Fundamental Truths.

May 9, 2014

Based on my own personal experience - both as an investor in recent years and an expert witness in years past -- rarely do more than three or four variables really count. Everything else is noise. -Martin Whitman
. . .

Each morning, he traded global currencies. Effectively stewarding the massive amounts of capital he'd earned through the various business enterprises he'd created over the years.
In the afternoons, he attended board meetings. Donating his time, energy and intelligence to a myriad of public and private enterprises that sought his counsel.

Yet, evenings were his passion. As shadows obscured the day, he prepared to play. An expert in baccarat and poker, he appreciated the relationship between risk and reward. Was adept at manipulating this delicate ratio in his favor. Over an Old Fashion or two, he laid siege to the balance sheets of the city's higher-end casinos.
His charisma was like a seaside lighthouse at midnight. Casting its glow across the surf below. Drawing others to him. The men hoping to emulate him. The women hoping for much more...
To envy his success was like trying to outshine the sun. And that, dear reader, is the very point.
America has extremely romantic notions about success. The protagonists in most success stories consist of swashbuckling renaissance men who ride life as a rodeo cowboy does a bull. Dashing bravery. A surplus of charisma. Prophetic vision. Expertise oozing from every pore.
Yet, within the loftiest circles, such individuals are the rarest of a seemingly extinct breed.
Truth is, those who achieve any modicum of success in this world have generally clung to one fundamental tenet. One secret that propels them beyond the rest.
That is, they endeavor to determine the critical differentiating truth in every situation. And exploit it.
You see, in most goal-oriented circumstances we confront, there is one simple, critical truth that, once grasped, can enable one to outpace peers. Occasionally, the differentiating truth is simple and obvious. Other times, it is more concealed and opaque.
Sometimes, it is a factor one can leverage. Placing the odds in your favor so as to enhance their chance of success. Other times, it's a factor to avoid. The recognition that something is fundamentally stacked against you. Like the casino's slot machines and table games. If you play, you will lose money.
Once these positive and negative truths are known, successful individuals utilize them to chart a more effective path to their objectives.
Look about your community. The leading business persons are not those born with the most charisma, intelligence or charm. But those who figured out the one exceptional idea they can use to their advantage. Over and over and over again.
Sometimes, it's finding the right network. Or an exceptional service offering. Or a great team. A luxurious experience. On-time delivery. Mouth-watering cuisine. A mind-bending experience. Or, simply a nice bedside manner. Something that they can live by. Day after day. Year after year. The veracity of which lends itself to success. Helps to navigate around pitfalls and failures.
These truths can lend to the success of both personal and professional endeavors.
Consider golfers who endeavor to keep their heads down, not swing too hard, and avoid big risks. And, by dint of those simple principles, have achieved excellence.
Look at poker players who never risk more than is necessitated by the potential reward. Realizing a hand has little probability of winning, they fold. Every time. And when, finally, they're dealt a hand that swings the odds in their favor, they play to win. And usually do.
Or the weekend triathlete who, noticing a lack of performance gains, completely changes her diet. Cut out sugars. LDL cholesterols. Steak. Consumes more fish, nuts, raw vegetables and other super foods. And saw her incremental gains surpass all expectations.
The point is, those who end up putting distance between themselves and their peers found some discernible fact they could leverage. That one fundamental truth that cuts through all of the white noise and provides clarity. Contributes to their success. And, on occasion, highlights the competition's utter lack of expertise.
Examine my vocation. That of investment advisors and wealth managers. I know, and count as friends, a myriad of advisors with winning smiles and expensive suits. Unfortunately, that is the extent of their beneficial offering.
Consider the 2008 financial crisis.
In March of 2009, following a year of plunging asset prices, fear and volatility, the stock market hit its nadir and began a five-year upswing. To the impartial, unemotional observer, never had a fundamental truth been more evident.
Following the S&P 500's 54-percent correction, stocks were cheap. There was blood in the streets. And while corporate earnings had been decimated, they would not remain so. By June, when the National Bureau of Economic Research declared an official end to the recession. The market had already rocketed 39-percent higher.
At the time, everyone -- including the denizens of Wall Street and Main Street, hated stocks. The American Association of Investors was bearish. As were Wall Street's leading equity strategists. The brokerage firms sent their minions out to sell exotic private equity, debt and hedge fund deals, or their mutual fund equivalents. This was Wall Street's antidote to owning the dreaded equity asset class.
As Main Street and Wall Street ignored every cliché and maxim ever spoken by the likes of Warren Buffett, Peter Lynch and John Templeton, equities rose like helium balloons for five years. Rising 26 percent. 15 percent. 2 percent. 16 percent. And 32 percent.
Yet, many investors, at the behest of their advisors, had ridden markets to their 2009 lows. Then, terrified, they sold everything. Choosing to sit on the sidelines. As stocks rallied, they failed to participate. Year after year. And those exotic private equity and hedge-fund investments Wall Street trotted out as its solution to the crisis? Well, they failed to keep pace with the S&P 500. Failed miserably, in fact.
While the average hedge-fund returned eight percent annually to investors these last five years, the S&P 500 index has averaged 18 percent per year.
The bottom line? When Main Street investors desperately sought guidance, having already lost much, Wall Street's brokerage minions failed to recall the fundamental truths endemic to the very act of investing:
-Be greedy when others are fearful; fearful when others are greedy.
-Buy low. Sell high.
-Generally, the greater the stigma or revulsion, the better the bargain.
-Buy not on optimism, but on arithmetic.
Every investor, especially those paid to do so, had heard, read or spoken these words and ideas. Yet, when markets fell 56 percent in 18 months, everyone lost site of these fundamental truths.
Sometimes, those simple truths fall victim to human nature. To fear and greed. Other times, we simply trust too much in those who, themselves, lost sight of these truths.
Human beings, especially investors, always want to believe that "this time it's different." Yet, it never is.
If individuals and investors -- regardless of how bogged down, stressed out or under fire they may be, simply returned to the fundamental truths in each and every situation, life quickly simplifies.
Accordingly, allow me to provide one of my fundamental truths. You may deem it self-serving, yet its veracity is indisputable.
We've long contended that Wall Street's banks and brokerage firms pose one of society's most inherent, yet rarely mentioned, conflicts of interest. Again, a situation where the simple truths are readily identifiable. Right under our noses. Though we fail to notice.
The five largest brokerage firms, Merrill Lynch, Morgan Stanley, Wells Fargo, UBS and Edward Jones had roughly 60,000 advisors between them in 2012. Aside from Edward Jones, which is not publicly traded, these firms have one critical objective that trumps all other priorities throughout the year: increasing profits so as to report better earnings per share. Accordingly, enhanced earnings per share is the primary goal of the CEO and his staff, who oversee the divisional directors, who oversee the regional directors, who oversee the complex managers, who oversee the branch managers, who oversee the advisors.
How does that chain of command set about enhancing earnings per share four times per year, year after year? By increasing revenue and profit margins. From whence might those revenues come? From the hard-earned, trusting nest eggs of Main Street investors.
The fundamental truth by which these firms operate?
A year-round drive to effectively reward the shareholders by enhancing the firm's bottom line. Which begins with acquiring more assets under management. Then, configuring a more effective means of increasing the fees on assets under management. And doing everything possible to extend the life of those relationships, come hell or high water, for as long as possible.
These firms don't sell household goods. Nor sporting equipment. Nor auto parts. They increase profits and earnings by managing Main Street's money. The more these firms make, the higher their share prices ascend. And the wealthier the firms' employees and other shareholders become. How can that not represent an egregious conflict of interest?
That, my friends, is the essence of a fundamental truth.

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