Financial Professionals Winter 2024

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, some “soft” yet important stuff. From the first few paragraphs of this:

It’s a strange job, being a personal financial advisor. While it requires expertise in financial planning and knowledge of investment products, it also requires a mastery of psychology. People have diverse relationships with money, not necessarily logical and not always consistent. Financial advisors understand that. “Being a great advisor is all about understanding clients’ hopes, dreams, and fears,” says one.

That makes it very personal. Like other jobs in financial services, providing financial advice is heavily trust-oriented, but whereas in other areas of the industry trust has become increasingly institutionalised, that’s less apparent in wealth management. Brand matters, and a small number of well-known firms dominate the industry, but a customer’s relationship is typically with their advisor rather than with the firm.

“More than investment performance or asset allocation, your empathy and personal connection with your client will make all the difference in the world,” says the same financial advisor. “Nothing will replace empathy and personal connection.”

Anyone who has been in this industry for more than five seconds should give those observations the “duh” they deserve, but on the other hand, it’s always good to be reminded of the fundamentals.

Also, I have been espousing this philosophy for a long time, and it is particularly important when markets are melting down. I was telling brokers in the late 1990s, that when there is bad news on CNBC, “Professionals are on the phone to their clients (and other advisor’s clients), amateurs are in the fetal position under their desks hoping no one will call them.”

Keep in mind “moments that matter.” From the end of this article:

1. When anticipating family health events, ask: “What would you do if your wife suffered a stroke?”

2. When it comes to trouble with financial decisions, ask: “What should we do if your dad can’t manage his account?”

3. When anticipating the death of spouses, ask: “If something happened to Gary, would your kids be able to help you?”

4. While anticipating possible “gray divorces,” ask: “How are your assets titled today?” “Would your kids and his kids be treated fairly?”

5. In anticipating healthcare worries, ask: “What Social Security and Medicare elections have you made?” “Do you have long-term-care insurance?” “Do you know what a continuing care retirement community, or CCRC, is?”

6. When talking to older adults who want to age in place, ask: “How have you secured your home in the event you cannot climb the stairs?” “Do you feel safe at night alone?”

7. To anticipate possible elder financial abuse, fraud or identity theft, ask: “How do you protect your account passwords?” “Do you pay bills online? “Do you subscribe to any protection services?”

My mother offers a tip, “Don’t tell the story of another person who had something happen to them. Most older people think mostly about themselves as they age. You can be direct and personal, but make it about them.”

Even some Unreasonable Hospitality is good; clients should feel cared for.

And, of course, don’t annoy them! Morningstar found (summary here) seven actions that clients reported disliking (in order from most to least disliked):

  1. Did not provide a breakdown of fees.
  2. Took more than a week for tasks.
  3. Used financial jargon.
  4. Recommended investments without considering values.
  5. Suggested investment options without going into details.
  6. Asked me to complete long forms.
  7. Did not provide holistic advice.

Second, some market history from Larry Swedroe (source):

Perhaps the best example of the boom-and-bust nature of equity markets is the late 1990s. From January 1995 through February 2000, the S&P 500 boomed, returning 25.8% per year. By the end of the period, the Shiller CAPE 10 had reached 42.2, producing an earnings yield of just 2.4%. The CAPE 10 earnings yield has been as good a predictor as we have of future equity returns. At the time, the yield on 10-year Treasury Inflation-Protected Securities was in excess of 4%. In other words, the expected real return to equities was almost 2 percentage points less than the riskless real return on TIPS. If anything is a sign of a bubble, that is the leading candidate. Then, from March 2000 through September 2002, the S&P 500 “busted,” producing a cumulative loss of 38.3%.

Another boom and bust was experienced from October 2002 through October 2007 when the S&P 500 returned 15.5% per year. That boom, which pushed the CAPE 10 to 27.3, producing an earnings yield of 3.6% (just 1.5 percentage points above that of the yield on 10-year TIPS), ended in a bust that saw the S&P 500 lose a total of 51.0% from November 2007 through February 2009.

The next boom and bust occurred a decade later. After returning 26.1% a year from 2019 through 2021, producing a total return of just over 100% in three years—a boom that pushed the CAPE 10 to 38.3 (an earnings yield of just 2.6%)—from January through September 2022, the S&P 500 lost 23.9%.

