"What I Read This Week"

By Ryan Dolan

Forbes: “How Aging Billionaires Are Making Sure Their Money Doesn’t Go To Uncle Sam”

Phil Knight is “determined that [the estate tax] won’t take a big bite from his fortune.  ‘That’s the art form.  I talk to my financial advisor all the time, and that’s one of the subjects we talk about endlessly.  My philosophy is that if I do this right, the charities I give to will use the money better than the government will.’”

“Wealth in the US has become increasingly concentrated, with the richest 1% (minimum net worth of $10 million) holding 31% of net assets…Forbes has identified 572 US billionaires [born before 1965] - the 0.0007%.  We estimate they have a collective net worth of $3.9 trillion to pass on.”

“Asked why he still works at 87, [Charles Koch of Koch Industries, said] ‘I have retired friends at the club I belong to in Palm Springs who play nine holes every morning, have lunch and play gin all afternoon.  If I did that, I’d put a bullet in my head.’”

Colossus: “A Conversation with Charlie Munger & John Collison”

“Old men have always tended to think that new generations are going to hell…[Nevertheless], I do not like the way politics has morphed in my lifetime in the United States…Only the most extreme parts of both parties have any power.

We have a political problem that is, in some ways, as bad as we’ve ever had.  We’ve got a lot to worry about.  The world has never been a perfectly safe place and it isn’t now.

[But] I’m used to things not working perfectly.  Why should I expect my society is always going to be marching upwards just because it has for a long time?  I believe you just adjust to whatever society turns out to be, and do the best you can.  That’s all I’m going to do.”  

Bethany McLean/Business Insider: “RIP Goldman Sachs”

“People always said: ‘You guys are greedy,’ a former partner told me.  ‘But they never thought we were incompetent.’”

“It’s not the swashbuckling traders of old, and I do think there’ some lost romance there.  There’s a lot of people who look and say, ‘Ah, that period of yesteryear where someone could put a trade on distressed credits in Thailand and make a billion dollars and beat his chest’ - I get it.  But that’s not realistic.  They’re nostalgic for a thing that can’t exist today at any bank, under the current regulatory system.  This place is still about excellence.  It’s just going to have to be in a different format.”

Chart of the Week:

"What I Read This Week"

By Ryan Dolan

Fortune: “Ultrawealthy couples are living like the 1950s never ended…”

“53% of super rich couples (median net worth of $17.6 million) had arrangements in which the woman was not gainfully employed, compared with 27% of rich couples (net worth $2.3 million), 20% of upper-middle-class couples (net worth $796,000)...”

“Just 28% of super rich couples had both the man and woman working full time.  In rich, upper-middle-class, and less affluent households, that figure was 51%, 61% and 50%, respectively.”

Novel Investor: “Wise Words from Sam Zell”

“Early on I adopted a philosophy I call the Eleventh Commandment, ‘Though shalt not take thyself too seriously,’ and it became a governing principle in my life.”

“I am very focused on understanding the downside.  And I have a pretty good track record, but it’s not perfect.  You can’t play at this level without some pretty big highs and lows.”

WSJ: “The Supreme Court and a Wealth Tax”

“As Justice Samuel Alito asked: ‘What about the appreciation of holdings in securities by millions and millions of Americans, holdings in mutual funds over a period of time without selling the shares in those mutual funds?’ Ms. Prelogar replied: ‘I think if Congress enacted a tax bill like that, and it never has, that we would likely defend it as an income tax.’”

Bloomberg/Daily Shot: “Households Still Overweight Equities”

"What I Read This Week"

By Ryan Dolan

Morgan Housel: “Frugal vs. Independent”

“The people I admire most have a way of escaping the bubble of culture.  Sometimes via religion; sometimes via old books; sometimes via time in nature.  Without such an escape, propaganda wins.  You stop thinking for yourself.  Modern delusions grow into an all-consuming mind virus.” David Perell

“Most people are wired to seek status and success, not necessarily happiness.  It’s remarkable to watch someone fight back against that trend.  From the outside they appear frugal.  But in fact they’ve rejected what the world tells them they should want and looked deeper, finding their happiness elsewhere.”

