tej dhawan's random musings

Month: July 2013

Past Performance is not a predictor of future results…but sure helps filter bullshit

“Past performance is not necessarily a guide to future performance.”

Though the disclaimer has become so oft-repeated footnote in financial disclosures that it has become ignored by the very people who should pay close attention to its hidden meaning.  Its shield is the hidden wall that any new investor is bound to hit as they spend money on investment advice, hand-holding, and account management fees.  As I open dozens of reports and disclosures weekly, I can’t bit smirk at the warning above.
I was chatting with an old friend the other night as he went through his 401(k) asset-allocation.  He was simply seeking help on the pie-chart of equities vs. bonds, domestic vs. international, and fund selections.  As we looked past the marketing names and details, the discussion quickly shifted to fees, when I noticed a sales load on some of the funds doing something has trivial as attempting to track the market (a S&P 500 index fund!).  He seemed to be trading the company match just to pay the ‘entry’ fee to the fund!  What utter nonsense, unless I thought, the manager was beating the index consistently.  No surprise, however, when I saw that the returns were abysmal despite the asset purchase and asset management fee due to the advisor ‘actively’ managing the fund by timing certain purchases/sales.
Since an investor is expected to pay for active management of their funds and asset management fees are often withdrawn at the beginning of the period, shouldn’t the investor expect a certain level of return.  After all, the father of modern investing, Ben Graham wrote of what defines an investment in “The Intelligent Investor” –

“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

When we go to a doctor, we have a reasonable expectation of becoming healthy in the near future.  When we hire a lawn mowing service, we expect the grass will be cut.  When we hire software developers, we expect the product to be developed to our needs.  So, why is it, that when an investment advisor allocates our assets into the market, their own asset is not on the line?  Why is it that, when the market has returned historical data for almost a century and we have predictable market movement, advisors who claim superior strategy, research, active management and tactics, have no responsibility when they don’t deliver?
I’m calling bullshit on the cop-out served by ‘past performance is not a predictor of future results”

Do we care enough to buy-fresh-buy-local?

There has been a movement underway to return to buy-fresh-buy-local.  Whether initiated as a corporate gesture with Des 4395_95732896643_696607_nMoines’ campaign for “Buy into the circle” or through the various farmers markets, it urges us (consumers) to connect with the product we buy.  When we buy a corporate product (i.e. mass-produced product), we lose our connection to the soul of the product – regardless of what the product may be.
I once argued strongly on this position with the then CEO and Chairman of a large insurer in Des Moines who was initiating a offshoring undertaking.  My position was that the company’s bread and butter business came from small businesses – a fact the company touted in its marketing.  Yet, through the very act of offshoring, it was going to disconnect from the small businesses – the consulting and IT shops in Des Moines, and lose not only their insurance business as their profits dropped, but potentially because the firms themselves would be out of businesses in short order.  It went against Thomas Friedman’s “The World is Flat” journal, and it went against bottom lines of the insurance company, but I argued, that it would be better for the community if the company were to continue nurturing  its local economy to the fullest.  The landscape is markedly different today, with the mid-sized firms mostly non-existent from the software and services marketplace, replaced instead by the mega-outsourcers or those with tiny groups of developers with rare exceptions buying the company’s products (from my informal email surveys…).
Though I am not as well traveled as many, I do see the spirit of supporting your community alive in UK, Italy, and now Germany.  Pick up a tiny plastic watering can and turn it over – Made in Germany.  See the cars on the road – German, bread and rolls sold in a gas station – being baked by the cashier behind the counter (Casey’s style!), hotel checkout receipts with the name of the proprietor who owns it – in today’s case “The Armatowski Family”.   It was alive in London and Cornwall, Rome and Florence, and just as I remember from the city of New Delhi.  You can’t help but have a different connection with the product you’re using or buying when a human being is attached to it.
I think it will take a lot more than us buying some fresh produce from the seasonal farmers  markets – if we want a true buy-fresh-buy-local, we will need to seek out the people who sell us everything from food and lodging to our goods and services, software, insurance, lawn care, pest control, car repair, office supplies, and much more.
If we don’t know who we are buying from, do we really connect with them enough to care?

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