Thursday, September 18, 2014

Like No Other Market

From time to time I will look at stock prices of companies that I like or whose products I use. The great fund manager Peter Lynch wrote a book called One Up on Wall Street many years ago. Lynch preached the message of buying stocks of companies that you know—whose products or services you actually use. So, for example, if you like Big Macs, buy McDonalds stock; if you use Band-Aids, buy Johnson & Johnson.

This strategy may or may not work. I have never back tested the stock prices of the companies that I like or whose products I use. Quite frankly, that doesn’t sound too interesting, and my hunch is that they have probably performed worse than a broad base index fund.

A few years ago Fairway Market went public. Fairway is an iconic specialty food store here in New York City with fifteen or so stores in the metro New York area. It is an amazing store of fresh produce, cheeses, olives, hams . . . It is a food lovers’ paradise. The stock went public at 13 and climbed higher. Many New Yorkers who shop at Fairway bought the stock because they used the product. Of course this is a great company, "I shop there." As of today, Fairway stock trades below $4, nearly a 70 percent drop in price. Is Fairway’s business off 70 percent from two years ago? I doubt it.

Sure, there are cases when a company you feel good about performs well on the stock market. But overall there is no foolproof correlation between stock price and how much you like or use a product. Peter Lynch is a very smart guy, and his fund, the Magellan Fund, was a great fund for twenty years at Fidelity. And then it wasn’t.

All this week the financial news has been filled with headlines of the largest IPO in history, Alibaba. Alibaba is the Chinese version of Amazon, Facebook, and Google all rolled up into one company. Everyone thinks this stock is their ticket out of here to happy street. They think they know something that no one else does and they are going to cash in on this one. The problem is that everyone is thinking the same thing. Alibaba knows this and therefore keeps raising the price of the stock it is going to IPO on Friday.

Investing is not a sport, and it should not be a form of gambling. There is no easy ticket, and the idea of investing in companies because you use the product is not logical, or at least it does not make sense to me.

There are a very few who get rich quickly from the stock market. Imagine if you were employee number 10 at Microsoft or number 55 at Walmart. For most of us wealth is built over time, with a diverse portfolio designed to handle the ups and downs that the world throws at us.

Thursday, September 11, 2014

You Complete Me

The other night I watched my favorite movie of all time, Jerry Maguire, for the hundredth time. Despite what some may think, Jerry Maguire is not a chick flick. Jerry Maguire is a movie about a person who decides to reexamine his life and live it according to the terms that he wants. It’s about making a decision about who you truly want to be.

As I come up on my two-year anniversary of launching Clearfront Advisory, I thought I would have my Jerry Maguire moment and write my own manifesto.

My tipping point, what pushed me to leave the bank world, where I was working, was seeing that banks and brokerage firms don’t care about their clients. Advisors within brokerage firms and banks are not fiduciaries; they are salespeople. If you have heard this story before, I apologize. I was sitting in a “sales” meeting, and the “sales” manager was talking about the concept of grabbing more “wallet share” from clients. My stomach churned hearing the phrase “wallet share.” It sounded like stealing to me. The “sales” manager went on to discuss credit cards, mortgages, and having clients leverage their securities and borrow against them to pay bills. I thought we were supposed to help clients save more, not spend more. If you weren’t aware, banks make money lending money—it is much more profitable than managing client assets.

Two years ago I planted my flag and went out on my own as an independent financial advisor. It was one of the best decisions I have ever made. When you start your own business, people invariably will think you are crazy. I don’t know why. There is nothing more liberating than waking up each morning and knowing there is no one else to depend on than you. As one client put it when I left banking, “There is nothing better than betting on you.

I did not pull an all-nighter or do handstand push-ups like Tom Cruise did in the movie while penning his manifesto. But I have given a lot of time and thought to what I want and what I want Clearfront Advisory to be.

·         Keep Clearfront small and intimate. We want to know each client and want them to know us. Bigger isn’t better; bigger creates bureaucracy and distance.

·         Stay true to the simple concept that our clients are everything. We may be investing or advising on their lives’ savings. Treat their money like our own.

·         We don’t want to work with everyone. Not everyone is a good fit. We want to work with clients who believe in us and what we stand for.

·         Keep clients diversified in their investment decisions. Be cost sensitive in investment selections and the fees we charge. Be tax aware when making decisions—remember, it’s not what you make; it’s what you keep.

·         Coach each client to have the discipline to stay the course and not worry about what they can’t control. Focus on what you can control and on what is truly important.

·         Markets work and are efficient; it is fruitless to try to time markets or think you are smarter than the market. A vast majority of professional money managers fail to beat their benchmarks each year.

·         Have a simple and transparent fee structure so that clients know exactly what they are paying for and what services we are providing.

·         This is not a zero-sum game; there are no winners or losers. Everyone should succeed.

·         Be modest. If you hire me to beat the market, you will be disappointed.

At Clearfront we want to be held accountable. If there is something you are not getting from us, tell us. This is a relationship, yin and yang; communication is paramount and a cornerstone of what we believe in.

Thank you for your support and loyalty. We look forward to continuing this journey.

Happy Second Anniversary!


Friday, September 5, 2014

Back to School

I just got back from dropping my kids back at college. Whenor a better question is whydid this become such an undertaking? Not to sound like one of those grumpy old guys who yearns for the "good old days," but when I went to school, I think I had my stereo, speakers, albums, typewriter, and two duffel bags of clothes. I probably had two pairs of sneakers (they call them tennis shoes in Michigan), a few pair of jeans, shorts, t-shirts, a sweatshirt, and maybe a nice sweater in case I was going out to dinner. My parents dropped me off at the dorm, then they were on their way back home.

Not so much today. I can’t tell you how many trips I made to Bed Bath & Beyond. It is beyond belief! Retailers have done a great job convincing kids and parents that they need a lot of stuff. Mostly you need a lot of stuff to hold all of the stuff that you have. If you want to invest in a stock, invest in the companies that make the containers that hold all of this stuff.

Most of my financial clients’ greatest concern, aside from retirement, is paying for college. I advise clients to save as much as they can, and after they come up with that number, save more. College is really expensive. The rate of inflation for college tuition is over three times that of the general rate of inflation in this country. If someone were really smart, they would come up with an investment vehicle that returned the rate of inflation of college tuition each year!

Anyway, I am done lecturing and reminiscing. My point is, maybe another way to save for college is to not buy as much stuff. In the long run, not spending money on things we don’t need probably has a greater return than some investments we make.