New Yorker: “How Jensen Huang’s Nvidia is Powering the A.I. Revolution”

“Huang’s business position can be compared to that of Samuel Brannan, the celebrated vender of prospecting supplies in San Francisco in the late eighteen-forties.  ‘There’s a war going on out there in A.I., and Nvidia is the only arms dealer,’ one Wall Street analyst said.”

“Huang is a patient monopolist.”

“...for years to come [Huang] opened staff presentations with the words ‘Our company is thirty days from going out of business.’  The phrase remains the unofficial corporate motto.”

‘Typically, in Silicon Valley, you can get away with fudging it,’ industry analyst Hans Mosesmann told me.  ‘You can’t do that with Jensen.  He will kind of lose his temper.’”

“Even when he’s calm, Huang’s intensity can be overwhelming.  ‘Interacting with him is kind of like sticking your finger in the electric socket,’ one employee said.”

Acquired Podcast: Charlie Munger’s last interview

“If I were running the world, I would have a tax on short-term gains with no offset for losses.  I would drive the whole [short-term trading] crowd out of business.”

Question: “If you started with Warren today and you were both 30 years old, do you think you guys would build anything close to what Berkshire is today.” 

Charlie: “The answer to that is no, we wouldn’t.  Everybody that [has] had unusually good results…has three things: they’re very intelligent, they worked very hard, and they were very lucky.  It takes all three to [be] super successful.  How can you arrange to have good luck?  The answer is you start early and keep trying for a long time, and maybe you’ll get one or two.”

Question: “When you look back at you and Warren’s time together, when did you have the most fun?”

Charlie: “We had about the same amount of fun all the way through.  We’re having fun now.”

"What I Read This Week"

By Ryan Dolan

Three articles, one chart.

“‘I just lost the fear’: why more older people are founding start-ups (Financial Times)

Notable lines:

“While older founders have more to lose, there is evidence their risk is more likely to pay off.  According to a 2018 NBER study, a 50 year old entrepreneur was almost twice as likely to have run away success as a 30 year old.  Experience in an industry was one of the best indicators of whether a person would create a high-growth business, it found.

‘People conflate the fact that someone has a successful idea and they are young,’ said a co-author of the report.  ‘Some people are just good at entrepreneurship, even when they are young.  What we found was that they get better with age.’”

“Are Joint Bank Accounts the Secret to a Happy Marriage?” (Wall Street Journal)

Notable lines:

The study “found that financial harmony likely improved participants’ relationship quality, noting that higher scores on the financial-harmony questions predicted which couples would also score highly on relationship-quality questions about 75% of the time.”

“It’s likely that people with joint bank accounts had to be more transparent about how they spent money, and that made them feel more aligned financially and better about the quality of their relationship.”

“The art of keeping it simple, by JP Morgan’s Jan Loeys” (Financial Times)

Notable lines:

“Our industry does seem to love complexity and to abhor simplicity…But there is a lot of benefit…to keep things simple.  

One should not buy assets that are too complex to be easily understood as the risk is then that the asset will not be appropriate for one’s financial objectives.  Second, the fewer the assets one has in one’s portfolio, the easier it is to judge risk on them, the easier it is to gauge one’s exposure, the easier it is to manage one’s portfolio.”

"The Icarus Files (Chapter 4): John Foley of Peloton"

By Ryan Dolan

“Everyone can see I had a rocky year.  This was not a fun personal balance sheet reset.”

John Foley, 2022

Building wealth and sustaining wealth.  Two sides of the same proverbial coin, and yet so different.  For the self-made, the road to a smooth transition from the first to the second can be challenging.  I’ve based this series on the Greek mythological figure Icarus, who famously flew too close to the sun on self-built wings, only to see them melt, causing him to tumble tragically back to earth.  I’ve profiled three individuals, each of whom built multi-billion personal fortunes, only to lose most of it in catastrophic fashion, and tried to take some lessons from their journey.

