Lipstick on a Pig: The Latest Wall Street Offering

What at first doesn't succeed, repackage and look for less SEC oversight

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Jan 23, 2016
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I have no desire to suffer twice - in reality and then in retrospect.”

- Sophocles, Oedipus Rex

The sad thing about creating future products on hypothetical past performance is the story never has a happy ending. We fool ourselves into thinking we can predict the future by cheating about the past. The vast majority of people who have succeeded with this method either distorted the data in the beginning or at the end. Be very, very leery of data back testing”.

- Ian Schlesinger

In investing you occasionally come across one of those news items that causes a real pause in your day. Examples of this were reading about the backdating of stock options [1] and another was the late trading/market timing scandal in mutual funds [2]. Both showed an appalling disregard for investors and disclosed managements that were focused on personal greed and enrichment.

Proprietary indexed notes and CDs

Today was a day similar to those. On the Bloomberg website, there was an article that struck me just as powerfully as the previously cited examples. Yakob Peterseil has a fantastic article today [3] detailing Wall Street’s new endeavors to avoid SEC oversight by moving from proprietary index notes (PINs) to certificates of deposits (CDs) backed by PINs. Why the move? Because CDs - while being backed up to $250,000 by the FDIC - generally aren’t supervised by the SEC. Their performance – like many Wall Street innovations – seem to work great in theory but fall woefully short in practice.

As an example, Peterseil shows the theoretical back tested results of PINs versus their actual abysmal performance when they were launched in 2010. Remarkably (or perhaps not), performance was almost entirely positive in the past and mostly negative after the product launch.


What makes this story particularly reprehensible is the fact some of these products were marketed utilizing nearly entirely back tested results. I suppose any registered investment advisor could collect considerable assets if they showed a prospective client a 20-year performance chart where the stock selection deleted any holding that had negative returns.

Correlation or causation?

How did Wall Street get this so wrong? And why did investors think this was a great idea? It’s important to ask these questions as firms are now offering PINs V2 (or PIN CDs). First, the back testing design was extraordinarily poor. Peterseil shows two charts – the back tested performance and the actual performance. Here’s the back tested performance with only five scenarios producing negative returns.


Here’s the actual returns achieved by these products.


Somehow actual performance significantly underperformed the back tested models. Poor design indeed. The second issue was high costs. With fees averaging 2.5% to 3%, it was nearly impossible to generate positive performance for investors. The only winners were the Wall Street firms peddling these products.

Why this matters

In these days when we see triple digit losses on a daily basis and the investment world seemingly under siege (China, ISIS, interest rate increases, Europe’s possible recession, U.S. possible recession - the list is endless), it’s important to remember value investing is a relatively simple concept – invest a dollar today in an underprices asset, let compounding do its magic, and sell for a significant profit. This concept has worked through the 1907 market crash, World War I, the Great Depression, World War II, the Cold War, the Cuban Missile Crisis, Watergate, the collapse of American manufacturing, two Gulf Wars, terrorist attacks…well…you get the drift. As the market slides, try to keep in mind several key concepts when someone attempts to sell you an extremely esoteric product or strategy like proprietary index note-backed CDs.

There are no shortcuts to profit

Some of the best results from investment strategy are achieved through understanding there are no shortcuts to making money. Buy low, sell high. Keep costs to a minimum. Don’t trade at high rates. Keep your emotions in check. These are all rules that demand a focused, long term, and patient application of classic value investing. As JRR Tolkien once said, “short cuts lead to long delays.” He certainly could have been speaking about an investment strategy and its role in retirement planning.

There’s a reason for the small print

If we had a nickel for each time we read, “past performance is not necessarily indicative of future results” we probably would be a lot wealthier. But many investors would be much wealthier if they had simply read that phrase and applied it to their potential too-good-to-be-true investment opportunity. Just ask investors in all those proprietary index notes.


The vast majority of investors would be better of investing in a basket of index funds. Keeping it simple by avoiding Wall Street’s newest fads like the Nano-Green Biotechnology Focused Fund or CDs with values pegged to hedged currency bets is generally a good bet. If you don’t understand the methodology behind these products, it’s highly likely Wall Street doesn't either.


In this time of market volatility, investors have tendency to seek calmer waters. Wall Street has repackaged a product that previously generated abysmal returns as a potential new safe haven for those particularly risk sensitive clients. It’s important that value investors stick to their core knitting. You don’t need complex algorithmic analyses to find an undervalued high quality company with a wide moat. Otherwise, investing in Wall Street’s “safe” products that work so well in theory could bring about Socrates’s fear of suffering in reality and retrospect.

As always, I look forward to your thoughts and comments.

*My apologies to Henry David Thoreau for utilizing his advice in an investment article.


[1] The Wall Street Journal’s Charles Forelle and James Bandler had a great piece covering this. It can be found at

[2] Eric Zitzewitz of the Stanford Graduate School of Business completed an excellent study on this. His findings can be found at

[3] It can be here

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