Third, is there Alpha from Ugliness? Not important, just interesting. The take-away would be to hire attractive people for roles that to be successful need other people to like them (sales, analysts that need manager access, internal roles that need support from others, etc.), but hire unattractive people (cheaper) to get back-office work done. Ceteris paribus of course.

Taleb had a version of this in one of his books. As I recall, his point was that if someone looks like the stereotype for their role, they may have gotten the job just because they looked right. But if someone looks completely wrong, then their competence must be high. So, for example, you would expect a short, fat, balding CEO with a stutter to be much better at his job than a tall, trim, articulate person with a full head of hair. (A woman CEO doesn’t fit the stereotype either, so is probably more competent than average.) I think Moneyball was successful because it elevated metrics over “looking like” someone who would be good at playing whatever position – which the scouts overrated. This probably applies to value vs. growth stocks as well: growth stocks “look” like the type of company that would be successful, value stocks don’t – so people don’t value them correctly.

Scott Adams was on this over 30 years ago:

Fourth, I don’t know if you have been following the recent changes to financial aid applications for college. If not, there is a good summary here and here.

Fifth, I’ve made these points before, but a study is out that makes them again. Here’s the way I usually say it: Working longer dramatically improves retirement finances – but it is a terrible plan. Why?

  1. About half of people retire earlier than they expected to – and it generally isn’t voluntary.
  2. If you want a realistic estimate of retirement age, average the expectation and 61. In other words, if you think you will retire at 55, then it’s probably 58; if you think it’s 65, then it’s probably 63; if you think it’s 75, then it’s probably 68, etc.

Sixth, I have been thinking about private equity and private credit investments, and I have thoughts:

  • Both Private Equity and Private Credit seem absolutely flooded with interest and capital making future high returns unlikely. Everyone seems to be pitching these funds.
  • Private Equity is probably just leveraged equity that isn’t marked-to-market so it doesn’t seem risky (see here and here).
  • Private Credit today is mostly just lending to Private Equity (which is frequently cashing out most of their investment with a special dividend), check how many of the top holdings in the private credit fund are portfolio companies of PE firms. For the last few I looked at it appeared to be all of them.
    • When you lend (non-recourse), it is a combination of buying treasuries and selling put options on the asset with a strike price at the value of the loan. If you use leverage (as in a leverage loan), you are buying a put option (and shorting treasuries) at a  lower level (assuming non-recourse still).
    • PE firms are paying a lot to borrow at the individual firm level (not the PE company level) because they value the put option a lot. Do you want to be the one selling them that option?

Let me explain the math on that last piece with a very simple example. Suppose you lend at 80% LTV and borrow for half of your capital (this seems to be about what is going on in the market). Suppose the asset (real estate, PE firm, whatever) is worth $1mm. You put up $400k and borrow $400k to make a loan of $800k on that asset. As long as the asset value stays above $800k you don’t lose money (and earn interest on one loan while paying on the other, but you earn the spread). As the value drops below $800k you lose on the $400k you invested dollar-for-dollar, if the value declines to $400k you are wiped out. If you are unlevered then you lend the full $800k and lose dollar-for-dollar down to zero. (You also keep all the interest instead of just the spread between the two loans.)

Seventh, should you stop playing the game?

When you’ve won the game, stop playing with the money you really need. – William Bernstein

It is insane to risk what you have and need in order to obtain what you don’t need. – Warren Buffett

Why do I bring this up? Because a TIPS ladder would fund a >4% real withdrawal rate right now – for someone with a normal span of retirement. This is a good summary of the longevity risk issues.

Eighth, Dave Ramsey is pretty ignorant on most financial topics other than getting out of debt and he riled up knowledgeable practitioners with some recent terrible advice. Nick Maggiulli wrote about this here and others have as well (here) but Nick made an error that I think most advisors make. Nick wrote: “While a portfolio of 100% U.S. stocks would’ve allow for higher withdrawal rates historically…”

I looked at this many years ago and anything from about 50% stocks to about 90% stocks allows roughly the same withdrawal rate (4%-ish). That doesn’t seem right, but it is. The higher return is balanced by the higher sequence of return risk so you can’t just increase your risk to get a higher sustainable withdrawal. What the higher stock allocation will get you is a higher bequest to your heirs! (On average, of course.) Or the higher possibility of higher withdrawals later, but you can’t start higher.

Ninth, Vitaliy Katsenelson opined on How Greed and Leverage Destroyed the Crypto Tulip Market.