The first profiled was natural-gas fracking pioneer Aubrey McClendon.   The founder of Chesapeake Energy, McClendon built a vast fortune in just a couple of decades, only to see it collapse in startling fashion.  McClendon’s wealth was overwhelmingly concentrated in assets that benefitted from a rising natural gas price-an infamously volatile commodity.  This concentration risk was magnified by McClendon’s wild use of debt.   As a local Oklahoma newspaper pithily said, “You can’t spell McClendon’ without lend.”  The man was perennially, and wildly, bullish: bullish on nat gas, bullish on his company and bullish on himself.  

McClendon levered up Chespeake’s balance sheet to finance continual expansion.  In addition, he took huge personal loans against his company stock holdings to finance a lavish lifestyle, including the purchase of the Oklahoma City Thunder NBA team.  These loans allowed him to avoid selling low-basis Chesapeake stock and incurring huge capital gains taxes.  

When this potent combination (levered assets tied to a rising commodity price with a focus on tax deferral) worked- boy did it work.  And just when it seemed McClendon could do no wrong…the wheels came off.  Falling natural gas prices, falling land values, margin calls.  

Next up: Brazilian mining magnate Eike Batista.  Batista burst on the international scene in 2005, and personified a new breed of swashbuckling emerging markets entrepreneur.  Batista built a commodity mining and shipping empire that was perfectly positioned to supply the voracious energy needs of emerging China.  From almost total anonymity outside of Brazil, at once he was seemingly everywhere, rocketing up the Forbes list with a net worth of $30 billion fortune in 2011.   When asked his future ambitions, he said simply, “A hundred billion.” 

Fast forward 3 years, and Batista’s empire (and fortune) lay in smoldering ruins.  Commodities, Brazil’s stock market and its currency had all collapsed.  The boom had turned to bust, the clock had struck midnight, the tide had gone out.  By 2017 Batista was serving jail time for bribery, money laundering, insider trading and misleading investors.  

Finally, Bill Hwang of hedge fund Archegos.  Hwang, the son of Korean immigrants, was an unlikely Wall Street billionaire.  Unlike McClendon and Batista, Hwang wasn’t given to wild personal materialism and ego.  Despite huge wealth, Hwang gave enormous amounts to Catholic charities, eschewed publicity and public displays of wealth-typically good signs.  

A protege of hedge fund pioneer Julian Robertson, Hwang generated incredible investment returns for much of the 1990s and early 2000s.  But after a spate of poor investment performance following the financial crisis, Hwang’s ambition seemed to have pushed him into illegal activity.  He was ultimately convicted of insider trading and banned from the Hong Kong stock market.  

Hwang rebounded quickly, however.  He set up Archegos, a less regulated family office, to manage his personal fortune.  His highly volatile investment focus (ultra-concentrated growth stocks and heavy portfolio leverage) was perfectly suited to the investment winds at the time, and Hwang went on a huge winning streak, pushing his net worth to an estimated $10-$15 billion.  

But in early 2021, cracks were forming.  One of Hwang’s largest positions reported poor earnings and fell sharply.  The position was so large, and the degree of portfolio leverage so high, that dominos began to fall.  Worse, it appeared that Hwang had skirted ethical lines once again,  purposely orchestrating short squeezes in his holdings, an illegal practice.  Hwang also obscured the total amount of portfolio from the various banks the firm dealt with.  With startling speed, the combination of a shift in the investment markets, ethical lapses and massive leverage all conspired to create an enormous loss of wealth in a startlingly short period of time.  Hwang’s fortune was crushed, and he was facing regulator scrutiny.  

Which brings me to the latest unfortunate chapter in the series: John Foley, the founder and former CEO of fitness phenomenon Peloton.  

Foley was not a natural-born entrepreneur and tech visionary.  An executive at Barnes & Noble and IAC, Foley was a health-conscious Manhattanite who was an early devotee of in-person, instructor-driven classes like Soul Cycle.  However, with a busy work life and a young family, he often found it difficult to trek across town to attend a class.  This personal pain point was the spark that led to Peloton: bringing an interactive and on-demand Soul Cycle-like experience into the home.

