Day Trading: Diving Into Shark-Infested Waters with a Bloody Nose

By: Ryan P. Dolan

“We’re going to need a bigger boat.”

Chief Brody, “Jaws”

I worked as a stock trader at a technology-focused investment bank in the late 1990s.  Though I didn’t fully appreciate it at the time, I was sitting at ground zero of a full-scale investment mania.  It was an incredible, wild and manic time in financial history, with large fortunes being minted at an almost unprecedented pace.  And like moths drawn to the flame, a large wave of individual stock day traders rushed into the chaos, desperate to grab a piece.  While there have always been day traders in the market, a few factors conspired to lure an unprecedented number of these small, inexperienced, short-term “investors” into the market in the late 1990s.

First,  the stock market had been in a 15 year bull market, with tech stocks entering a full scale euphoric bubble.  Late stage bull markets and bubbles, those times when investing seems easiest and profits the most certain, are the perfect enticement to the uninitiated investor. What was unique to the late 1990s, however, and what ultimately sparked such a mass invasion of day traders, was the proliferation of cheap, online discount brokers and widespread internet access.  People could trade stocks at home in their pajamas.  This combination of a high risk environment and widespread access to the market was the equivalent of handing a 15 year old a bottle of whiskey and the car keys.  

And initially, many of these investing neophytes were making large and consistent trading profits, dancing in and out of stocks multiple times a day.  Anecdotal success stories were everywhere.  A college buddy, with no investment experience,  who had supposedly made close to a million dollars trading stocks in a year while in business school.  Or a friend of a friend who quit his job as a realtor to day trade stocks full time.  Who had time to show a house when there was big money to be made in the market?  The sense of easy riches, of a new economy with new rules, drew more and more traders into the market, further exacerbating the bubble.  Anyone not participating simply didn’t get it and would miss the gold rush.  By early 2000, it seemed everyone, even the early critics, had capitulated and grabbed a seat in the casino.

Fast forward a year, and the day trader, the market and technology stocks lay in smoldering ruins.  The bubble had turned to bust; the clock had struck midnight.  The day trader went over the falls and the pain was relentless and never-ending.  By the end of the long bear market in 2003, you no longer heard about day trading.  All those who had been crowing about their success a few years earlier were conspicuously silent and clearly licking their financial wounds.  The very term “day trader” became synonymous with greed, foolishness and ignominy.  

It’s taken almost twenty years later, but the day trader is back, amidst echoes of that prior golden era.  Once again, we’ve had a long bull market with technology stocks the stars.  Now, rock bottom interest rates have pushed many out on the risk curve looking for yield and growth.  Conveniently, those low rates allow brokerage accounts to be leveraged cheaply, magnifying gains (and losses).  Discount brokerage firms have slashed commissions (to zero in some cases), and new robo advisors like Robinhood have increasingly “gamified” investing for millennials.  

While the number of day traders has been picking up quietly for years, the onset of the Coronavirus has turned this trickle into a tsunami.  People are stuck at home, maybe out of work, bored and unable to gamble on sports or in a casino. The stock market has become the speculative vehicle of choice.  The number of new brokerage and robo accounts opened in the last 3 months has been unprecedented.  

I can say, with categorical conviction, that this will end badly.  I could list dozens of reasons why day trading, even with a small portion of your portfolio, will negatively impact your long-term financial health.  I’ll focus here on just a few reasons why you should avoid it:

-Jumping into a shark tank with a bloody nose:  Day traders, in the search for consistent, short-term profits, are unwittingly and naively, entering a very dangerous competitive arena.  These are treacherous waters, stocked with apex predators.   The amount of human, financial and technological capital that a day trader is competing with today, whether he knows it or not, is mind-boggling.  As the saying goes, if you don’t know who the mark is at a poker table-it’s you.  You need to have a realistic view of your competitive advantages and disadvantages, and focus on fishing in the right pond.  Short-term trading is not the pond.  Trust me.