Tenth, you are probably aware of the new beneficial ownership reporting requirement for LLC clients. This is a summary from Steven Clark:

Business owners need to be aware that a section of the Corporate Transparency Act (CTA) goes into effect on January 1, 2024 that will impact 99% of small business entities. Beneficial ownership information must be filed by small business entities with the Financial Crimes Enforcement Network (FinCEN). Below are key items to be aware of (also, see link below to download a guide):

  1. The goal of the law is to prevent the hiding of illicit money or other property in the United States.
  2. The part of the CTA that goes into effect is the Beneficial Ownership Information (BOI) Reporting Rule (The Reporting Rule).
  3. Certain small business entities must file beneficial ownership information (BOI) reports (basically almost everyone).
  4. BOI reports must include beneficial owners and company applicants.
  5. First you need to determine if your company is considered a “reporting company”.
  6. Then you need to see if your company is exempt from the reporting requirements.
  7.  Failure to file the BOI report or filing fraudulent information in a BOI report can lead to a fine up to $10,000 and/or imprisonment for up to two years.
  8. Entities that existed prior to January 1, 2024 have until January 1, 2025 to comply. Entities created on or after January 1, 2024 have 30 days after entity creation to comply.
  9. Foreign companies that register to do business in any U.S. State or tribal jurisdiction by filing documentation with the state or tribe may be subject to the reporting requirements.
  10. Information that must be reported for each beneficial owner of a business or company applicant include legal name, date of birth, current address, and unique identifying number (U.S. passport, state driver’s license, state or local government ID, foreign passport, etc.).
  11. The information must be kept up to date by filing an updated BOI report when information for a beneficial owner or applicant changes (within 30 days of the change).

Business owners need to determine who in their company is going to file the BOI report, or will it be their tax practitioner, attorney, CPA, or other?

Use [this link] to download the Small Entity Compliance Guide published by FinCEN that provides more information about the reporting requirements.

I expect there will be a lot more on this as we get to the end of 2024 and people really focus on it, but if someone sets up an LLC now (for a solo-401(k) or whatever) I think they have 30 days and we need to be paying attention. Also, see this for more information.

Eleventh, a reminder about what will happen in two years if Congress does nothing.

Twelfth, a paean to Charlie Munger. Even though Warren gets most of the press, I admired Charlie more. I thought I’d note his passing by sharing some of my favorite quotes from him (which I have collected, along with other people’s here):

Great investing requires a lot of delayed gratification. – Charlie Munger

If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century, you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get. – Charlie Munger

It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. – Charlie Munger

It’s in the nature of stock markets to go way down from time to time. There’s no system to avoid bad markets. You can’t do it unless you try to time the market, which is a seriously dumb thing to do. Conservative investing with steady savings without expecting miracles is the way to go. – Charlie Munger

It’s waiting that helps you as an investor and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that. – Charlie Munger

Spend each day trying to be a little wiser than you were when you woke up. – Charlie Munger

The liabilities are always 100 percent good. It’s the assets you have to worry about. – Charlie Munger

Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things. – Charlie Munger

We try more to profit from always remembering the obvious than from grasping the esoteric. – Charlie Munger

What is the secret of success? I’m rational. That’s the answer. I’m rational. – Charlie Munger

When you locate a bargain, you must ask, “Why me, God? Why am I the only one who could find this bargain?” – Charlie Munger

Perhaps the best Charlie Munger quote is from the last BRK annual meeting:

It’s so simple to spend less than you earn, and invest shrewdly, and avoid toxic people and toxic activities, and try and keep learning all your life, and do a lot of deferred gratification. If you do all those things, you are almost certain to succeed. If you don’t you’re going to need a lot of luck.

See this and this for more of his comments on things (pretty good for 97 and 98 years old).

His Psychology of Human Misjudgment speech (audio, original transcript, revised version) is excellent and the books Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger and Charlie Munger: The Complete Investor are worth reading as well.

Thirteenth, I recently read The Delusions of Crowds (one of William Bernstein’s recent books). It really should be two books: one on religious silliness, and one on financial silliness. Inexplicably they are intermixed (though with distinct chapters) in one book. The financial chapters (3, 4, 6, 7, 13, & 14) are worth reading though if you haven’t read much market history. In any case here is one portion I thought was worth sharing (from Chapter 14, citations omitted throughout) to give you a flavor:

Rational thought takes considerable effort, and almost all human beings are mentally lazy or “cognitive misers,” in psych-speak, and they intuitively seek analytical shortcuts like the heuristics described by Kahneman and Tversky. The intense cognitive effort demanded by rigorous rationality is not at all pleasant, and most people avoid it. As put by one academic, we “engage the brain only when all else fails – and usually not even then.”