Foley launched Peloton in 2012 at age 40 with little more than the idea.  Overwhelmingly, the big investors he pitched the idea to turned him down.  Undaunted, Foley turned to crowdfunding to generate seed capital, and by 2014 was producing an internet-connected bike.  Initially, the company grew fitfully, but in time started to gain a  cult-like following-for the immersive experience and the quality of its instructors.  Within 5 years, the company was on fire.   Sales were surging and Peoloton was an unquestionable fitness phenomenon.  By 2019, the company went public.  

Then Covid hit.  

Few companies were poised to benefit more from the pandemic-induced societal convulsion- than Peloton.  With gyms closed nationally, demand exploded.  Though the company struggled logistically to keep up with demand, consumers and investors were enthralled with the company and its potential.  By the end of 2020 the stock was up more than 800% and sported a $30 billion market cap.  

There are different ways to respond when the unpredictable financial winds turn to a gale force tailwind.  The first is with humility-”I didn’t see this coming, I certainly didn’t plan for it, and though it may be uncomfortable benefitting from this unfortunate event-there is a chance that I’m not that smart, and was at the right place and the right time”.  The second, on the other hand, is to view this massive flush of success as validation of your innate business genius-to let the events stock an almost messianic belief in your own vision, acumen.  

What seems clear is that Foley, seemingly a very self-effacing and modest guy, lost himself a bit amidst this explosion of success.  He was put off when some suggested Peloton was only benefitting from a temporary Covid-bump, and that slowing growth seemed likely. While he conceded that the pandemic may have accelerated the conversion of new customers, this was the beginning of a revolutionary, sustainable trend in at-home fitness.  How else can you explain Foley’s decision to invest massively in new production capacity?  In interviews at the time, Foley envisioned a trillion dollar company.   

Foley also spent money, both the company’s and his own, as if continued success was inevitable.  There was lavish company spending even when signs emerged that demand was slowing amidst national reopening.  Foley also spent big personally.  He put his current Hampton’s home on the market for $5 million and purchased a new one for $52 million.  He had a yacht to get to and fro from the city.  

Well, you say, Peloton’s stock may have been wildly inflated-but at least he sold some of it to pay for this spending.  Wrong.  Foley didn’t sell much of his stock at all.  He primarily got liquidity by taking very large margin loans against his company stock (purportedly $300 million in loans).  Did he do this to take advantage of the well-worn tax deferral strategy to avoid capital gains?  Was he concerned investors would be spooked if the founder/CEO dumped stocks?  Or was he a true believer?  

Flash forward to the fall of 2022.  Peloton, having scaled up massively, was hit with a sharp deceleration in demand.  Whenever a company invests big for future growth-growth that doesn’t materialize, the pain can be intense.  With retrospect, Peloton did benefit from a temporary Covid-bounce, and now faced the prospect of being another in a long line of health-care fads.  

The company slashed headcount.  The stock fell by more than 90%.  And John Foley resigned from the company he founded and built, his fortune and pride massively dented.  

A couple lessons come to mind:

Don’t confuse good fortune with brilliance.  

No doubt Foley was a very capable guy.  Indeed, without his unflappable belief and undaunted self confidence, Peloton would never have gotten off the ground.  But once you get traction and success, you need to temper that confidence with humility and objectivity.  Foley should have had the composure to recognize the role of luck in driving the company’s success in 2020, but instead he took it as confirmation and validation of his vision.  The smartest and most talented wealthy people I know are almost always the most humble.  

When massive success comes, change nothing.  

Whenever a client receives a large inheritance or sells a business or benefits from any huge financial windfall, my recommendation is almost always the same: don’t change anything.  Wild success and fortune is very seductive.  It can, and often does, change people-often in unforeseen ways.  

My recommendation: park the funds and change nothing-for 6 months to a year.  Nothing.   No big house, no cars, no large charity gifts, no dramatic new businesses or investments,  no changes to your daily life.  Give yourself time to adjust and calibrate. 

You’ll thank me.

