A minor Gripe or Two

MJG

Hi Guys,

Its been a good investment year so I have little to grumble about. But grumble I will although the gripes are not of a very serious nature.

Earlier this year I expressed my displeasure with those who reference statistical data and only report some vague average value. I am sometimes also guilty of this sin.

If statistics are cited, they should be more completely reported. A more complete and useful report should include the number of observations, the mean value, the median value, the standard deviation to quantify data scatter, the outlier maximum value, and the outlier minimum value. It is a more cumbersome disclosure, but it is a more comprehensive characterization of the data itself.

Today, as I was reading the weekend edition of the WSJ, I identified a second investment numerical representation gripe. In today’s media coverage it seems to be a common practice that a financial expert’s credentials are mostly established by solely referencing his Assets Under Management (AUM). The video and audio media do the same. A large AUM says nothing about the investment acumen of the person touting that number.

The AUM really only measures the cumulative salesmanship skills of the person being interviewed. It does not quantify his abilities as a money manager, stock picker or economic market forecaster.

A more meaningful introduction would report the annual return rates that his clients received under his management contrasted to some market standard applicable to the expert’s investment style. Has he generated Alpha (excess returns) or, if he is defensively risk oriented, how did he dampen losses in down markets? His actual performance record over a specified timeframe should be an integral part of any introduction.

Fat chance that either of these gripes will be soon implemented. But I can always grumble and dream.

As one of my New Year’s resolutions, I will pledge to not permit these minor gripes to trouble me. They are just not worth my ire. Nor are they worth your ire either. Sorry for injecting my personal gripes on your goodwill and time.

Best Regards and Happy New Year.

MarkM

I love these gripes because they show you are actively reading an article not just accepting its contents as unchallengeable information. This is higher order thinking. Perhaps they should not raise your ire but you should keep taking note of authors biases and weaknesses in arguments. This skill has doubtless put you in the position to succeed as you have done.

BobC

Hi MJG. As an RIA, I have always disliked the Assets Under Management as a way to bestow competence. You are exactly right. $2 billion vs. $350 million has no bearing on the competence of an advisor. Unfortunately, using rate-of-return information is problematic, too. The numbers, if available, are for specific models the advisory firm uses. So unless there is specific model information provided (strategies used, specific allocations, fee schedules, etc.), comparison is impractical if not near impossible. Then you have a lot of investment companies that do not use models, or use them for only a specific group of clients, or use them and choose not to go through the SEC requirements for publishing them. Are these companies less competent than the ones who do publish their model numbers? Of course not.

I would suggest that a more logical process is to select an advisory firm that starts with the calculation of the return you actually NEED to achieve your long-term goals, factoring in risk profile, longevity, ability to save, projected lifetime income needs, how long you intend to work, or whether you will continue to have earned income in retirement, what your Social Security or pension benefits might be, etc. This, then, results in an allocation that targets that return. Without this process, you may be taking on much more risk than necessary, or not being aggressive enough, or any number of other factors.

As I have suggested many times on this discussion board, most investors base investment decisions on how well a fund does compared to the S&P 500. Ignoring the fact that the S&P is often an inappropriate comparison, this approach is backwards. We want to know how a manager handles market sell-offs and periods of high volatility. This may be just as important as how they do in bull markets over a long time period. Most investors like to brag to their friends when their investments have a good year. But privately, they are much more concerned about hanging onto dollars in down markets. Your comments above regarding these things are spot on. Thanks for the contribution.

MJG

Reply to @MarkM:

Hi MarkM,

Thank you so much for the generous and kind words. Your comments exceed both my capabilities and my contributions.

Best Wishes and Happy New Year.

MJG

Reply to @BobC:

Hi BobC,

Agreed.

Thank you for expanding the discussion in a much needed direction. Your fair and insightful commentary certainly added needed depth to my submittal.

Best Wishes and Happy New Year.