|The infamous Robert Citron|
My competitors are brokers--a regional broker from the birthplace of Davy Crockett and an entity that would have gone bankrupt had it not been bought out by a bank who itself was very shaky in 2008.
My proposal is very simple. It amounts to investing the account in several low-cost well-diversified exchange traded funds and possibly a chunk in a Virginia muni fund. It mostly focuses on asset allocation and managing the cash flow. The investment part is very straight forward--as readers of this blog would expect.
In contrast, the other proposals involve using funds of funds and actively managed mutual funds. One includes buying individual municipal bonds. The fund of funds does not have information available on the fund's holdings, and forget the availability of a publicly available price. Needless to say, the muni bonds have all kinds of bells and whistles that are difficult for even bond traders to analyze in different interest scenarios.
Nevertheless, the other two proposals appear considerably more complex than mine. Sometimes, in the investment world, people find this to be attractive. Complex is seen as sophisticated. I saw this firsthand a couple of decades ago when investors were falling all over themselves buying esoteric collateralized mortgage obligations (CMOs). Many were super complicated and investors sopped them up. I sat in on meetings where the people at the table had no idea how the instruments worked and yet wanted to buy them. It became clear that the presenters were smart; and the line of reasoning seemed to be that, if you buy complicated instruments from smart people, it must make you smart. It makes you look like you are working hard analyzing these complicated instruments.
But the bottom line, though, was that, in the restructuring process, highly liquid instruments--basic mortgage backed securities--were carved up into illiquid tranches and sold at higher prices!
The presenters, of course, were brokers. They had rocket scientists back at the shop structuring products to fit what the market wanted. When interest rates moved sharply higher, the market wanted instruments that would do well in a rising interest rate environment. The brokers provided them--at super attractive commissions.
Robert Citron is one case that went from being brilliant to being an idiot. He single-handedly bankrupted Orange County--the richest county in the U.S. He resigned as county Treasurer in disgrace.
My experience has led me to the point where, if I can't price a security on an ongoing basis, I'm not interested. If I can't calculate a time-weighted return and compare it to a benchmark, I'm not interested. If I don't understand the compensation package exactly, I'm not interested.
Steve Jobs said,
“Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains.”I agree. Fortunately, we've had giants in the field of investing break down the process to make it simple.