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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.

Saturday, May 21, 2016

The robot selling investments; brief thoughts on a trend

Summary bullet points:

  • No one likes being sold to. Poor selling - especially of financial products - feels condescending and judgmental. 
  • And in an environment where a generic Financial Adviser at a generic bank charges 1% to do essentially the same thing as a robot, it makes sense to choose the lower priced, self directed option. 
  • Robo-investing painlessly resolves the conflict a lot of people feel about investing, that they should know more about the market but they've never found that foothold on which to engage it. The various online robo-options provide non-judgmental, non-condescending ways of allowing people to engage the markets. 
    • But is it the best option? An undifferentiated approach to investing is now the most popular but it is not necessarily right for everyone. It reflects a misreading of academic studies as well as the lazy (and greedy) aspects of the mutual fund industry, which has become good at aggregating AUM yet can't possibly allocate it efficiently in an active style. This "race to the bottom" of AUM aggregation - not robo-investing - is hurting the industry. 
    • Selling differentiated aspects of active investing without compromising integrity or returns on capital seems the best and most attractive option to me as I try to grow a nascent asset management business. 

    I recently attended an event where a lobbyist spoke for three minutes of prolonged insincere, smarmy-ness, and towards the tail end - concluding with an awkward introduction to the event's organizer - I had this revelation: No one likes being sold to.

    It got me reflecting on the generational shift in attitudes around selling and how much the avoidance of salespeople and "being sold to" might factor into shopping online.

    Personally, I still enjoy the occasional face to face shopping experiences and the guided journey towards a better product. But online shopping is such a better alternative.

    Ironically, the entire online experience is made possible by constant shuk-like efforts to sell me stuff I just bought. Despite the ubiquity of those efforts (not on this blog, mind you), the intrusiveness is algorithmic and therefore feels impersonal and "just sort of there", like billboards in the city.

    I imagine the current batch of 20-somethings - the first generation to grow up exclusively with online shopping - is super experienced with the self-driven, yelp driven, review driven process whose independence makes the dopamine rush at its completion that much more of an accomplishment.

    Concurrently, I think every generation has their enlightenment, and if my experience in my 20's is any guide, it involves some recognition that whatever we've learned up until that point is propaganda and hypocrisy, and there's ample room for improvement to make things a bit better, more honest and real.

    With that frame of reference, I'm conflicted about the trend in "robo-investing", the simple, self guided, asset allocation method of online investing targeting today's 20-somethings.

    On one hand, of course they're investing online. The only people surprised by this are traditional financial advisers.

    On the other hand, I have a hard time understanding why the same person who might spend 20-minutes trying to find the right restaurant, glasses or sweater, might spend less time buying the least differentiated product with likely larger sums of money and more limited information.

    I struggle with this "dichotomy" (whatever that means).

    I have this nascent business - an investment management firm - focused on well-researched, patient ownership of terrific small businesses trading for discounts to my sense of what they're worth, and with enough integrity to avoid companies that despoil the environment and drop bombs on people's heads, (ie the roughly 30% of the S&P tied to energy, commodities, dirty power, and aerospace / defense).

    And I'm trying to come up with a good questionnaire to help clients better establish an awareness of how they think about money and investing so they can better understand themselves (what's more important than that?) and also so I can better understand if it makes sense for us to work together.

    So here I am exploring various ways of framing surveys to engage people in their attitudes about investing, when a friend suggested I was overthinking this and perhaps I should check out how a robo-investor establishes suitability.

    On Wealthfront I was asked TWO questions, quoted directly below ...

    1. When deciding how to invest your money, which do you care about more?
    Maximing gains
    Minimizing losses
    Both equally

    2. The global stock market is often volatile. If your entire investment portfolio lost 10% of its value in a month during a market decline, what would you do?
    Sell all
    Sell some
    Keep all
    Buy more

    ... and based on those two questions I was given a portfolio of Vanguard ETF's.

    In an environment where a generic Financial Adviser at a generic bank charges 1% to do essentially the same thing, I can see how it makes sense to use the robo-adviser. Undifferentiated AUM aggregation is a race to the bottom.

    And in an environment where a shady salesperson might ask only one question for appropriateness: "Do you want to invest? Perfect, I have the right product for you" the robot is certainly a better option (and the client won't feel dirty).

    And somewhere in the middle is the traditional FA who might unconsciously talk down to clients: "I know it's hard to understand, let me do this for you."

    In all of these worlds, I can also see how the robo-option painlessly resolves the conflict a lot of people feel about investing, that they should know more about the market - they hear about it everywhere - but they've never found that foothold on which to engage it. These robots - like online ads - provide a non-judgmental, non-condescending way of selling.

    But I also think: "Wow, Wall Street has gotten really good at separating people from their money."

    Because on one hand, if you want an undifferentiated approach, of course you should just take the cheapest alternative. But on the other hand, why should anyone accept an undifferentiated approach?

    We've taken these academic studies about how a long held passive index fund will outperform the "average active investor after fees" and turned it into an undisciplined mantra, as if its a solution to everyone's needs. Average the shady salesperson racing for AUM against an honest investor with sound judgment, and after fees you'll probably return below the market. 

    But find someone knowledgeable, trustworthy and good at this, and you might, for not much more money, become a shareholder in terrific business that you're proud to own, and some might turn out to be great returns on capital. 

    I'm framing this from my own bias as an active investor, where index ETFs seem like the investment analogy of a glory hole; it gets the job done at the lowest cost possible, just don't ask what's on the other side. (For the super-rich, secretive hedge funds fill the same void and at much higher costs, because the rich person's burden is the need to pay more).

    If you do ask what's on the other side, you'll find that it's a mass of businesses, and businesses within businesses, some too big to fail, others too big to succeed, which overall should grow at or near GDP, and whose value depends largely on interest rates and the comparative value of alternatives.

    This is "the market" - mentioned every 15 minutes on the radio, etc. in the form of "The Dow" or "The S&P" - and the huge propaganda machine that says we should invest in it absorbs people into doing things they wouldn't normally do, like wagering their retirement and savings on it, day in and day out.

    I think due to misinterpreted studies, people think the markets are less risky than individual businesses so they throw their retirement savings and 401k's and money at them. I can't wrap my head around that. Would you rather own a handful of things you know, want and like, or bags full of random things, including those that aren't necessarily good for you, that pollute, that despoil, that kill?

    I'd prefer to invest in actual businesses I (and my clients) won't feel dirty owning and that can provide meaningful returns on capital over time, no matter what "the market" does.

    There are lots of people out there investing this way. Like some of them, I aim to be an open book, a guided journey through investments and analysis, providing clients with exposure to individual businesses that generally aren't in the indexes, that are well managed, generate cash, seem inexpensive and over time could grow materially faster than GDP so that perhaps at some point - if things work out and the value is realized - ownership in these businesses can compound capital faster than the market. 

    And I do this without exposure to companies that drop bombs on people's heads or despoil the environment b/c my clients capital should have as much integrity as they do.

    It makes so much more sense to me than the undifferentiated approach. Maybe I just need to find the right robot to sell it?

    -- END --


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