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Thomas Macpherson
Thomas Macpherson
Articles (130)  | Author's Website |

The Best Investment Advice I Ever Got

Wall Street loves to measure investments relative to indices. Investors should measure against absolute return and their personal financial goals

December 31, 2018 | About:

Here’s the only way I can think of making money off of all the suggestions I’ve gotten based on “the only investment advice I’ll ever need”. For each person making the suggestion, tell this new fount of wisdom to give you $500 in cash and assure them you will follow this investment advice to a tee. There’s only one catch. You will keep the $500 no matter what happens but split the profits 50/50 from this “only investment advice you will ever need”. See how many of these gurus telling you about this wisdom will whip out their wallet and fork over the $500. My guess is they will suddenly become far less confident in their “only piece of advice you will ever need.

- Bob Tyson III

Over the years, individual investors and money managers will read a lot about possible technique, style and process in their investment career. Along the way it’s impossible to keep track of the amount of times you might have heard, “This is the only investment advice you will ever need.” In my case, I made my first investment in 1999 as part of Nintai Partner’s corporate internal fund investment program. Since then, I’ve received so many examples of “the only investment advice you will ever need” I’d be a millionaire if I got a nickel for each time it was brought up.

I’ve found over time that the basis for these claims is a some get-rich-quick scheme based on several core concepts. These include investing in thinly traded penny stocks, placing bets on rare metals or other commodities, or getting in on the “ground floor” of some new investment venture with a highly dubious claim such converting ore obtained in western Ireland to tons of silver from a 2000-year-old peat bog.

There are other versions of what was once called “the projector’s pitch[1].” These are proprietary trading systems based on phases of the moon (just kidding!), technical chart patterns known as the “double ended pricing helix” or the “inverted energy power trade” (not kidding!). All of these suggestions may be the only ones I – or you – might need to lose a lot of money quite quickly in the markets.

There is one last category of individuals who sometimes give the “only investment you need” speech, and that is your financial adviser. Occasionally I will have clients who tell me of former financial advisers insisting on a proprietary process that assures a client of a certain return. Many will claim to beat the S&P 500 index on a regular basis or outshine the BBgBARC US Government TR bond fund each month.

I feel strongly that all of these pieces of advice some well-meaning and some not – have a glaring omission in their design and claim. The best investment advice should be developed exclusively for the investor’s needs and goals. It doesn’t matter much if investment performance beats the MSCI world index but doesn’t allow the retired investor to pay their Medicare Part B premiums. While much investment advice is relative (meaning measured against some other organization’s or index’s performance, many investors need advice about investing with absolute returns.

The best investment advice I ever received was from a board of directors member at Nintai Partners. We had just decided to create an internal fund in which retained earnings would be invested and owned by the employees of the firm. As we pondered the goal of the fund, many ideas centered on performance metrics that measured returns versus the major market indices such as the S&P 500.

After one contentious meeting, the board member asked why relative performance versus the S&P 500 Index was so important. He proceeded to ask a series of questions. When did we need to access proceeds from the fund? What returns were necessary to meet individual retirement needs of the employees? Were there specific dates and times when a draw down might be necessary? He pointed out that none of these were entirely relevant to the S&P 500 returns. Indeed, in some cases, the company’s needs might be in direct contrast to the S&P 500 returns.

The best advice was to ignore what all the talking heads cited as successful investment returns, and focus on what met our needs. In regards to how to achieve this, it occurred to me there are several core concepts investors should keep in mind.

To thine own self be true

No matter how much shouting, prognosticating or tales of woe or exuberance one might be blasted with while watching financial news networks, nearly none of this noise has an iota to do with your investment goals or strategy. If you can’t sleep at night after purchasing that triple-leveraged oil short fund you heard about on “Trader Nation,” then don’t buy it. No amount of trash-talking gibberish by so-called trading experts is going to enhance your investment returns or ability to get a good night’s sleep. Either you fully understand your investment thesis and it meets your investment goals, or you don’t buy it.

