Monday, April 2, 2012
Tuesday, March 27, 2012
6 Reasons Wall St. Hates Lazy Portfolios
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 The subject line of today's email was the title to an article I read this morning at MarketWatch.com. I thought it was going to address the ineptitude of asset allocation and diversification as a solution to mitigating risk within portfolios. After all, the "buy and mold" tactic that is asset allocation and diversification is about as "lazy" as a portfolio can get. The first paragraph in bold print suited my outside the Wall Street box mentality. It used a 10 year old quote from former SEC Chairman, Arthur Levit in Fortune magazine. The paragraph read: "America's investors have been ripped off as massively as a bank being held up by a guy with a gun and a mask." That same year in his classic "Take On The Street," Levitt lambasted the fund industry as "a culture that thrives on hype . . . withholds important information," a "cutthroat business" that "misleads investors." Today, it's worse. He goes on a few paragraphs later "Since my days at Morgan Stanley it's been obvious that Wall Street gets rich on "the action," on all the hot trading going in their casinos. More commissions and fees mean they can skim off America's retirement money. Want hard evidence? In the decade ending in 2010, Wall Street's stock market lost an inflation-adjusted 20% of America's retirement money." This was the climax of the article for me. I was in complete agreement with him. Unfortunately he used the above two paragraphs to build a case for hanging on to an asset allocated and diversified portfolio of low cost index mutual funds. Ugh!!! This is like fighting the corruption of Wall Street by throwing your hands into the air and giving up. Might as well move to France! The bottom line to his argument is the superior return of an asset allocated and diversified, low cost portfolio of index funds compared to the returns of broker sold, asset allocated and diversified, expensive mutual funds over the last 10 years. He assumes the only way to manage money is by asset allocation and diversification. If this truly is the only option, then yes, why pay a broker? Unfortunately he completely leaves out the downside to his conclusion. Real life market fluctuations kick many people out of these overtly risky investment approaches at the bottom of the market, then leaves them at the bottom to drown. Want proof? All we have to do is look at the Vanguard Mutual Funds cheap Target Date funds. A Target Date fund has a professional money manager asset allocating and diversifying a portfolio of mutual funds. Vanguard utilizes their own low cost index mutual funds. But lets look at the volatility of these funds compared to the stock market. 
The above is a simple google finance chart of Vanguard's 2030 Target Date fund. The blue is Vanguard the red is the S&P 500. At the bottom of the last recession the market was down 55% and this bundle of cheap index funds was right down there with it at nearly 50% loss. Both are still down nearly 10% from 2007. You can see it moves nearly identically with the market. Why not just buy the S&P 500 and forget about it? If you think I'm selecting their worst performing fund, think again. This fund is designed for someone between 45 and 50 years old (according to their wisdom). The fund designed for someone 65 years old still lost nearly 40% and still hasn't broken even either.
I've been in this industry since 1992 and was trained with the same asset allocation and diversification approach as everyone else. Fortunately it didn't take me long to figure out the lie associated with this approach and begin looking for other alternatives. I thank God for his guidance to our current investment approach. Our Moderately Aggressive portfolios have been quite busy lately. Please visit the Briefing Room to get an idea what we are expecting next!
Have a great day!!
John Norquay CEO PivotPoint Advisors |
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Monday, March 19, 2012
Ditching Wall Street
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 Until last week, Greg Smith was a high ranking executive at Goldman Sachs, working in London. According to Forbes, Greg was witness to a business culture changing for the worse. "To his great shock, he discovered an infection of virulent greed destroying a venerable culture of excellence, a culture that attracted him to Goldman with all the exuberance of his youthful talent and ambition. But instead of making money - significant money - by making money for clients, he realized he was in a culture making money fromclients and not for them." (emphasis mine) Greg quit, wrote a powerful testimony, and many say will now be banished from Wall Street. Goldman stock lost over 2 billion dollars of market value since Greg shared his honesty. GOOD FOR HIM!! He could come and work for PivotPoint in a heart beat! I am highly impressed with his character. He finally let his conscience be his guide and did the right thing. Reading the multiple articles regarding Greg, I felt many parallels in my life. Working with UBS as a Vice President and my partner being the branch manager (one of the larger branches in the country), I too was asked to "sell" investment products to our clients. These investment products were "packaged" with derivatives. This means UBS would take normal investments and mix them together in a way that looked attractive to the clients. In reality, the fees buried inside of these bundles of joy almost guaranteed the client wouldn't make money. Even worse, our branch had a quota for the sales of these pieces of trash. The clients that had them, hated them. This was NOT an atmosphere of clean conscience. As soon as my contract ran out, SO DID I. The worse part, when the crap hit the fan, UBS got bailed out by those getting taken to the cleaners by their "packaged products". The good ol' american tax payer. This leads me to an article I read this morning on Zero Hedge. About half a trillion dollars have left mutual funds that invest in U.S. equities. It appears that people are finally getting it, and realize that asset allocation and diversification don't truly reduce risk OR increase return. Instead they are turning to actively managed investment strategies. While 500 billion dollars has moved OUT of U.S. equity mutual funds, 700 billion has moved INTO Exchange Traded Funds, which are very inexpensive, transparent and liquid. ( Amounts according to the 2011 Investment Company Factbook) . My conclusion is that regular investors, like me and you, are getting tired of being called "Muppets" (a term Greg Smith said Goldman Execs would call their clients) and turning from the old ways of wall street to more transparent and efficient investment strategies geared to themselves than the brokers trying to sell them. Don has written another excellent brief this week. Please visit the briefing to see our thoughts on what is next in the market and our plans to take advantage of it. Have a great day!! John Norquay CEO PivotPoint Advisors |
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Tuesday, March 6, 2012
Unintended Consequences
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Don made it back to civilization from Aruba, but unfortunately brought the flu bug with him. In spite of this, the briefing was updated today and can be found in The Briefing Room.
