentBody;housing

PS: Michael Osinski retired from Wall Street and now runs Widow’s Hole Oyster Co. in Greenport, NY http://www.widowsholeoysters.com

And, our www.MedicalBusinessAdvisors.com related books can be reviewed here: http://www.amazon.com/s/ref=nb_sb_noss?url=search-alias%3Dstripbooks&field-keywords=david+marcinko

Assessment

Visit Scion Capital LLC and tell us what you think http://www.scioncapital.com.

And to Mike himself, I say “Mazel Tov” and congratulations? I am sure you will be a good and faithful steward. The greatest legacy one can have is in how they treated the “little people.” You are a champ. Call me – let’s do lunch. And, I am still writing: www.BusinessofMedicalPractice.com for the conjoined space we both LOVE.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Link: http://feeds.feedburner.com/HealthcareFinancialsthePostForcxos

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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[PHYSICIAN FOCUSED FINANCIAL PLANNING AND RISK MANAGEMENT COMPANION TEXTBOOK SET]

  Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™  Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

[Dr. Cappiello PhD MBA] *** [Foreword Dr. Krieger MD MBA]

***

Value v. Growth Fund Managers

Understanding Investment Styles

By Dr. David Edward Marcinko; MBA, CMPbiz-book1

A mutual or hedge fund manager’s investment style is defined by the means or strategies used to accomplish the fund’s stated objective. Most managers have a strategy they believe to be the key to maximizing risk-adjusted investment returns. For example, two equity managers may seek growth of capital or capital appreciation over the long term. The strategies they use to achieve that goal can be vastly different, however, as evidenced by their choice of securities.

Style Characteristics

Astute physician-investors are aware that there are four, main manager style characteristics: value vs. growth, top-down vs. bottom-up—which can be refined further by additional approaches. Certain statistics and information reveal a manager’s style. An investor may prefer one style or one combination over another

Approaches Vary

Style approaches can be used in tactical asset allocation. Research has shown that one style tends to outperform the other during certain periods. If investors believe they can identify when one style will outperform the other, they could overweight the favored approach. More and more fund complexes are now offering funds in each style; especially for large healthcare entities and other institutions.

Value vs. Growth

Manager autonomy and style is an important consideration.

  1. Value managers focus on a company’s assets or net worth and attempt to place a value on such assets: if their valuation is greater than the market’s valuation, the security is a candidate for ownership. Benjamin Graham, the father of value investing, believed this approach to selecting securities would eventually be recognized by the market, rewarding patient, long-term investors. In today’s service economy, value managers also attempt to value the intangible assets of a company, such as franchise value or human capital. Value managers tend to be contrarians—they buy out-of-favor stocks or stocks not widely followed or recommended by analysts. Value managers also look at the breakup value of a company (what the individual parts could be sold for). They buy cheap stocks: stocks with low P/E ratios or low price-to-book value relative to the market, and stocks of established companies that pay dividends.
  2. Growth managers look at corporate earnings and focus on improving or accelerating earnings. They look at the trend of an industry or market sector (for example, environmental technology) to see if there is future sales-growth potential. They may lean toward companies that are dominant in the industry or have a product or service that will dramatically improve their market share. Growth managers typically own stocks with higher P/E ratios than the market average; these stocks may not be out of favor, but they may have been overlooked by market analysts. Growth stocks usually are not high-income-paying stocks.

Assessment

Prior to the recent financial meltdown, growth and momentum investing was the norm. Now it is value investing. What about the future for the physician-investor?

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com 

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Fiduciary Burden of Participant-Directed Investment Plans

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An Emerging Issue for Physician-Executives

[By Jeffery S. Coons; PhD, CFP]

Managing Principal-Manning & Napier Advisors, Inc

fp-book1

The goal of designing a participant-directed investment menu should be to provide enough diversification of roles to allow participants to make an appropriate trade-off between risk and return, without having so many roles as to create participant confusion. 

Medical Administrative Burden

Ultimately, the burden on plan administrators and physician executives is to adequately educate employees and is largely driven by the investment decisions we require them to make in the plan, with more choices necessitating a greater understanding of the fundamental differences between and appropriate role for each choice.  The logical questions that arise when selecting options on a menu are:

  • Are there clear differences among the options?
  • Are these differentiating characteristics inherent to the option or potentially fleeting?
  • Are the differences among options easily communicated to and understood by the typical plan participant?
  • Most importantly, if participants are given choice among these different options, can the decisions they make reasonably be expected to result in an appropriate long-term investment program?

Fiduciary Concerns and Liabilities

All this adds up to additional fiduciary concerns for the health care entity and plan sponsor. 

For example, can the typical participant understand growth and value as concepts when even the experts can not agree on their definitions? The use of style based menus for self-directed plans bring this issue to the forefront. What about investment strategy?  What choices are we expecting the participant to make when offering growth and value styles for one basic asset class role? 

Finally, beyond the responsibility to provide effective education, what other fiduciary issues are associated with style categorization for a participant-directed investment menu?

Effective Style Communications

Consider whether the differences among manager styles can be effectively communicated to the average participant.  Because the general style categories of “growth” and “value” are not well defined, we are expecting the participant to understand how the manager is making investments in a fundamental manner and the differences in risk/return characteristics of these alternative approaches.  This exercise is difficult for investment professionals and trustees, so it will be even more unlikely to be properly understood by an average participant.

Given Assumptions

Let’s assume for the moment that there is an effective means for understanding the different risk and return characteristics of two managers investing in what is ultimately the same basic asset class.  When allowing the choice of these two differing approaches, what decision can the participant make?  There are four possibilities:

  1. Select the single manager whose investment philosophy makes the most sense overall to the participant;
  2. Time the decision of when to move from one management philosophy to another;
  3. Split the allocation between the two managers; or,
  4. Give up from confusion and do not participate in the plan.

We have already discussed the difficulty of the first choice, so let’s consider the second possibility.  This decision is an extremely risky choice that typically leads to poor or even catastrophic performance. 

Why?  Timing decisions such as this are typically based upon recent past performance, which is cyclical in nature.  In essence, investors generally chase after yesterday’s returns and invest in funds after their period of strong relative performance.  The strong flows into S&P 500 Index funds and growth/momentum firms of today were preceded by flows into value/fundamentally-oriented investment firms a few years ago. 

In fact, a Journal of Investing academic article in the Summer of 1998 (“Mutual Fund Performance: A Question of Style”) found that mutual funds changing their investment style had the worst performance of any style individually.

Allocation Choices

The next choice is to split the allocation between growth and value.  While this approach may mean that the participant will not under-perform significantly when any one style is out-of-favor, it also means that the participant will generally never out-perform either.

Nevertheless, by combining two halves of the same basic universe within an asset class, it is likely that the basic performance of the asset class will result (i.e., index-like returns).  Since the participant is paying the higher expenses of active, value-added mutual funds, the end result is likely to be index-like returns less the significantly greater fees and consistent under-performance over the long-term.

Assessment

While there may be participants who can handle the investment process, the previous discussion illustrates why it remains an open question whether educational efforts and typical menu choices provided by plan fiduciaries will be adequate from a regulatory and legal standpoint.

However, while it is unreasonable for participants to select the single best manager, it is reasonable for trustees to choose managers by defining investment policy and objectives that focus on characteristics like broad asset classes. 

And; do you think that by creating an investment menu that removes soft, overlapping, and largely qualitative distinctions such as style; plan sponsors can take a significant step toward mitigating the potential for participant confusion that inevitably could lead to litigation?

Conclusion

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