Post Election Traumatic Stress Disorder

This is an excerpt from my latest newsletter.

About the only good news these days is that the election is FINALLY over. In my Fearless Forecast edition back in January I said “I believe President Obama will defeat Mitt Romney in a relatively close election as a divided GOP is unable to coalesce behind Romney. The Tea Party is marginalized and the Senate remains in Republican control. Fiscal austerity, job creation and tax policy are the main debate points.” I’d say I nailed that one right on the head. Now, Obama and the lame duck Congress MUST figure out a way to avoid pushing this country over the “fiscal cliff”. Should every possible tax increase and spending cut go through, the 4-5% reduction in GDP would push the United States into a deep recession. But I believe that the self-preservation instincts of our politicians won’t allow that to actually happen. Somehow they will figure out how to avoid the cliff. It’s likely that they’ll compromise on some easy tax increase wins and entitlement cuts then push the harder decisions into next year to let the next Congress fight it out. And the sooner they do this, the better for the stock market, which hates uncertainty.

At the end of the day, I don’t think the results of the election will change things very much. We still have a left-leaning president with no real mandate and a divided Congress with a weakened Tea Party. That’s a great prescription for more of the same where there’s lots of talk and very little real action. I think the best we can hope for, in the short run, is some modest compromise and lots of procrastination. Looking longer term, I truly hope the President looks to his legacy and makes a real effort to articulate a tax and spending policy that makes sense. If he does, the Republicans will be forced to the table and maybe a plan that can save us from becoming Greece and Spain can be shaped. Or not.

What is really sad is how little confidence I, and so many people I talk to, have that our leaders will really work together to shape an intelligent policy that will hurt everyone a little in the short run but help us all in the long run. There will have to be tax increases. There will have to be spending cuts. There will have to be reductions in entitlement programs. Many good programs will have to be cut back or eliminated. People will lose their jobs, especially those in the government.

Unfortunately, standing in the way of what must be done are the special interests and the lobbyists, the ones with the real money and power. These groups have too strong a voice in what happens in this country. It really is no longer about “we the people”; it’s “we with influence”. Maybe someone in Washington will show some courage and leadership and prove me wrong and do what’s right, even if it isn’t what’s popular. I hope so, but I’m not hopeful.

Unspoken secrets in the money management business

The past few weeks have been dominated by storms, literal and figurative:  the election, the fiscal cliff, Sandy, the nor-Easter and now infidelities. It was enough to give me a brain cramp and writer’s block. Rather than talk more about that which has been discussed too much already, I thought today I’d share with you some of the unspoken secrets in the investment management business because they have potentially serious implications for your money. And that is, after all, what I’m supposed to be writing about.

Professionals in the investment business, whether they’re called stockbrokers, investment advisors, financial advisors, money managers, or something else entirely, are often described as “playing with other people’s money (OPM)”. That phrase alone should give you pause as it suggests a carefree attitude to investing by the pros because it isn’t their money. The idea is that a client gives you money, and you employ some method to decide how to deploy those funds, then you sit back and collect your commission or your fee. One of the unspoken truths in the industry is that few of these professionals are the ones that actually invest the money that they are paid to manage. Indeed, they usually farm that responsibility out to someone else.

Oftentimes, once the advisor has your money, he will usually either hire someone else entirely to manage the money, or rely on his research department pick the investments for you, or put your cash into pre-determined “model portfolios”, or simply dump the money into a bunch of mutual funds according to the asset allocation tenets of “modern portfolio theory”. More often than not, advisors are simply cash aggregators; accumulating as much money as possible, thereby generating the largest fees possible. How that cash is actually invested, and by who, becomes secondary. And to compound the problem, since it’s just “other people’s money” he has no personal stake in how your money is ultimately invested because it’s your money, not his, that’s at risk. And that’s where I’m different.

I make 100% of the decisions as to how my clients’ money is invested. The buck clearly stops with me. And as importantly, I have 100% of my own money, and that of my children and other family members, invested in exactly the same securities as my clients. Indeed, I personally own 29 of the largest 30 positions owned by my clients. I am clearly talking the talk AND walking the walk. My general rule is that if it’s good enough for my clients, it’s good enough for me and my family. I wouldn’t buy anything for my clients that I wouldn’t buy for my own children.

So what does this mean for my clients? It means I have my skin in the game, right alongside theirs. That I will not take any risks with their money that I wouldn’t take with my own. And it also means I am DIRECTLY accountable for the money that I’m managing on their behalf. Can your advisor say the same thing? Have you ever asked your advisor who is actually managing your money and where his own money is invested? Maybe it’s time you did.