Concentration got you here; diversification will keep you here.  

One of the best ways to build wealth is to concentrate: put all your eggs in one basket (hopefully the right one), and WATCH THAT BASKET.  It’s very difficult to build wealth quickly without concentration.  But concentration presents risks-risks that diversification materially reduce.  

Say the company you founded and built has exploded in value and made you wealthy.   No matter how bullish the company’s future prospects, the sound approach is to gradually reduce that concentration and diversify.  It’s a hedge against the tide turning, unforeseen circumstances-and it’s the rational thing to do.  

You need to slowly transition from a sole focus on wealth creation to one of wealth sustainability.  Know that this will never be harder to do psychologically than when the wealth-building asset is on a tear.  “Why would I sell a piece of this rocket ship-one I know and have control over, to buy something not as good?”  I get it.

John Foley is on to his next challenge: a high-end, custom-built rug company.  His tagline on LinkedIn says “Hungry and Humble.”  I appreciate his resilience, wish him well, and will be rooting for him.  

"The Power of Realizing Your Money Isn't About You"

By Ryan Dolan

”The only way to keep it is to give it away.” 

George Vaillant, Grant Study director

Harvard University’s Grant Study had an ambitious mission from its commencement in 1939: to closely track the lives of 268 Harvard students for decades.  A “longitudinal” study (examining a small number of subjects for very long periods of time), the quest was to identify patterns in behaviors, backgrounds, psychology, and health that conspired to create successful and unsuccessful lives.  
And what a group of students to study.  Part of the legendary “Greatest Generation,” the students were born and came of age in the the Depression, fought in World War II, and then came home and played a role in building the US into the world’s dominant global superpower.  Who better to model a successful life than this generation of driven Harvard students? 

And yet, the individual life stories varied widely.  There were many success stories, and a few luminaries-JFK and Ben Bradlee of the Washington Post to name two.  But there were also many sad stories of broken men and broken lives.  As an Atlantic profile (highly recommended by the way) pointed out, “by age 50, almost a third of the men had at one time or another met the criteria for mental illness.”

Over decades, certain things stood out.  For example, those men who, at age 50, had a stable marriage, avoided smoking, used alcohol sparingly, and exercised and maintained a normal healthy weight, were far more likely to be “happy-well” at 80.  Alcohol abuse was singled out as particularly dangerous as it affects physical and psychological health-and was a major factor in many of the men’s lives.  

While those observations may seem obvious, there were less intuitive ones as well.  The study singled out the importance of what it called a “mature adaptive style” to successful aging.  This adaptive style stemmed from a range of traits that were critical to building resilience in the face of the frustration, ambiguity, and suffering that afflicts everyone in life.  One of these traits singled out as particularly important?  Altruism.

It is a universal desire to have a happy, successful, meaningful life.  We all want to build financial freedom and to have the autonomy and independence to live the lives we want.  And yet very few of us sustainably achieve the combination of financial security, freedom and happiness.  Why?

Work with people and their money long enough and, much like the Grant Study, patterns emerge.  Certain behaviors and traits, whether innate or consciously built over time, tend to lead to successful financial outcomes, while others work to inhibit them.  Over time, I’ve learned to place enormous importance on the fact that these beneficial traits work - and less on trying to understand why they work.  

Almost without exception, the people I know who are the happiest and most fulfilled financially tend to be altruistic and generous people.  They are the type of people you just want to be around.  While they can be  ambitious and strong-willed, these traits are tempered by a deep “other” orientation.  Though often quite personally accomplished, they tend toward humility and gratitude.  They have a quiet peace and serenity with themselves and their money.  They downplay their role in their success, and play up the role of good fortune.  Dig enough into their financial and life history, and almost inevitably you will find a deep vein of generosity running through their lives.  While initially I thought that was a byproduct of their success, increasingly I think it was a critical catalyst.

