About Me

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This is written with serious investors in mind, though sometimes they're just drafts in progress. I'm a former reporter, private investigator and institutional equity analyst who digs deep to find niche undervalued and undiscovered securities. I manage money for individuals, institutions and family offices via my business Long Cast Advisers. This blog is part decision-diary, part investment observations and part general musings about Philadelphia sports. It should not be viewed as a solicitation for business or a recommendation to buy or sell securities.

Friday, January 16, 2015

A review of "Betterment"; the online self service RIA

My sister got an email from her friend at YNAB "You Need A Budget" about moving her money to a website financial adviser called "Betterment." I'd never heard of YNAB or Betterment. But a few years ago my sister was knee deep in credit card debt and she pulled herself out. Yay! 

I don't know if YNAB was helpful but now she's debt free, just redid her roof, and she asked me about an offer for Betterment. so I took a look at it. 

i wanted to like it. I wanted her to have alternatives to her FA at UBS who ... does what? ad diversifidium ad nauseum.  

So, I looked at Betterment to see if it could be a viable alternative, then wrote her the response below. I'd summarize my experience as follows; when I had questions I called the 800 number on the signup page and no one answered. so i clicked "live chat" and it opened an email box. 

these are fixable things if they want to fix them but I couldn't get around my objection when I learned that one of the lead investors is a very wealthy serial "RIA entrepreneur" with a mixed record for his clients. Whose interests does he look out for? 

Betterment is part of a trend towards "robo advisers" and as a form of inexpensive market exposure maybe that industry could work, but I'd advise her to shop around for a company with a better record of putting the customer first. 


there is a lot of marketing. it's catchy! it was VERY quick to get to the low costs.

but it was hard to get to a page that told me anything important other than; "we are cheap, easy to use and statistics show better returns." but what do they do and who are they? 

they invest in ETFs across various market sectors ... 

"Your money is in an optimized diversified portfolio of low-cost stock and bond ETFs that balance risk and reward. The portfolio also has a slight small-cap and value tilt, which has tended to beat the market in the long term."

... ETF's are computer created portfolios designed to match a market or market sub-set (like large cap, mid-cap or small-cap stocks). Most major fin svcs companies brand and sell ETF's (Blackrock, Merrill, WisdomTree, etc). Maybe betterment has their own? I don't know.
through ETF's an investor gets "broad exposure to the market" but at lower costs than mutual funds (ie managed by people). the nobel prize winning piece is tied to the "the capital markets theory" that defines an "optimum portfolio". it's been around for more than 50 years ... 

... there's another fund that does nobel prize investing under the "french fama model" called DFA. i think they're the best quant fund available to retail investrs. but i digress. 

there's a bunch of things about ETF's. first and foremost, they are a product sold by financial svcs companies to make money. they offer "broad market exposure" by buying and selling shares all day to match the market at that moment either by market cap or valuation. it's "algorithmic" trading. by computer. ETF's account for an enormous amount of daily trading volume maybe +80% of total? 

they are not as diversified as most people think b/c of various overlaps Murray Stahl explains it best ... 


... they are trading machines. and b/c they're machines, the costs are cheap: Betterment advertises 25 basis points for AUM below $100k and 15 bp above. note that deeper in, the website indicated 0.19% were added for portfolio expenses. so 34 bps and 44 bps. 

but that's still cheap; by comparison most advisers charge 1% + fees. But here you have an automated front-end putting money into an automated back-end (ETF) with no human interaction. 

The "traditional" financial services industry - those who charge 1% or more - calls this class of company "robo advising". I thought that was slightly disparaging ... until I called the number on the Betterment signup page and sat on hold for 2 minutes. then I tried the live chat ... and it isn't actually live chat it's just an email page. dear.

big downer. but that's how they get better returns. SIMPLY B/C FEES EAT INTO RETURNS. remember Ben Franklin? "A dollar saved is a dollar earned". Still at the expense of customer service? maybe that will improve. part of the low cost is limiting human touch. why is human touch so expensive given we are surrounded by humans all the time?! and we're a social species?  

anyways, who is Betterment, this inexpensive, market beating robot with an auto front / auto back? 

I found a recent (1/8/15) article in an industry rag (http://goo.gl/NhKkwK ) about an investor in the company names Steve Lockshin. he's a serial RIA entrepreneur. he created a "pooled RIA" biz called AdviZent that failed. then he started another one called Convergent, but he just sold it after his partner (in the firm) killed himself (under questionable circumstances). As the article offers in its tell all ... 

"Lockshin also reflected on the death of his former partner Dave Zier, who died in an apparent suicide in October amid scrutiny of an investment fund that he had been running outside of Convergent."

... and now he's involved in Betterment and a high net worth RIA called "AdvicePeriodLLC" with $300M AUM. 

there's a lesson for aspiring RIA's and future customers. For aspiring RIA's, your job at the low end is under pressure from computers unless you can articulate a value add.  

as for the potential customer, I'd say ... i don't fly discount airlines b/c the pilots are inexperienced and low-paid. And when something goes wrong I want someone with experience ... The same goes here. 

But if this is your thing, I'd suggest you find another robo-advising business with a firm you can trust, not someone who is a serial money maker for themselves. 

my broader concern I share with Murrah Stahl about automated ETF's, a new product not tested over cycles that is more duplicitous than it seems.

Generally speaking, for anyone who wants a financial adviser, find the right person who isn't dumb and pay a bit more for safer and more productive returns.

Book rec: Social Media Strategies for Investing

Just read Social Media Strategies for Investing by my friend and former colleague (at two firms) Brian Egger. If you're under 30 you probably know how to use social media for *everything* but for the over 40 and pre-internet crowd this was a very quick read and easy guide to using various non-traditional sources of information - cashtags on twitter, various blogs, etc. - for investment tracking and research. It's not a huge leap to figuring out how to use it for due diligence as well.

Individual investors may be surprised to hear that on the institutional / investment banking side of the world, social networks are verboten b/c of compliance reasons, so exposure to these avenues is limited. This was a helpful guide to peeling and revealing several layers of the onion that is the social network.

Amazon link to Social Media Strategies for Investing

Monday, January 12, 2015

Shorting Canadian Banks

The financial writer and strategist Jack Ablin once provided a report to the analysts at the Canadian bank where I worked to talk about what really drives Canadian bank stocks, an important metric given the valence of stock prices to compensation.

He'd tested a variety of indicators and found that the USD / CAD exchange rate was the strongest indicator of earnings and stock price performance.

I include below a graph showing the stock prices for the three largest Canadian Banks - BMO, TD and RBC - against the USD/CAD exchange. The graph begins in mid-1996, the first date where I could find historical prices on all three stocks. Exchange rate data comes via the FRB. Stock prices are from Yahoo! and are adjusted for divs and splits.

All three companies have increased their exposures to US customers over the last 10 years, which would decrease some of the volatility seen over previous exchange rate cycles. Also, all the banks report declining direct exposure to commodities and minerals.

But Mining, Quarrying, and Oil and Gas Extraction is about 8% of Canadian GDP. Construction is another 7%, and energy related work drives an export economy's construction load.

Consider the indirect lending related to these two businesses in the forms of mortgages, car loans, credit cards to employees and executives of the companies and it doesn't take a great deal of imagination to anticipate a profitable trade shorting these stocks.