Financial Professionals Fall 2023

This is my quarterly e-mail missive (affectionately dubbed “the massive missive” by one of my readers), intended primarily for my fellow financial professionals. It’s simply a way to share things of possible interest that I have read or thought about this quarter. Enjoy!

First, as you are undoubtedly aware, “manifestation” is not “the secret” to success. In fact, it may make you more likely to go bankrupt (though correlation doesn’t prove causation), here’s the abstract from a new paper:

We explored the psychology of those who believe in manifestation: the ability to cosmically attract success in life through positive self-talk, visualization, and symbolic actions (e.g., acting as if something is true). In three studies (collective N = 1,023), we developed a reliable and valid measure—the Manifestation Scale—and found over one third of participants endorsed manifestation beliefs. Those who scored higher on the scale perceived themselves as more successful, had stronger aspirations for success, and believed they were more likely to achieve future success. They were also more likely to be drawn to risky investments, have experienced bankruptcy, and to believe they could achieve an unlikely level of success more quickly. We discuss the potential positives and negatives of this belief system in the context of growing public desire for success and an industry that capitalizes on these desires.

In short, Marianne Williamson is unlikely to manifest her way to the presidency…

Second, an estate planning pro tip: Don’t keep your (hand written!) estate planning documents “in a spiral notebook under a couch cushion.” If you have a net worth of $80mm (now $6mm!) you can have it done right! More here.

Third, a phrase from the headline of this piece, “Staggering Amount of Money” is more revealing of the headline writer’s financial situation than it is Americans in general. $233k/year is a comfortable income, but certainly not a “staggering” one; it’s about the top 10% or so.

Fourth, I was reading about the changes to money market fund rules that recently came out and, with the SVB, et al. situations not having faded completely from mind, I realized something: A money market fund is just a type of bank. One with very small duration and credit risk, but no equity cushion (other than the sponsor’s capital if they deign to provide it for reputational – not legal – reasons).

Fifth, there is a good article on “facts” here that ties into financial issues at the end. I’ve said for a long time that portfolio management is just applied epistemology!

Sixth, you are probably aware of this already, but it happened after my last publication. The IRS has suspended RMDs on inherited IRAs for yet another year. More here. Also, 401(k) catch-up provisions have been punted, as many of us assumed would happen.

Seventh, instant financial transfers may be coming soon through a program called FedNow. More here.

Eighth, I’m going to keep working. From a new paper (statistics omitted throughout):

Cognitive functioning was stable before retirement followed by a significant decline after retirement. The decline was … highest among White men.

And:

Greater post-retirement cognitive decline was also observed among participants who attended college. While greater work complexity and higher income were related to better cognitive function at retirement, neither was significantly related to cognitive change after retirement.

Ninth, William Bernstein’s Four Pillars has been one of my top recommended reads for decades. A new version is out that I will read soon. Anyway, here is an excerpt.

Tenth, we don’t know as much as you might think about happiness, but there is weak support for expressing gratitude and talking to strangers.

Life satisfaction is different from happiness, and another interesting paper can be found here. Basically, psychologists have settled on five primary personality traits, commonly referred to by the acronym OCEAN, and three of these are pretty correlated with life satisfaction:

• Emotional Stability (the inverse of “Neuroticism”)
• Extraversion
• Conscientiousness

Interestingly, the two that don’t seem to matter much are:

• Openness
• Agreeableness

Eleventh, hedge funds don’t hedge, apparently they just dilute equity exposure with cash. As someone (I don’t know the original source) once observed, hedge funds are a compensation scheme masquerading as an asset class.

Twelfth, I liked this line about sudden money:

As the lawyer was reviewing the estate, he looked up and said, “This is a lot of money. It’s either going to last you 18 months or the rest of your life. I wonder which you’ll be.”

Thirteenth, regarding competence, or, more precisely, giving the appearance thereof, I saw this Dan Solin piece, and this sentence caught my attention: “One study found that individuals could exert influence in a group when they behaved in ways that make them appear competent, ‘even when they actually lack competence.’”

I was curious what those behaviors were, so I located the paper and the relevant portions state (citations omitted):

[I]ndividuals are perceived to be more competent when they use more certain and factual language, speak more often and in a fluid and assertive manner, use more direct eye contact, and use a relaxed and expansive posture.

And:

In group settings, individuals higher in trait dominance make more suggestions and express their opinions more frequently, speak in more assertive tones, make more direct eye contact, and use a more relaxed and expansive posture.

Fourteenth, there is an excellent recap of the returns to elite education here.

Fifteenth, as I write this, PowerBall is advertising a $1.72 billion grand prize. Is it a good investment?

It would be, but the taxes make it a loser. (And you could end up splitting the pot.)

Sixteenth, a good summary of a current Supreme Court case that would clarify the constitutionality of wealth taxes is here.

I’m in the originalist camp (as always), but it would change partnership taxation rules. For the better maybe initially (no taxation of retained earnings?), but Congress would be on it immediately and partnerships and S-corps would probably end up taxed like C-corps.

I think that is the correct reading of the law, but it would certainly be different.

Seventeenth, do you think you are rich? Some objectively rich people don’t:

Full article here.

Eighteenth, I wrote this in our newsletter to clients recently, but I thought I’d share some of it here as well.

