Investing is hard work

Forget the Glitz… Successful Investing is Hard Work

If you are looking for a movie about power, money, sex, drugs, yachts, Lamborghinis, high-pressure sales tactics, stock manipulation, sex, and drugs (did I mention sex and drugs?) then go see the new Martin Scorsese movie, The Wolf of Wall Street, starring Leonardo DiCaprio. The film is based on the memoirs of Jordan Belfort, the founder of the brokerage firm Stratton Oakmont, which functioned as a boiler room selling penny stocks in the 1990s. I don’t want to give away the ending, but I will say that if you enjoy watching unimaginable amounts of corruption and debauchery, you are going to love it.

All of which gets me thinking about the admittedly boring world of our Pinnacle investment analysts.

Are We Making Too Many Trades?

Actively managing a portfolio requires buying and selling securities with the goal of managing risk and outperforming passive benchmark portfolios. Clients are correct to question the number of trades that are being made in their portfolio in pursuit of this objective. After all, one trade can generate several trade acknowledgments from our custodians, and each trade acknowledgement shows the brokerage commission charged for each transaction. Clearly the cost of trading has a negative impact on total portfolio return. As we approach year-end and Pinnacle’s investment team continues to generate commissionable transactions in our managed accounts, it might be helpful to analyze the cost of brokerage commissions relative to our ability to implement our active management strategy.

Media Gets it Wrong on Active Management… Again

In a recent “Your Money” column in the New York Times, John Wasik did a great job of delivering the status quo message about portfolio expenses. He reminds us that John C. Bogle, Founder of the Vanguard Group, and many others, have performed studies that demonstrated that active managers cannot beat a passive index because of the fees charged in actively managed funds. He reminds us that these consist not only of the well-known and often discussed fees in a fund’s expense ratio, but also include ‘hidden’ fees like the cost of managers who leave too much money in cash (which does not earn market returns), and fund transaction costs. The article goes on to mention a recent paper by William Sharpe, the Nobel Prize winner this year in Economics, who compared the expense ratio of Vanguard’s Total Stock Market Index Fund to a more expensive actively managed fund, and found that the costs of active management were $2,000 for a $10,000 investment over ten years.

How to Make Money at Neutral Volatility

Lately I have participated in several discussions about how to make money at “neutral vol,” or when Pinnacle portfolios are positioned to have roughly the same volatility as our benchmark portfolios. A good starting point for the conversation is to analyze the total equity positions we own in the portfolio versus the neutral allocation to equity in our benchmark portfolios. In Investment-Speak, changing the overall portfolio risk posture by underweighting risk assets is called a “beta trade.” We are reducing the portfolio allocation to market risk.

A Turning Point in the Market?

Inflection Point: (N) – Mathematics – A point on a curve at which the curvature changes from convex to concave or vice versa.

In describing our current thinking, I have to resort to an investment writing cliché where the financial markets are described as being “at an inflection point.” While the mathematical definition for an inflection point is presented above, in the business of investing inflection points occur where there is a change in the long-term trend or momentum of the financial markets, economy, or price of an individual security. Inflection points are critically important because if you recognize one and if you understand the significance of the change, then you can make a lot of money.

The Problem with Monthly Returns

I recently wrote about three “red flags” that I look for when evaluating portfolio manager returns. The third item – a firm dropping a specific time frame from its performance reports – is particularly relevant, because we’ve decided to make our own change to the time horizon for our performance numbers. Beginning next month, Pinnacle will no longer publish monthly portfolio returns.

How to Find a Good Investment Advisor

In these uncertain economic times, how do you find the right investment advisor for you? Ken Solow, a founding partner and Chief Investment Officer of Pinnacle Advisory Group, offers five excellent questions to ask your money manager to help you evaluate his or her investment skill, experience, and philosophy.

Why We’re Changing Our Performance Benchmarks

As a longtime observer of portfolio manager performance, I have noticed a few common warning signs that there might be trouble brewing with a money manager. They are, in no real order of importance:

1. When there is a major change in the management team of a fund

2. When a specific time frame of historical portfolio performance is no longer reported by the firm

3. When a firm changes the benchmark for its performance reporting

How to Choose a Financial Advisor

We recently received a question at our website from a troubled consumer of financial advice who wondered how he might compare Pinnacle’s wealth management process to that used by his current advisor. That’s an excellent question. After all, there is no Consumer Reports for financial advisors where firms are evaluated by objective and independent experts. The best we can do is recommend a process of evaluation that will give an educated consumer confidence in choosing the right financial advisor.