Your goals should drive investment decisions

There’s a classic story told by Jack Bogle in which several individuals were discussing their investment returns over drinks. After one boasted that his investment manager had beaten the S&P 500 by a wide margin, he asked his tablemate how his returns were over the past year. He said, “How the hell do I know? I just know I have enough money to golf every day, go fishing, and spend all the time I want with my grandchildren.” The game of trying to beat the markets has nothing to do with this individual’s performance measures. Never forget you invest for your goals – not Wall Street’s.

The measure of performance is my clients’ outcomes

As a professional investment manager, my fiduciary responsibility means that I choose the most appropriate investment vehicles to meet my investors’ goals. This means there are no cookie-cutter solutions for my clients. Some have 50- to 100-year time horizons where growth is required to keep up with their Trust’s ever-expanding financial commitments.

Another client might have a nest egg vital to supplementing their Social Security and pension income. They simply can’t accept substantial drops in their portfolio. Whatever their situation, the best investment advice I can give is to design a portfolio that specifically meets their financial needs. Anything less is a failure in my fiduciary responsibilities.

Conclusions

If you Google “best investment advice” today, you are likely to find hundreds of articles from major publications (Forbes), websites (Motley Fool) or investment managers (Ken Fisher (Trades, Portfolio)). If you read any of these articles, you will likely get a list of stocks or industries completely detached from any investment goals you might have for you and your family. What help is this? How does this help any person get closer to their personal financial goals?

My investment advice? Turn off the TV, switch off the computer, and draw up a list of your financial needs, your risk tolerance and what investment strategy most suits your personality. Some people love to invest on their own, others are most happy using index funds. Whatever the strategy, make sure it’s your own. Because in the end, only you will know whether you met your financial goals or not.

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

Disclosure: None


[1] In the late 16th and early 17th century a “projector” was defined in the Oxford English Dictionary as “a schemer; one who lives by his wits; a promoter of bubble companies; a speculator, a cheat.”. Perhaps the most famous literary account of projectors is that offered by the author Jonathan Swift in “Gulliver's Travel”. Gulliver is introduced through an entire troupe of projectors in his tour of the Grand Academy of Lagado which is a think-tank populated by inventors of perfectly useless or insane conceptions and contraptions.

About the author:

Thomas Macpherson
Thomas Macpherson is Managing Director and Chief Investment Officer at Nintai Investments LLC. He is also Chief Investment Officer at the Hayashi Foundation, a Japanese-based charity serving special needs children and service pets. The views expressed in his articles are his own and not necessarily those of the firm. He is the author of “Seeking Wisdom: Thoughts on Value Investing.”

Visit Thomas Macpherson's Website


Rating: 4.9/5 (10 votes)

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Comments

batbeer2
Batbeer2 premium member - 2 weeks ago

Thanks for sharing your thoughts.

I have nothing to add.

Thomas Macpherson
Thomas Macpherson premium member - 2 weeks ago

Thanks Batbeer. I'm sure you have thoughts of your own and I'd love to hear them! Best. - Tom

batbeer2
Batbeer2 premium member - 2 weeks ago

Yes, I often have something to say....

but this is some of the best I've read in years.The point you make is so simple and important and yet almost universally missed.

stephenbaker
Stephenbaker - 2 weeks ago    Report SPAM

Interesting thoughts - thanks. I think most people expect some sort of relative performance from their financial advisor. This means there should be a default benchmark that can be used as a measuring stick. I agree that the S&P 500 index is not an appropriate benchmark for everyone, but for stock investors, this seems to be the most common standard. If there is no benchmark against which the success (or failure) of an investment advisor can be measured, precisely what guidelines would you suggest? Investors may be concerned that without an objective benchmark or standard, investment professionals may tend to downplay what may be an otherwise appropriate investment return and thereby profit from what would be a too risk averse investment strategy. I assume most people who use investment professionals look to these advisors not only for appropriate investment selections, but also guidance as to what consitutes a suitable return based upon risk tolerance. If my risk tolerance falls within a reasonable scope, the returns I would expect should also fall within the same reasonable scope as commensurate indices which track a broad range of stocks (or bonds, etc..) which I can buy without the assistance of an investment professional and which can thereby be used as a benchmark.

batbeer2
Batbeer2 premium member - 2 weeks ago

>> If there is no benchmark against which the success (or failure) of an investment advisor can be measured, precisely what guidelines would you suggest?