-Getting a good result with a bad process/the typical life-cycle of a day trader:  The day trader starts out hesitatingly and cautiously, by betting small.  Then he starts making money.  This positive feedback builds confidence and conviction.  Over time, the bet sizes increase. The trader thinks he is getting a good result, so by default he must have a sound process.  Unfortunately, he most likely has simply gotten lucky.  Just when the day trader has the most confidence in what is inherently a bad process, he is most exposed financially to a turn in his luck.  When his process gets exposed, the trader often has a desperate desire to “get back to even” before he gets out, which tends to magnify the losses.

-Day trading is a bad use of your human capital:  Day trading is a distraction-it’s all short-term dopamine hits and adrenaline that ultimately doesn’t serve you financially.  Resist this siren song.  You have two forms of capital: human and financial.  Your human capital is your future income stream.  We work primarily with high-earning professionals in mid-career.  They have a lot of human capital left, and considerable control over it.  They are FAR better served focused on developing and maximizing their human capital, then dissipating their focus on trading. Day trading ultimately serves to dilute your human and financial capital.  

-The financial double-whammy: When the day trader has suffered a devastating reversal there is the immediate financial pain of the money lost trading.  That’s obvious.  More insidious is the long-term financial damage from this ill-advised foray.  The typical busted day trader spends years licking his wounds, refusing to even look at the stock market again.  The lesson often learned is “stocks are bad” instead of reinvesting with a sound investment methodology.  This considerable opportunity cost often dwarfs the actual amount lost day trading.  

A lot of success in life boils down to avoiding mistakes. All too often we learn by making mistakes ourselves.  Hopefully then we can, internalize the lesson, and adjust our behavior in the future.  A far better approach is to learn vicariously from others' mistakes.   You would be far better off completely avoiding day trading altogether.  You don’t need to make this mistake yourself.  I get it-the lure of quick and “easy” money is tempting.  It’s a mirage.  All successful financial planning and investment is about making slow, steady, relentless progress and letting that compound over decades.  

Stay dry-and safe-on the beach.

About Dolan Partners:

Dolan Partners is a holistic financial life planning and investment management firm, working hand in hand with professionals and business owners.  We dive deeply into clients' financial lives, working to align their money with their unique vision, values and goals.

We offer complimentary introductory calls with prospective clients, which are always completely confidential and judgment-free.  

Learn more at www.dolanpartners.com

Ryan P. Dolan

Managing Partner

Dolan Partners LLC

100 School St.

Danville, CA  94526

The Icarus Files (Chapter 2): Eike Batista

By: Ryan P. Dolan

“We have been students of other’s folly, and it has served us well.  I’ve often felt there might be more to be gained by studying business failures than business successes.  We try to study where people go astray, and why things don’t work.” 

Warren Buffett

“Pride goes before destruction…”

Proverbs 16:18

We live in a success-obsessed culture.  Charlie Munger has said that most of the questions he gets boil down to some version of  “How do I become like you, except faster?”  Without question, there is value in studying success.  However, there may be more value in studying failure.  Why?  First, the unique traits of the hyper-successful are often difficult to emulate.  Yes, you can read more or get up earlier, or work harder.  But, ultimately, you likely don’t have the capacity to invest like Warren Buffett, or the vision to build a company like Jeff Bezos.  However, we are all very susceptible to the causes of financial failure.  Second, most “success” proves short-lived and ephemeral. While achieving short-term financial success is fairly common, long-term sustained financial success is quite rare.  Live long enough, and you will see some amazing turns in fortunes.  So, study success-but make sure you focus on long-term, sustained success.  And be sure to study failure, and look for commonalities and themes. 

While it is preferable  to learn as much about financial failure vicariously, inevitably we have financial failures of our own.  Nobody likes admitting they are wrong, but doing periodic post-mortems on errors in our own judgment is a first step in attempting to not repeat them in the future.  You will learn much more from your financial missteps than your greatest hits.  

I’ve named this series “The Icarus Files” after the tragic Greek character who soared on wings of wax, only to fall back to earth in shame and ignominy when his wax wings melted as he climbed too close to the sun.  In the first post in this series, I detailed the meteoric rise and tragic fall of natural gas pioneer Aubrey McClendon, the brash and brilliant founder of Chesapeake Energy.  McClendon built a personal fortune of $2 billion on the back of his unshakeable faith in fracking and natural gas.  For a decade or more, McClendon’s bold acquisitions of natural gas reserves and huge investments in fracking equipment were extremely successful.  