The second main reason for our propensity to act irrationally is that we more often than not apply our intellects to rationalization, and not to rationality. What we rationalize, generally speaking, are our moral and emotional frameworks, as evidenced by the division of our cognitive processes into a fast-moving System 1, seated in our deeply placed limbic systems – our “reptilian brains” – and a plodding System 2 that analyzes the rationality-demanding tasks of the CRT and CART.

Beginning in the late 1980s, psychologist Philip Tetlock began to quantify the predictive abilities of supposed authorities in their fields by examining the performance of twenty-eight thousand predictions made by 284 experts in politics, economics, and domestic and strategic studies. First and foremost, he found that experts forecast poorly – so poorly that they lagged simple statistical rules that fed off the frequencies of past events: the “base rate.”

For example, if the average investing “expert” is asked about the likelihood of a market crash in the coming year, defined as a fall in price by more than, say, 20 percent, he will likely spin a narrative about how Fed policy, industrial output, debt levels, and so forth affect that possibility. What Tetlock discovered was that it was best to ignore this sort of narrative reasoning and simply look at the historical frequency of such price falls. For example, monthly stock market price falls of more than 20 percent have occurred in 3 percent of the years since 1926, and this simple data point proves more accurate in forecasting the likelihood of a crash than narrative-based “expert” analysis.

Most of us suffer from strong bias toward self-affirmation, the desire to think well of ourselves, and thus misremember our forecasts as more accurate than they actually were; conversely, we erroneously remember our opponents’ forecasts as less accurate. Hedgehogs, though, have an especially marked tendency to do this, and Tetlock enumerated the most notable excuses they deploy: “A bolt out of the blue derailed my prediction,” “I was almost right,” “I wasn’t wrong, I was just early,” and finally, when all else fails, “I haven’t been proven right yet.” He succinctly summarized this tendency: “It is hard to ask someone why they got it wrong when they think they got it right.”

Finally, Tetlock identified a particularly potent forecasting kiss of death: media fame. For its part, the media seeks out “boomsters and doomsters”; that is hedgehogs fond of extreme predictions, who appeal to viewers more favorably than do equivocating foxes. Further, media attention produces overconfidence, which itself corrodes forecasting accuracy. The result is a media-forecasting death spiral that seeks extreme, and hence poor, forecasters, whose media exposure then worsens their predictions. Tetlock observed, “The three principals —authoritative-sounding experts, the ratings-conscious media, and the attentive public—may thus be locked in a symbiotic triangle.”

Fourteenth, the economy is doing pretty well, but if you only get your information from conservative-leaning news sources, you may find this surprising:

Fifteenth, Sharpe’s Arithmetic of Active Management explained a long time ago that active management must underperform after fees and expenses, but I hadn’t considered the corollary that the risk is higher as well (source):

(1) the average risk across all actively-managed portfolios of stocks will be greater than the risk of the market portfolio, and

(2) the average risk-adjusted excess return across all active portfolios will be less than the risk-adjusted excess return of the market portfolio, before taking account of fees and trading costs [emphasis mine]

The authors of the above wrote The Missing Billionaires: A Guide to Better Financial Decisions, which just came out last year. I read it over the holidays and highly recommend it. I also added it to the recommended readings on page seven of Ruminations on Being a Financial Professional.

Sixteenth, a client’s 401(k) has options for the S&P 500 and an extended market index. What mix equals a single total stock market fund?

I took the holdings of VTI from Morningstar and converted them into Excel. The S&P 500 isn’t exactly the largest 500 stocks, but this will be close enough:

  • The top 500 holdings are 88.68% of the fund.
  • The next 500 (they only give the top 1,000) are 7.06%.
  • The remaining 2,664 (there are 3,664 holdings total) thus must be 4.26%.

So, if you are trying to replicate the total (U.S.) stock market with an S&P 500 fund and an extended market fund, then the mix you want is roughly 90/10, and if you were trying to replicate the total market with just the Russell 1000 and Russell 2000 the split would be roughly 95/5 (“roughly” because values will fluctuate, and, well, close enough).