LOL.... here are some suggestions:

1) Add a zero to the value of the portfolio every decade. Achieve that and you get X dollars.

or

2) Earn X dollars if you beat a target of Inflation + 10%. It's not unreasonable to ask a professional money manager for a 10% increase in wealth is it?

or

Your fee is 2% of the value of the portfolio 10 years from now (rolling 10 years).

Now try to find a money manager who will agree to any of the above terms. They are hard to find. Why is that? In what way are my suggestions different to the common yardsticks/incentive systems used within the industry?

stephenbaker
Stephenbaker - 2 weeks ago    Report SPAM

Batbeer, I'd like to speak with any investment professional who would agree to any of those performance standards and/or believes and can demonstrate they can achieve either of the first two you mention.

batbeer2
Batbeer2 premium member - 2 weeks ago

@Stephenbaker

1) The CEO of DJCO has an incentive package resembling the last one I suggested. That is one reason I own stock of DJCO.

2) Off the top of my head, Mason Hawkins (Trades, Portfolio) uses something resembling #2.

P.S.

The per-share book value of DJCO has increased at the rate suggested in #1 for many decades. That is another reason I own that stock :-) It's just that they've spun out assets every couple of decades or so and as a result they remained small. Also I suspect Li Lu is compounding at that rate at his fund but I haven't seen any hard evidence.

stephenbaker
Stephenbaker - 2 weeks ago    Report SPAM
Batbeer, isn't DJCO Charlie Munger (Trades, Portfolio)'s company? If I am not mistaken he only owns a few stocks. HIs portfolio would make for a great benchmark for most long term stock investors, no?

batbeer2
Batbeer2 premium member - 2 weeks ago

HIs portfolio would make for a great benchmark for most long term stock investors, no?

LOL.... yes.

As for beating the S&P on an annual bassis.... that is a dumb yardstick for various reasons. One very technical reason why it's not very smart is that it is trivial to do. Just do monthly dollar cost averaging and you'll beat the index almost every year. That was especially the case in 2018. I've seen funds where clients are expected to add to their "savings' every month but the manager gets paid an incentive for beating the index. Now that's a nice setup.

I've seen worse structures though. Much worse.

stephenbaker
Stephenbaker - 2 weeks ago    Report SPAM

Good point. But if you are in the business of selling the public on your financial expertise, there should be an objective, minimum standard by which you should be measured. The good thing about investments is everything is ultimately quantified.

Personally, I love Munger for his patience. IMO, that is the most important variable for successful investing. All of my success is attributable to patiently waiting for a stock I've long followed to become cheap and then hold it as long as the narrative/investment thesis doesn't change. All my mistakes have come from impatience and flyers. I've held my best successes for more than 35 years. All of my mistakes are long gone but in hindsight, expensive lessons that needed to be learned.

Thomas Macpherson
Thomas Macpherson premium member - 2 weeks ago

Hi Stephen. In my old days as Nintai Partners we used a performance measure similar to Batbeers number 2. Our hurdle was 6%. It’s actually done more often than you think. But the gist of this article’s message is that relative and actual results are not mutually exclusive. You can have both and the investment manager and client might be equally pleased with results best - Tom

stephenbaker
Stephenbaker - 2 weeks ago    Report SPAM

Tom, thanks for that. I guess my point is that an investment "advisor" should - as the title implies - provide appropriate advice, not just select investments. In other words, be a teacher of sorts rather than assume the investor knows what he should want and need. This involves providing an appropriate context through which an investor can make informed decisions.

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