McClendon’s unquenchable thirst for “more,” more wealth, more power, more growth led him to take on astounding levels of corporate and personal debt to finance even more growth.  As so often happens, success seemed to inflame his self-belief and led him to take progressively larger financial risks.  McClendon had so much faith in Chesapeake, that instead of selling shares to finance his prodigious lifestyle or pay down debts, he borrowed heavily against his stockholdings.  He seemed incapable of asking that crucial question: “What if I’m wrong?”  He seemingly refused to consider the ramifications of a fall in the price of natural gas or Chesapeake stock price.  

And yet, the collapse of natural gas crushed the values of McClendon’s concentrated investments and assets, and caused a cascade of margin calls and the eventual forced sales of assets into an already distressed market.  With almost unbelievable speed, the vast majority of McClendon’s wealth, built over twenty years, was vaporized.  

In this post, the focus is Brazilian Eike Batista.  Batista burst on the international financial scene in 2005, and embodied a new type of swashbuckling emerging market entrepreneur, with a refreshing level of bravado and ambition. Batista was the son of a very prominent and beloved Brazilian, Eliezer Batista, the long-time head of Brazil’s state-owned mining assets, a major component of Brazilian wealth.  Later, when these assets were privatized, Eliezer led the new company,  Vale.  What’s clear in reading about Batista, is that he had a competitive relationship with his father, always striving to earn-and never quite getting-his respect.  

Batista, with a considerable chip on his shoulder, set out to forge his own identity and financial success.  He spent the first decade of his career building a fortune in gold mining and gold speculation, with hair raising gains and losses along the way.  From the beginning, he outlandishly vowed to become the richest man in Brazil.  Batista parlayed his early success by trying to vertically integrate Brazil’s commodity export industry.  China was a ravenous consumer of commodities, and Batista was determined to build an empire to search for, excavate and ship commodities.  Batista seemed to be perfectly positioned to ride the surge in commodity prices, Brazil’s stock market, and the China growth story.  

Batista IPOd an alphabet soup of companies, such as EBX, OGX and MPX, all unprofitable.  Investor interest was whipped up by Batista’s extremely promotional financial projections for growth and future profitability.  By 2011, Batista was worth $30B-the seventh wealthiest man in the world.  He appeared on Charlie Rose and when asked about his future ambitions he stated bluntly:  “A hundred billion dollars.”  He lived an ostentatious lifestyle, remarried to a much younger Brazilian model, and was prone to garish materialism, such as displaying a McClaren sports car in his living room. 

Fast forward 3 years to 2014. Batista’s corporate empire lay in smoldering ruins, and his personal fortune completely incinerated.  Commodities, Brazil's stock market and currency had all collapsed.  The boom had turned to bust.  Overambitious corporate strategies, overleveraged balance sheets, and signs of outright fraud were beginning to come to light. By 2017 Batista was serving jail time for bribery, money laundering, insider trading and misleading investors.  The McClaren was repossessed.  

There are many financial lessons to be learned from the Batista story.  Here are three:

Don’t let psychological hang-ups or flawed goals drive you; define a sound vision of success:

You don’t have to be much of an armchair psychologist to see that Batista’s relationship with his father, and the desire to prove him wrong or earn his respect was a major catalyst in his quest for accomplishment and wealth.  Ultimately,  you need to understand and make peace with your own past and insecurities if you want to sustainably succeed.  I’ve seen many “successful” people lead unfulfilled lives this way.

There  was never enough money, accomplishment, power and fame to appease Batista.  All of it served no purpose than to aggrandize his own ego.  This is an incredibly unstable foundation for long-term financial success.  At the heart of all Icarus stories is raging insecurity and flawed goals. 

It’s harder to sustain a fortune than to make it in the first place:

Batista seemed incapable of understanding that the traits and attributes which allowed him to build his fortune were not the same ones that would allow him to keep it.  The bravado, self-assurance and audacious risk-taking which drove early success must be tempered with increased humility and balance over time if it is to be sustained.  This is very hard to do when you’ve been on a protracted hot streak and your ego and self-belief are raging.  You have to be humble to ask “What if I’m wrong?”  Batista clearly didn’t have the ability to do that.

