Former Major League All-Star Sues Advisor

Denny Neagle, 2-time all star pitcher, and his ex - wife are suing their financial advisor who put them in hedge funds, private equity funds, and alternative investments where they have experienced large losses and today cannot access their funds.  As Larry Swedroe points out in  "Invest Smarter Than an MLB Star" posted at Arianna Capital's site, "Working with an advisor you can trust is important but shouldn't replace your own education on financial matters."

Neagle signed for $51 million in 2000.  Swedroe lists a number of other big time athletes who blew their fortunes because they were financially illiterate.  Here's the rub, at least to me - it is not difficult to gain financial knowledge.  It's a hell of a lot easier than walking to the mound in Yankee Stadium in front of 57,000 screaming maniacs with the bases loaded in the bottom of the ninth.

For example, these athletes could have saved millions by spending a weekend reading Millionaire Teacher (available at $11.49 used on Amazon) or a similar book.  The advisor  wouldn't tell them this. Quite the opposite - he would emphasize how difficult investment management is and, in the process, build up his importance and rationale for a huge fee.

Most people reading these books are learning how to build their wealth.  These books are also valuable, however, for those trying to understand how to manage risk and preserve wealth--which is a big part of the game.  It's a mistake to automatically assume that, because you are well off and have a high-priced adviser, you don't need this information.

My question, though, has to be on what the advisor's motives were.  Advisors know that accounts of this size don't come along often and are literally a gold mine.  There never is a need to try to hit the ball in the upper deck (to use a baseball pun), but especially with an account of this size.  Was the advisor that greedy?  I'm not naive - I know about Madoff et al. - but it does puzzle me!

Swedroe also points out that financial illiteracy is not just a problem for high-priced athletes.  A large percentage of adults admit to pretty much being clueless when it comes to their investments.

The sad part, IMHO, is that it isn't difficult to remedy a large part of the problem.  But until steps are taken, stories like the Neagles' will, unfortunately, be all too common.

Market Predictions

This is the season of predictions and forecasts.  Pundits are getting a lot of air time and magazine space trotting out all kinds of charts and esoteric facts to support highly specific predictions on where markets are headed.

If you are like a lot of investors, you will be impressed.  In fact, crystal ball seers in the market are usually introduced by citing a time in the past when they made accurate predictions. 

What should you make of them?  Sometimes potential clients reel off well-known pundits' names and their forecasts.  They say so-and-so says the market is headed higher/lower or gold is going to $ _____/oz. etc.  They want to know what I think.

I patiently explain that I can get super smart, very articulate people to give well-reasoned, highly-believable arguments on both sides.  Jeremy Siegal (author of Stocks For the Long Run), for example, will argue forcefully that stocks are headed higher while Bob Shiller (author of Irrational Exuberance) will take the opposite side and say that now is not a good time to buy. 

What you don't see are all those in the gutter because their predictions turned out horribly wrong.  You won't see Miller, Paulson, Berkowitz, et al.  Sometimes this gets through; often times it doesn't.  After all, some people have their whole view of investing grounded in predicting which stocks and which sectors will do best.



If I thought forecasting was useful, I'd probably go with the most recent presenter given that they are so persuasive.  But I don't think it is useful.  In fact, it is harmful, IMHO, because many times investors use these forecasts as a  substitute for thinking; and when forecasts start to go awry, emotions come into play and the investor is set up for a stressful period that typically ends badly.


Larry Swedroe is the director of research of Buckingham Asset Management, LLC and a well-known proponent of index investing.  Here is his response when asked to make a forecast of macroeconomic events:
 
 From interview of  Larry Swedroe by "Seeking Alpha":


SA: Global Macro considerations dominated the headlines in 2011. Do you see 2012 unfolding differently? If so, how?
LS: Yes, it is always different, but my crystal ball is always cloudy. So I don’t make forecasts. Investors should learn what Warren Buffett knows: A market forecast tells you nothing about where the market is going but a lot about the person doing the forecast.
       There are good studies on the ability to forecast and the only thing that correlates with accuracy is fame, and the correlation is negative:  The more famous the forecaster, the less accurate the forecast.

Legg Mason 10 Year Results

Larry Swedroe presents 10 year results for Legg Mason funds in a post on Arianna Capital Management entitled "Legg-Mason:  Does it Add Value?" The answer he finds is no. Compared to similar Dimensional Fund Advisor (DFA) passively managed funds, the Legg funds underperform in 6 out of 6 asset class comparisons. Equally weighted by asset class, the underperformance averages to 2.4%.

Over 10 years, 2.4% takes a chunk out of the bottom line.  DIY Investor looked at  the impact of just management fees over the long term in "What is the Cost of Investment Management?"

Swedroe quotes his co-author (The Only Guide You'll Ever Need for the Right Financial Plan: Managing Your Wealth, Risk, and Investments (Bloomberg)) Kevin Grogan as saying, "If this were a fight, it would be stopped."

Legg's Chief Investment Officer, Bill Miller, is a brilliant, experienced investment manager and knows stocks inside and out. And yet he produces the results presented by Swedroe. The question that Swedroe asks is: how can they still have $700 million under management?  He offers a number of explanations ranging from failure to admit their error to hope for a turn around. Wes Wellington of DFA argues that Bill Millers intellect carries the day. It is hard to believe that someone as smart as Bill Miler can't beat a "...simple market index".

I would  offer a couple more reasons. First, many investors have never seen the comparative results as shown by Swedroe. Legg is obviously not out there touting the fact of their underperformance. Secondly, many investors are offered Legg Funds in 401(k) plans where they may be the the least poor of the available choices.

As a final point to ponder: if you have an advisor trying to beat the market do you think he or she is smarter than Bill Miller?