I dropped into a yoga class (if you know me you know the comedic value of that concept) and as we held a pose the instructor said, “It’s harder sometimes to be still than to move.”

It immediately made me think of investing. Doing nothing – particularly when it is difficult (i.e., during manias and panics) – is generally the best strategy.

As Uncle Warren once said, “Benign neglect, bordering on sloth, remains the hallmark of our investment process.”

In other words, “Don’t just do something, sit there!”

On a slightly different note, Marcus Aurelius wrote almost two thousand years ago:

You always own the option of having no opinion. There is never any need to get worked up or to trouble your soul about things you can’t control. These things are not asking to be judged by you. Leave them alone.

Or, going again to the Sage of Omaha: “Charlie [Warren Buffet’s partner] says we have three boxes: In, Out, and Too Hard. You don’t have to do everything well. At the Olympics, if you run the 100 meters well, you don’t have to do the shot put.”

Charlie Munger also said it this way, “If something is too hard we move on to something else. What could be simpler than that?”

Don’t just do something – stand there!

Nineteenth, I was reading this and thought about how applying “rules” from Trader Joe’s to an advisory firm would work. From the article:

I looked for other categories that met the Four Tests: high value per cubic inch, high rate of consumption; easily handled; and something in which we could be outstanding in terms of price or assortment. For example, diamonds met the first test but flunked the second. Fruits and vegetables met the first and second tests but flunked the third because produce requires constant reworking. Fresh meat flunked the third test even more.

My thoughts on application to wealth management:

1. High value per cubic inch => high fees per time spent, and since time scales with client complexity and client count, I think it’s better to stay in the middle. I.e., it’s better to have one $2mm client than ten $200k clients. The fees are the same but the work is vastly less. Larger clients though (say >$20mm) start to need (or just want) much more complex and bespoke offerings (PE, VC, hedge funds, advanced estate tax strategies, etc.) while the fees are discounted. Better, probably, to have two $10mm clients or maybe even five $2mm clients – the fees are about the same in all of those cases (on our fee schedule anyway). I think the “sweet spot” is probably the $2mm-$20mm AUM client.
2. High rate of consumption => this automatically happens because AUM or retainer fees recur every quarter, planning fees are much less recurring though.
3. Easily handled => standardized offerings without needless complexity (no alts, one-off services, etc.). We will, of course, do needed complexity but some advisors seem to need to justify their existence (fees?) with complexity just for the sake of complexity.
4. Outstanding in terms of price or assortment => see below.

This last point is a little different in the wealth management space. I think for us it is a low price/quality ratio. You don’t want to compete on price, but for the price you charge the quality should be outstanding. Quality means the client can have appropriate peace of mind – which is what I think the deliverable is. Here’s the way I wrote it in a mission/vision statement (we don’t share it with clients, it’s just the lodestar for internal purposes):

We provide peace of mind to private clients concerning their financial success by providing excellent wealth management delivered as frictionlessly as possible with authenticity, respect, and professionalism.

(I elaborated on what “excellent” means previously.)

Twentieth, how many stocks should you own (if you are going to own individual stocks)? Probably more than you think.

Twenty-first, I found this paper interesting. Not sure what it is useful for, but thought I’d share anyway. Following are some of the conclusions I noted.

High-income people are most isolated from other classes, except in rural areas. Low-income people are isolated also, but only half as much.

The five types of establishments that are most isolating (i.e., you will be more likely to see others of the same income level there, rather than a mix of income levels) are:

• Elementary and Secondary Schools
• Fitness and Recreation
• Supermarkets
• Religious Organizations
• Nature Parks

This is in large part because high-income people attend different schools, gyms, churches, etc. than low-income people do. Even if folks go to the same chain (CVS serves all income levels) high-income people are going to one in a high-income area where the other customers are similar. And, of course, this applies to low-income folks going to their local CVS as well.

And here is a ranking of where folks differentially tend to go (from lowest income to highest income):

• Church
• Credit Union
• Library
• Alcohol store
• Dept Motor Vehicles
• Fast food
• Large chain
• Park
• Non-chain
• Casino
• Medical
• Full-service restaurant
• Historical Site
• Museum
• Bar
• Golf, Country Club

So, it turns out that “[T]he places that contribute most to mixing by economic class are not civic spaces like churches or schools, but large, affordable chain restaurants and stores.” (e.g., Olive Garden and Applebee’s) Interesting.

Twenty-second, along the lines of the last item (division), there seems to be a widespread belief that our politics are uniquely dysfunctional right now and people long for a sepia-toned past when things were not so contentious. That is a misremembering of history, a common malady known as Rosy Retrospection (see also The Illusion of Moral Decline). Carl Rove provides a good potted history here.

Twenty-third, it turns out that people are hopeless. (I would have used a stronger word than “hopeless.”)

Twenty-fourth, make good mistakes.

Twenty-fifth, a good paper on factor replication is here.

Twenty-sixth, keep it simple.

Finally, my recurring reminders:

J.P. Morgan’s updated Guide to the Markets for this quarter is out and filled with great data as usual.

Morgan Housel continues to publish valuable wisdom.

That’s it for this quarter. I hope some of the above was beneficial.

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Regards,
David

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