Batista just kept pushing all his chips back on the craps table, out of sheer arrogance.  He won big for years, but at the end, lost it all-including his dignity.

Don’t confuse brains with a bull market:

Financial history is littered with tales of people who built huge fortunes in bull markets, only to get thrown over the waterfall in the subsequent bust.  A trait I work to strengthen in client’s is emotional ballast.  In good times, it’s imperative not to buy your own BS.  Yes, you’ve worked hard and are talented, but if you’re honest, you’ve also likely had the wind at your back.  In bad times, you need to have faith in your worth and have confidence in the future, even in the face of withering current conditions.  

Life is cyclical and unpredictable.  We are all on the great, turning wheel of fortune, and every life has its share of good times and bad times.  It’s critical not to continually extrapolate the recent past into the future, and build a degree of emotional and financial contrarianism.

About Dolan Partners:

Dolan Partners is a holistic financial life planning and investment management firm, working hand in hand with professionals and business owners.  We dive deeply into clients' financial lives, working to align their money with their unique vision, values and goals.

We offer complimentary introductory calls with prospective clients, which are always completely confidential and judgment-free.  

Learn more at www.dolanpartners.com

Dolan Partners LLC

100 School St.

Danville, CA  94526

Quarantine Epiphanies

By: Ryan P. Dolan

“All the problems of the world could be settled easily if men were only willing to think.  The trouble is that men very often resort to all sorts of devices in order not to think, because thinking is such hard work.”

Thomas Watson, founder IBM

“The difference between successful people and really successful people is that successful people say no to almost everything.”

Warren Buffett

Epiphany: a usually sudden manifestation or perception of the essential nature of meaning of something; an intuitive grasp of reality through something usually simple and striking; an illuminating discovery.

Merriam-Webster

I’ve been hiking nearly everyday since the onset of the virus-late afternoon, long hikes in the vast open foothills near my house.  It’s a welcome break from being confined to the house, gives my wife and kids some space, and lets me clear my head and unwind.  I’ve found over the years that I do some of my best thinking during a hike.  The combination of an extended period of solitude and quiet, being in nature, coupled with a moderate level of cardio exertion often leads to epiphanies and connections that otherwise would have eluded me. 

Photo by author.

It’s as if the modern world is intentionally designed to prevent introspection. I’ve learned the importance of making time for solitude and introspection, to think about life and what’s really important.  This is true in all areas of our lives, including financially.  If I don’t consciously and intentionally build time into my schedule, open white space devoid of the noise, urgency and busyness of modern life, I find myself quickly getting off track.  This manifests itself in a tendency to become shorter-term oriented and for my discipline and behaviors to start to slip. I lose sight of the big picture, of how my actions today have an impact on everything and everybody I care about, today and in the future. 

Devoting time to thinking and planning involving saying no to many things, both bad and good.  I have always been a big reader, yet it took me years to realize that reading can get in the way of thinking.  It is another form of information “input.” When taking information in, we can’t begin to create our own personal “output” or ask the core questions about what success.  We need time to begin to ask the proper questions, and then begin to unravel the answers. Financially, you need to define what success and financial freedom means to you.  All financial planning is a battle of trade-offs between competing priorities and goals, and the needs of today and those decades in the future.   If you don’t engage in this process, proactively and consistently, the chances are you will be living out someone else’s definition of success, and making choices and decisions you didn’t realize or intend.  

Over the last few weeks, here are the questions I’ve been asking: For all the priorities and goals in my life, how am I doing?  Am I focused excessively on one to the detriment of others?  Am I focused on urgent but not very important issues, to the detriment of important but non-urgent ones?  If I’m being honest, what are the elephants in the room that I am rationalizing or ignoring?  Am I making progress in seeing reality, or am I letting biases and flawed thinking color my views and get in the way?  What bad habits and behaviors have crept into my life, and what good things are being crowded out?  Am I building, in David Brook’s words, resume virtues AND eulogy virtues? 