Iran is probably getting closer to affecting our stock market. The Iranian elections were in the headlines regularly. We were trying to get Ahmadiniwhatever to the nuclear bargaining table by implementing sanctions on their country. These sanctions, in turn, caused huge stress to their economy during elections. We just spoke a few weeks ago how elections go when the economy is under stress -- the incumbent gets de-throned.
The unintended consequences of our actions is the true hardliners (Khameini and his gang) have gotten back into power. They won over 75% of the parliament seats making Ahmadinijab a lame duck. It will be interesting to see what happens now. We thought Ahmadimidribble was bad!
My favorite analyst, John Mauldin wrote this week: "For every government law hurriedly passed in response to a current or recent crisis, there will be two or more unintended consequences, which will have equal or greater negative effects than the problem it was designed to fix." He goes on; "A further corollary is that laws passed to appease a particular group, whether voters or a particular industry, will have at least three unintended consequences, most of hwich will eventually have the opposite effect than the intended outcomes and transfer costs to innocent bystanders."
John was referring mostly to the european mess and the "solutions" they are implementing, including the trillion euros the European Central Bank just printed (created). In the last 6 months the ECB has nearly quadrupled their money supply. His conclusion is that these antics will lead to the european break up rather than fixing their problems. Time will tell but in the meantime volatility will probably pick up.
We have been hanging along the sidelines as the market has pretty much gone sideways, patiently waiting for a meaningful pullback exposing a new wholesale entry. Today's over 1.5% pullback gave us such an opportunity to begin some new positions. Please visit the briefing for all the details.
Have a great day!!
John Norquay CEO PivotPoint Advisors |
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Wednesday, February 29, 2012
Over Extended
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Since Don is on vacation in Aruba this week (first once since 1987) the weekly briefing will have to wait for his return. Unfortunately that won't keep me from putting in my 2 cents.
Inflation Strikes Once Again!
The market took off and hasn't yet taken a breath. The shorter term cycles have only caused the price to take short consolidations rather than causing any meaningful pull backs. What could be causing this? The first thing that comes to mind is fear of inflation.
Many people have the wrong definition of inflation. They think inflation is the cost, or value, of goods going up. In reality it is the value of the currency being used to purchase the goods, DECREASING in value. What causes the decrease in value? If there were only one dollar in the economy today, and another dollar was printed tomorrow, would todays dollar be worth as much? No.
The U.S. cleverly disguises their money printing. Instead of calling it such, they instead called it QE and QE2 (Quantitative Easing). Most money that is "printed" is really "created". Most money is electronic today. The advent of debit cards and online transactions have decreased the need for good ol' cash. None the less, there is much more money in the economy after the program than there was prior (chart below). The Europeans have decided to use the U.S. approach as well. Much to Germany's ire, they are "creating" lots and lots of new money to float their way out of their mess. Instead of devaluing the bad loans on all the bank's books NOW, they are getting 1% loans from the European Central Bank that don't need to be paid back for three years. The hope is they can loan that money out to others, with leverage, to make enough to make up for the bad debt on their books. When they write off the bad debt later, hopefully they will have enough other reserves to stay in business. Europe isn't calling it QE or QE2 though, instead they are calling it LTRO. The bottom line is they have created over 850 BILLION euros of new money in the last couple months. Helicopter Ben (Bernanke) hit the headlines in the Wall Street Journal today by stating he "sees temporary inflation pressure". Genius!! Maybe HE finally took a trip to the grocery store or filled up his own car with gas. Look at the money supply chart below (from the Fed themselves) and tell me if you can tell why we might be running into some inflation pressures.  Very good!! Yes, money supply is dramatically increased due to QE1 and QE2. We once again printed our way out of a recession (grey areas). The same is now going on in Europe. This is why, I believe, the market is acting with reckless abandon. It knows it will have to keep up with inflation and is trying to get a head start. The good news is it WILL take a meaningful break, have a good pullback and give us a wholesale opportunity to get involved.
Have a great day!!
John Norquay CEO PivotPoint Advisors |
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