This is why I categorize VTI as “large-cap” in our portfolios – it really is.

Seventeenth, I recently finished reading Morgan Housel’s most recent book, Same as Ever, and highly recommend it. Following are four quotes from it that I liked:

[I]n personal finance, the right amount of savings is when it feels like it’s a little too much. It should feel excessive; it should make you wince a little. The same goes for how much debt you think you should handle – whatever you think it is, the reality is probably a little less.

Your happiness depends on your expectations more than anything else. So in a world that tends to get better for most people most of the time, an important life skill is getting the goalpost to stop moving. It’s also one of the hardest.

The trick in any field – from finance to careers to relationships – is being able to survive the short-run problems so you can stick around long enough to enjoy the long-term growth. Save like a pessimist and invest like an optimist. Plan like a pessimist and dream like an optimist.

In finance, spending less than you make, saving the difference, and being patient is perhaps 90 percent of what you need to know to do well.

Eighteenth, if you have clients in other states you may have missed tax changes for 2024; here is a summary.

Nineteenth, I asked ChatGPT (version 3.5) to “Write a personal finance book in the style of Dr. Seuss.” Here is the result:

Title: “Oh, the Money You’ll Save!”


Oh, the places you’ll go with your money, my friend, In this book, we’ll explore, from beginning to end. From dollars to dimes, and cents in a jar, Let’s learn about finance, it’s not very far!

Chapter 1: Saving with Glee:

In the land of green dollars, oh so pristine, Start saving your pennies, like a money machine. Put them in jars, watch your savings grow, Oh, the places you’ll go with the money you stow!

Chapter 2: Budgeting Bliss:

Make a budget, my friend, it’s not a big pain, Track your expenses, it’s a financial gain. In and out, like a river it flows, Budgeting helps you, as everyone knows!

Chapter 3: Credit Quest:

Credit is key, it’s a magical thing, Build it up high, like a bird on the wing. Pay your bills on time, keep your score high, Oh, the doors that will open, up in the sky!

Chapter 4: Investment Rhyme:

Investing is fun, like a financial game, Watch your money grow, it’s never the same. Stocks and bonds, a diversified brew, Oh, the wealth that will come to you!

Chapter 5: Rainy Day Dance:

Create an emergency fund, when skies turn gray, A safety net for a stormy day. Three to six months, in savings you’ll prance, Oh, the peace of mind, you’ll surely enhance!

Chapter 6: Retirement Romp:

Plan for the future, with a pension and more, Retirement savings, let them soar. Compound interest, like a magical dance, Oh, the golden years, full of finance!

Chapter 7: Giving with Heart:

Give to others, it’s a joy to share, With a generous heart, show that you care. Charity and kindness, a financial art, Oh, the warmth you’ll feel in your giving heart!


So here’s to your wealth, both near and far, In this financial journey, you’ll be a star. Oh, the money you’ll save, invest, and give, In the world of finance, it’s how you’ll live!
Remember these lessons, simple but true, And oh, the financial success that will come to you! In the land of green dollars, with wisdom to wave, Oh, the money you’ll save, my friend, oh, the money you’ll save!

Not bad!

Twentieth, some wisdom from the CEO of Norway’s $1.4 trillion sovereign wealth fund (source):

  • The way to judge yourself is inertia analysis. Run your January 1 portfolio for the full year without any changes and compare it to your actual results. It’s awful because some years you realize all you did was subtract value when you went into the office.
  • The fewer decisions you make the better they become.
  • When you are young (25) you are in such a hurry despite having your whole life ahead of you. When you are about to die like me (57) only then you suddenly develop long term thinking. (Laughing)
  • The biggest bias you have is you believe you don’t have any biases.
  • It’s interesting when you think about all the people in the world that make a living from getting information out of people – doctors, lawyers, journalists. Most don’t have any professional training on how to get information out of people and they should. We hire interrogators and forensic linguists to work with our portfolio managers so they learn how to get better information out of management, etc.
  • If you call it gut feel no one believes in it but if you call it pattern recognition everyone believes in it even though it’s the same thing.
  • 9 out of 10 drowning victims in Norway are men. Why? Men take more risk.
  • The two most important traits in high achievers: 1) bounce back factor – how well you bounce back after a loss 2) debrief process – learning from wins and losses.

Twenty-first, an interesting observation: “Poor people pretend to be richer than they are, and rich people pretend to be poorer than they are.”(source)

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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