Hard questions to ask, and trust me, harder to answer.  When done correctly, which I don’t always do, the answers will be objective, honest, and, frankly, often demoralizing.  They will also evolve and deepen over time. You need to keep asking. Over time, admitting what reality, facing it, and removing rationalizations becomes increasingly liberating, and is the critical first step in getting back on track.  

I work primarily with mid-career professionals and business owners.  Almost as a rule, they are driven, accomplished, intelligent and…perennially time-starved.  The demands on their time often consume all of their bandwidth.  Almost as a rule, they don’t invest the time to ask and answer their key questions. Most, at best, have a  broad, hazy, and incomplete outline of who they are, what’s important to them, and where they want to go.  As their lives and finances have gotten more complex over time, the pull of the urgent and the demands of today, crowds everything else out.  

Photo by author.

It’s been my observation that the most harried new clients, those clients who can’t seem to find the time to schedule a call or return an email, have spent the least amount of time defining what success looks like to them.  They are so immersed in the demands of the day, that over time, they have lost the plot of their lives.  Frenetic busyness is often, frankly, an excuse to avoid asking the hard questions.  They don’t have tangible, concrete financial goals and a workable plan to achieve them, and it starts to negatively effect their lives.  Commonly, the candor and communication between spouses is less than ideal.  They feelthey work harder then ever, have no time, and struggle with a nagging sense of anxiety and lack of control.  Often, what financial goals they have are centered on accumulating “more. Balance, fulfillment and freedom are put off into the future.  Life becomes one daily sprint after another. 

My entire advisory practice is built with the mission of helping these types of clients.  It’s about building consistent, proactive time to ask the salient questions and then actively working to excavate the answers.  We iteratively get closer and closer to clients’ unique financial characteristics, needs, obligations, priorities, goals, and importantly, dreams.  We build dynamic plans, and always keep clients centered on a handful of tangible action items. We help them prioritize and say “yes” to their key priorities and increasingly target what to say “no” to.  By slowing down and investing proactive time, they find increasing mission and control of their financial lives.  

During this unusual time, I suggest turning down the noise and distraction (Tiger King?) and asking yourself your key questions. From a financial perspective, do you feel you have more clarity and confidence today than you did a year ago?  A decade ago?  Dolan Partners’ process is specifically designed to help expedite this process for time-starved professionals.  It won’t happen overnight, but sustainable financial progress, increased fulfillment, and less anxiety is achievable sooner than you realize.  

Today: get outside, take a long walk, and ask if you are ready to begin the journey toward discovering your own financial epiphanies. 

About Dolan Partners:

Dolan Partners is a holistic financial life planning and investment management firm, working hand in hand with professionals and business owners.  We dive deeply into clients' financial lives, working to align their money with their unique vision, values and goals.

We offer complimentary introductory calls with prospective clients, which are always completely confidential and judgment-free.  

Learn more at www.dolanpartners.com

Ryan P. Dolan

Managing Partner

Dolan Partners LLC

100 School St.

Danville, CA  94526

In Markets Like These: 1: Breath, 2. Return to the Fundamentals

By: Ryan P. Dolan

With stock markets down a jarring 25% in less than a month, I thought I’d dust off an investing piece sent to clients in 2018.  I believe in proactively working to educate clients on sound investment principles and the recurrent rhythms of financial history.  When this is augmented with an understanding a client’s unique behavioral investment tendencies, the chances are very good that we can improve investment decision-making and outcomes.  

When markets get frenetic and highly emotional, investor’s can be coerced into making mistakes.  I believe it is essential to take a deep breath, step back, and return to core investment fundamentals in an attempt to reorient yourself.  Warren Buffett has routinely extolled the influence that his mentor, Ben Graham, had on his career. In particular, he cited two specific chapters in Graham’s book “The Intelligent Investor,” as having a profound impact on his investment philosophy.  Here is a synopsis of both chapters and some of my thoughts.

Financial Education Series: 

Book Review: “The Intelligent Investor” by Benjamin Graham

“Chapters 8 and 20 (of “The Intelligent Investor”) have been the bedrock of my investing activities for more than 60 years.  I suggest that all investors read those chapters and reread them every time the market has been especially strong or weak.”