Conversely, I’ve seen many financially successful people who don’t exude these qualities.  Despite having considerable income and wealth, they don’t seem very happy, content or secure.  In their minds, money and success seems to be primarily viewed as a means to fill some inner emptiness.  Money is their means and end.  It’s all pecking order and relative status.  These people are often emotionally brittle and erratic: brimming with ego and self-confidence one day, in a pit of despair and fear the next.  They tend to think their success is all about them-their accomplishments, their talent, their ambition.  They seem anything but serene and balanced.  Almost without exception, these people tend to have little or no altruism.  Despite their success, they give little away.  They never feel like they have enough, and to give away money-no matter how much they have-seems completely alien to them.  

No matter where you fall on the generosity spectrum, we could all benefit from consciously building and fortifying an altruistic mindset.  When you start to embrace the fact that your talent and treasure are not all about you, it can radically reshape your relationship with money.  You’ll also be happier.  An added bonus is you will likely see your financial condition improved over time.  I cannot think of a single example where someone I know has materially ratcheted up their giving (within financial reason), where it didn’t translate into increased financial security and abundance down the road.  Again, I don’t know why it works-but my experience has shown it does.  

Altruism builds a healthy detachment from money-beneficially depersonalizing it.  All sorts of errant financial behaviors stem from a lack of detachment.  When you work to focus more on gratitude for what you have, and less on what you don’t have, you will often see wasteful spending and materialism decrease as giving increases.  I’ve seen generosity stoke a second wind in people’s careers.  Often, when people realize that all of their future financial needs have been met, they can lose motivation in their careers.  When they move beyond themselves and realize how their generosity can impact their children, grandchildren, or causes they believe in, their career ambition can reignite.  

Think this is all goody-goody, impractical “pie-in-the-sky” thinking?  I can’t think of anyone I know or have worked with that has embraced this mindset and not had a tangible improvement in their financial condition over time.  No one.  Ultimately, the more you can embrace the fact that your money is not about you, the happier you will be.  

How to start?  Target a percentage of income to give away this year (start small).  It should be enough that you feel it. We all want financial security, freedom and independence.  We all want to be happy and fulfilled.  I see no better start then building an altruistic mindset. 

Start today.

Schedule a 20 minute intro call to learn more.

Not Hearing Much About Crypto Anymore

By Ryan Dolan

I penned this piece to clients in late-2021 amidst the parabolic hype of crypto and frequent client questions about its appropriateness in their portfolios.  I was far from enthusiastic, and convinced most not to jump in.  

Now, with crypto down 70% plus, it’s crickets-nobody seems all that interested anymore.  Yet another chapter in the long book about how investor behavior (or misbehavior) can dictate long-term outcomes.  And the centrality of having a trusted advisor and behavioral coach riding shotgun with you.  

Excerpt from Dolan Partners Client Newsletter (12/15/2021):

Given the increasing frequency of client questions, I thought I would give my perspective on the highly-charged topic of crypto.  

Investing demands you balance two traits, which can seem at odds with each other.  First, you need to be open-minded.  The world, business and markets change and evolve-you cannot get locked in static, inflexible thinking.  So you absolutely need to be adaptable and open to change.  

On the other hand, you do need some core investment beliefs that are based on unchanging principles (anchoring investments to goals, patience, having a long-term orientation, balancing greed and fear, being diversified, keeping an eye on valuations, etc).  It takes some time and experience to build these-but it’s critical.  It’s why I reinforce them frequently.  If not, you risk being unanchored-constantly flitting from one investment style to the next-always chasing what’s hot.  Occasionally, markets get deeply distorted and unhinged from reality.  While it continues, every fad seems to be the “next big thing.” We don’t want to fall prey to that.

With crypto, I am open-minded to the fundamental need.  Throughout history, nations have abused their currency monopoly.  From the leaders of ancient Rome clipping gold coins, and melting them down to create new coins to today’s digital money printing by central banks, governments have always resorted to currency debasement and price inflation (largely to reduce government debt).  Since the financial crisis, governments have been suppressing interest rates, printing massive amounts of currency, and building up huge debt and deficits.  The idea of having an independent sound currency, not controlled by any government, is clearly very alluring.  

