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As Market Hits Extraordinary Highs, Money Managers Appear Shell Shocked

I found myself watching Consuelo Mack’s Wealthtrack show this morning.   Money managers are virtually all tremendously underperforming the Dow, the S&P and the Nasdaq.    The wealth managers on Mack’s program and programs like look out-and-out shell shocked.  You can see the same thing virtually any time of day on CNBC or on Fox Business where the message is the same, albeit less polished and full of screaming. 

Quite simply, these active managers cannot explain why they have so dramatically underperformed.  They are trying to market themselves as about to outperform equity markets, even when at 18x future earnings, just being long the market has become dramatically more risky going forward.   Money managers are so under the gun that they are resorting to positions that rely on tenuous arguments, such as the one often voiced that investors now need more exposure to US small caps.  They try to ignore the fact that small cap have also moved dramatically higher and bear risk equal to, or greater than, the broader market.  They also are playing in emerging market stocks, even though most US managers lack even a cursory knowledge of these areas and a prudent investor would avoid large exposure to emerging markets now more than ever.

Yes, a few money managers will make good calls that will cause their active portfolios to outperform the market over short or medium terms.  One or two have already been heavily and continuously exposed to Facebook, Amazon, Netflix and Google over the last several months and years and, thus, dramatically outperformed the market.   

Most advisors, however, will not have made the right calls.  For every manager who has invested well over the last couple of years, there is one who has bet during that time on Twitter, Tripadvisor, Verizon and CenturyLink.  Some have even made tremendously bad trades, like Bill Ackman’s trade on Valeant (or JP Penney beforehand) and doubled or tripled down.  While Ackman managed to avoid doing tremendous damage to his portfolio by countering these bets with a handful of good bets, many who are less talented will turn the super wealth into the merely wealthy and the wealthy into poor.

Money managers charge fees (and pass on transaction fees and costs) that, when compounded over any length of time, guarantee not only their own wealth accumulation, but underperformance for their clients.   Too boot, there are very few managers who are savvy as to tax implications of their transactions for their customers.   Even in a dramatically higher market like we are experiencing today, they might as well ask: “Together with our underperformance, can we interest you in a heavy tax burden and outlandish, recurring fees?”

Given that the market has performed so well for anyone using low cost index funds (and even roboadvisors), now more than ever, active manager are struggling to explain their underperformance (or, even their losses!).

Some will no doubt outperform in the years to come, but you will secure your future and your wealth by turning off Wealthtrack, CNBC and these other shows and avoiding their follies.

My advice is to stick with index funds to the extent that you require exposure to the stock market over the next year or two. 


Fear In America

Before the election, some people worried out loud about our new President’s ability to steer with a steady hand.  There were few who had the courage to speak out then, and their impact small. 

Today, there are even fewer.  And, that is not because the President has assuaged anyone’s concerns.  Quite the contrary.  Today, there is even greater fear on the part of many that this President could easily create a major incident that could threaten our country, the world, our very existence.

Throughout, America’s psychiatrists have been particularly silent.  At a conference held at Yale Medical School recently, however, mental health experts came together finally to weigh their role in warning the public about the dangers posed by this President.  It was surprising that the meeting took so long to happen, given the potential import of their professional judgment.  But happen, it finally did.  And, the outcomes were even more alarming, not so much for what they discussed, but for what they were unwilling to say.

A number did speak up, arguing that the symptoms were visible to all, professionals and the least informed; that it was the duty of mental health professionals to warn the public of very real danger.  But not all spoke up.  A good many hid behind an outmoded Goldwater Rule, insisting that they could not speak out.

But, what was most pronounced at the meeting was fear itself.  Fear of speaking the truth.  Fear that the President is now so powerful and that he can and has already been ruthless to those who dared to speak out against him. 

And, so the silence is even louder today.  Psychiatrists who have never been very bold are cowering even more today.  They have let us all down, worried most about their own hides, they are unwilling to share their informed assessment of the seriousness of the President’s illness. Gripped by fear, they are letting the country and the world down, standing by in silence for fear of retribution.

That’s what happens in situations like this.  That’s what happened in Nazi Germany: fear took complete hold and silence reigned.  


Who is Managing The Store?

A couple of days ago, as North Korea was parading it’s latest missiles, Donald Trump announced that he had sent “an armada” to the Sea of Japan as a clear signal that “we are strong” and “not to be played with.”  Others in the government described it as a large strike force (the Carl Vinson and three other warships) steaming to positions in striking distance of North Korea.  Coverage of all this was widespread in the country and throughout the world.  Some cheered at its boldness, some worried about what it might mean, and many prayed.

The press pushed for more from the Secretary of Defense, the National Security Advisor, and the Press Secretary.  All sang from the same music sheet and all confirmed the story, adding useless detail.

The only problem was that it was a story and not true.  The “armada” was nowhere near the Sea of Japan.   Indeed, there was no American war ship or even row boat in striking distance of North Korea.  Instead, the Vinson was and always had been off the coast of Indonesia, thousands of miles from the Korean Peninsula.  The President’s strike force had been streaming south, not north the entire time.

This is, of course, not very funny.  In fact, there is no comparable example of anything like this throughout American history.  Never before had an American President made a public statement of this kind, only to learn later that it was a total fabrication.  It is mind numbing to think that the President and his people could have been so wrong or, worse, could have been playing so carelessly with its credibility and with a very dangerous and rogue nation. 

How we, as a nation and world power, recover from this is hard to see.  Clearly friend and foe alike will wonder about the next and the next pronouncement from the American government.  This event has caused nothing short of a major erosion of confidence in America and the credibility of it leaders.