“To invest successfully over a lifetime does not require stratospheric IQ, unusual business insights, or inside information.  What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.  You must supply the emotional discipline.”

“The sillier the market’s behavior, the greater the opportunity for the business-like investor.  Follow Graham and you will profit from folly rather than participate in it.”

Warren Buffett

Chapter 8: The Investor and Market Fluctuations

“Since common stocks, even of investment grade, are subject to recurrent and wide fluctuations in their prices, the intelligent investor should be interested in the possibilities of profiting from these pendulum swings.  There are two possible ways: the way of timing and the way of pricing.  By timing we mean the endeavor to anticipate the action of the stock market-to buy or hold when the future course is deemed to be upward, to sell or refrain from buying when the course is downward.  By pricing we mean to endeavor to buy stocks when they are quoted below their fair value and to sell them when above.” Ben Graham

• Graham warns against market forecasting or having opinions about future market direction.  While he admits a small minority of professional investors can successfully time markets, most cannot.  Graham points out that an investor need not time markets to be successful.  

• Most timing-based investors seek short-term trading profits, and “want to make their profit in a hurry.” It is a material advantage for an investor to elongate his time horizon and to focus on longer-term returns and investment decisions.  

• It is critical to put a valuation approach at the center of your investment philosophy.  Only when you have an estimate of fair value can you make educated investment decisions.

“Every investor who owns common stocks must expect to see them fluctuate over the years.  A serious investor is not likely to believe that the day-to-day or even month-to-month fluctuations of the stock market make him richer or poorer.”  Ben Graham

• This can’t be stressed enough.  For clients with a natural short-term orientation, this must be given particular focus.  Investing, when done right, is about making intelligent long-term decisions for long-term results. It’s about delayed gratification.  Always strive to look at portfolio outcomes over an extended period of time. Short-term portfolio volatility is largely noise.  

“Even the intelligent investor is likely to need considerable will power to keep from following the crowd.  It is for these reasons of human nature, that we favor some kind of mechanical method for varying the proportion of bonds to stocks in the investor’s portfolio.  The chief advantage, perhaps, is that it will give him something to do. As the market advances he will from time to time make sales out of his stockholdings, putting the proceeds into bonds; as it declines he will reverse the procedure.  These activities will provide some outlet for his otherwise too-pent-up energies. If he is the right kind of investor he will take added satisfaction that his [actions] are exactly opposite from those of the crowd.” Ben Graham

• Everyone thinks they are a contrarian, and yet when the rubber hits the road few really are.  We have to work to build our resistance to the investment crowd, particularly when the herd is at its largest and most convincing. We must not overestimate our ability to resist the crowd.  

• Graham’s recommendation, and the action I take in your portfolio, is to rebalance your portfolio periodically.  The vast majority of individual investors don’t rebalance at all, resulting in “passive drift” where their risk allocation peaks at market peaks, and bottoms at market lows.  Rebalancing offsets this drift, results in better outcomes, and helps build emotional balance.  

Graham uses an analogy of a private business, in which you own 1 share worth $1,000.  A partner in the business, Mr. Market, obligingly offers to give you his opinion of the shares value on a daily basis, and buy or sell your share at that price.  

“If you are a prudent investor, you may be happy to sell to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low.  But the rest of the time you will be wiser to form your own ideas of value. 

The true investor is in the very same position when he owns a stock.  Price fluctuations have only one significant meaning for the true investor.  They provide him with an opportunity to buy wisely when prices fall sharply, and to sell wisely when they advance a great deal.  At other times, he will do better if he forgets about the stock market.” Ben Graham

• While daily liquidity is a gift for the sound investor, it is a curse for the unsound one.  We must never let the market dictate what we think value is. Stock market valuations have far wider swings than the valuations of the underlying businesses, because daily liquidity can compel investors to create dramatic and emotional price swings.  Fear and greed are contagious human emotions, and cause many investors to get carried away and make emotion-based decisions. Our goal is to view these swings as opportunities to take advantage of, and not to be instructed by.  