On the other hand, while the need is apparent, it’s unclear to me that crypto will be the solution.  First, even in the event that crypto does reach widespread adoption, there is the very real risk that an investor picks the wrong currency.  This is akin to investors in the early automotive industry.  Let’s say you had perfect foresight in the early 1900s that cars would reach massive, global adoption and scale.  Despite that, it would have been very difficult to profit from that insight.  There were hundreds of automakers, and the overwhelming majority went out of business.  Even if you paired perfect foresight with the right stock selection-picking the industry’s eventual winners-you would have generated pedestrian long-term returns.  While Bitcoin seems to have achieved dominance, the proliferation and success of other currencies is a concern.  

There is also the risk that countries will simply outlaw crypto.  Governments are slow-moving, particularly when it comes to new innovations and technology.  But regulation eventually comes.  Ask yourself, why would governments willingly give up their currency monopoly, particularly now?  The governments of China and the US can’t agree on much, but hostility to crypto is one area of alignment.  Several times in US history the federal government made it illegal for US citizens to own gold-typically at a time when an investor would really want to hold it.  Why would crypto be different?  I’ve heard the counterpoint to this argument.  Yes, proponents say crypto is untraceable.  Yes, for a ban to be really potent it would need to be globally coordinated.  I get it, but nevertheless it’s an existential risk.

Finally, there’s a risk-perhaps small- that crypto turns out to be a colossal bust or fraud that goes down in the annals of financial history, much like the Dutch tulip bulb mania in the 1600s.  For some reason, still unclear, the typically sober Dutch lost their collective minds and bid up the prices on coveted tulip bulbs to unprecedented heights-only to have the market completely collapse. In a time of rampant investor speculation, if there was a time for a new currency to gain widespread adoption-this would be it.  With regards to fraud, at a time of unprecedented cyber crime, much of it by state actors, can you be 100% certain that this couldn’t be a fraud or ponzi scheme?

At the end of the day, I won’t be buying crypto for clients anytime soon, nor will I be recommending that clients do so.  Nevertheless, should clients feel an intense desire to get in on the action, let’s have a conversation.  I’ve heard a reasonable argument that for people who are true believers, having an appropriately sized, diversified allocation to crypto can make sense.  There is a bit of a lottery ticket approach involved.  If crypto does in fact reach long-term adoption and starts to disintermediate government currencies, the winning currency would likely go up many multiples from here.  But clients should go in with eyes wide open-it could also very easily be a zero.  Either way, the position should be small.

Caveat emptor.  

Comprehensive financial planning for professionals primarily in the executive search, technology and real estate industries.

We offer a 20 minute introductory call where we can learn about you and your needs.

If there is a potential fit, we will schedule a more detailed, discovery call.

There is no obligation, and all conversations are completely confidential.

The Problem With Robos and DIY Investing

By Ryan Dolan

The last several years has seen a surge in DIY investing, with people either managing their own investments or outsourcing to “low-cost” options such as robo-advisors. DIY investing is always popular in extended bull markets which make everything look so easy. But as I originally wrote in 2018, I smelled trouble on the horizon.

2022 has experienced sharply falling stock and bond markets amidst rising inflation. The data on robo-advisor and self-managed investing platforms this year is not pretty. According to Kitces.com:

“Research from Parameter Insights [shows] usage of digital advice tools fell for the first time in 2022…Notably, the biggest losses were seen at higher levels of wealth, with usage among those with a net worth of at least $500,000 declining from 38.3% to 14.5% (compared to a decline from 23.6% to 20.6% among those with less than $50,000 of assets). Further, the use of online brokerages by US self-directed investors fell from 35.9% to 22.9% in the past year.”

October 16, 2018

While a do-it-yourself approach can work, it is a rare individual who can both determine a sound investment strategy and, more importantly, stick to that strategy over time through all the emotion and temptation of markets.  In my admittedly biased view, the majority of investors would achieve far better long-term investment outcomes if they worked with a trusted and competent investment advisor who could both structure proper portfolios while also preventing self-inflicted investment mistakes that bedevil most individual investors.

The core issue I see with do-it-yourself investing is that portfolio asset allocation, the central question of investing, is given superficial attention at best, and is unlikely to be properly answered.  Individualized asset allocation combines elements of both science and art, and demands considerable time and consideration at the beginning of the investment process. The science comprises what asset classes to invest in, what to avoid, diversification, asset-class valuations, the investor's time horizons and objectives, among many other factors.  The “art” involves an objective view of the investor’s psychology and past investment behavior and mistakes to determine risk tolerance, while taking a comprehensive account of the investor’s financial assets and cash flow, not just investment assets.

In reviewing the portfolios of prospective clients who are self-managing their investments, the asset allocations often look materially inappropriate.  Typically, these portfolios have considerable “rear view mirror” characteristics. They tend to be aggressively exposed to the asset classes that have performed best in the past few years, and underexposed to those that did worst.  The opposite of sound investing. In the financial crisis, many investors went into the crisis with too much equity exposure, which increased the likelihood that they would make an emotional fear-based reaction to sell stocks, just at the wrong time.  It was a classic example of the dangers of getting asset allocation wrong: you are likely to compound those mistakes by making belated adjustments, typically at the worst time, the dreaded whip-saw.

Robo advisors attempt to address these self-inflicted investor mistakes, and on paper sound great.  Robos help you determine asset allocation, rebalance your portfolios regularly, and do so for a fairly low price.  The issue is that the methods used for determining asset allocation are incredibly superficial and simplistic. Asking a few basic questions about an investor’s time horizon, income, retirement age, and perceived risk tolerance is unlikely to generate an accurate result.  This is compounded by the fact that robos take no account of the highly important “art” component of asset allocation: the client’s relationship with money, their realistic risk orientation based on behavior in the past, etc. The biggest issue with robos is that they assume their customers will always behave rationally, particularly in market extremes.  Anybody who has worked in financial advisory knows this is far from reality.

In my opinion, the surge in popularity in do-it-yourself investing is partly due to the fact that equity markets have been in a 10 year bull market.  Investor mentality becomes: who needs to pay an advisor or an active investment manager when you can just buy the S&P 500 or the NASDAQ at 0.05% and just be fully invested?  This is reminiscent of the surge of individual investors into passive equity mutual funds in the late 1990s. David Swensen in his book “Unconventional Success” noted that in 1993 investors’ allocation to equities was just 30%.  By 1998, as the market surged, it pushed to 50%. At the peak of the market in 2000, investors had a peak equity allocation of 60%. As Swensen noted, “At the market peak in March 2000, investors exposed the maximum amount of assets to the maximum amount of risk.”  When stock markets bottomed in 2003, with the S&P 500 down 50% and the NASDAQ down 80%, and poised to begin the next bull market, investor allocations had been slashed to 40%. The wrong allocation at a market peak increases the risk that an investor will slash exposure at the worst possible time.  

In truth, an advisor earns his fee in two ways.  First, in having both the quantitative and qualitative ability to collaboratively determine the optimal asset allocation for the client-defined as one the client can stick with through the rising and falling tides of financial markets.  When clients are invested in the right way, they are less likely to want to make the rash emotional decisions which can be so damaging to their long-term investment outcomes. Nevertheless, even with a sound allocation, there will be those rare times when investment markets’ alluring siren song can reach even these investors.  It is at these times when the advisor really earns his fee. A competent advisor is able to keep his clients focused on the long-term, resist fear and greed, and prevent large self-inflicted investment mistakes.

You get what you pay for. Are you ready to finally start taking your money and investing seriously? Schedule a 20-minute introductory call to see if Dolan Partners could be a fit for you and your needs.

Dolan Partners works with professionals and business owners (primarily in the real estate, technology and executive search industries) who:

-Are at least 35 years old.

-Own a home.

-Have at least $750,000 in investment assets.

-Are natural savers.

-Do not have the time, energy or desire to manage their increasingly complex financial life.

-Are looking for holistic financial planning which comprises cash flow and balance sheet management, goal definition, insurance, estate, tax and investment planning and more.

Learn more here.