• In the financial crisis many homeowners likely dramatically underestimated how much their home value had fallen, precisely because there was no daily pricing or liquidity.  Do not make the mistake of underestimating the volatility of illiquid assets. Just because you don’t have a daily mark doesn’t mean the asset value is static. Similarly, stocks and stock markets are far more volatile that the underlying fair value of the asset.  View this excess volatility as an opportunity, not a rational appraisal of the underlying value.  

Chapter 20: “Margin of Safety” The Central Concept

“In the old legend, wise men boiled down history into the single phrase, ‘This too will pass.’ Confronted with a like challenge to distill the secret of sound investment, we venture the motto, ‘Margin of Safety.’”

“The margin of safety is always dependent on the price paid.  It will be large at one price, small at some higher price, nonexistent at some still higher price.”  Ben Graham

• As the old saying goes, there are no risky stocks, only risk prices.  Price paid dictates how wide the margin of safety is. This relates back to the centrality of value investing.  Without a sense of fair value, the investor has no idea of the magnitude of his margin of safety. 

Warren Buffett describes the concept best.

“You have to have the knowledge to enable you to make a very general estimate about the value of the underlying business.  But you do not cut it close. That is what Graham meant by having a margin of safety. You don’t try to buy businesses worth $83 million for $80 million.  You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000 pound trucks across it. That same principle works in investing.”   Warren Buffett

“The Washington Post Company in 1973 was selling for $80 million in the market.  At that time, that day, you could have sold the assets to any one of ten buyers for not less than $400 million, probably appreciably more.  The company owned the Washington Post, Newsweek, plus several television stations in major markets. Those same properties are worth $2 billion now, so the person who would have paid $400 million would not have been crazy.”  Warren Buffett 

• Valuing a business is necessarily imprecise, but we don’t need precision.  We are looking to buy assets that we can value that trade at material discounts to their estimated fair value, of which private market value is one metric.  

At times like these, it is critical to act less and think more.  Do you have a clear financial roadmap for your life? Do you know where you are trying to go, what you are trying to achieve?  Only when you have a clearly defined, well-articulated and personalized understanding of your financial life, needs and aspirations, can you begin to understand what role your investments play in that.  Now more than ever, it is critical to have a map along with a seasoned, experienced and trusted trailguide who is there to calmly and rationally steer you through what is very challenging terrain.  

About Dolan Partners:

Dolan Partners is a holistic financial life planning and investment management firm, working hand in hand with professionals and business owners.  We dive deeply into clients' financial lives, working to align their money with their unique vision, values and goals.

We offer complimentary introductory calls with prospective clients, which are always completely confidential and judgment-free.  

Learn more at www.dolanpartners.com

Ryan P. Dolan

Managing Partner

Dolan Partners LLC

100 School St.

Danville, CA  94526

ryanpdolan@dolanpartners.com

www.dolanpartners.com

To Invest Well, It Helps to Have a Map and a Copilot

By: Ryan P. Dolan

“I went 100% to cash in my retirement accounts on Tuesday.”  

This statement, apropos of nothing, came from a friend recently at a party.

“Oh,” I stammered, unsure what to say “...why?”

His response essentially boiled down to a combination of factors: “the market is too high,” “coronavirus,” and the “election.”  He seemed confident in his decision as the market subsequently fell 2% the day after he sold.  

“OK, but when do you plan on retiring?” I asked, trying to reorient the conversation.  

“God I don’t know” he said huffily, mildly irritated by my seque.  “In my early 60s ideally, but the way we spend money, it’s probably going to be later.”

This put his retirement at least 20 years away.  

“Do you have a rough idea of what kind of income you’re going to need annually in retirement?  Said another way, do you know how much money you are going to need to fund your lifestyle in retirement?

Awkward silence. 

I highlight this conversation because it's reminiscent of many such conversations I’ve had over the years.  My friend was exhibiting a problem which bedevils so many individual investors. Simply put, he was making critical investment decisions in a vacuum.  Here he was, making a massive change to his retirement-focused investments without first defining what his retirement would look like, and what his needs will be.  When you don’t begin with a picture of your destination, how on earth can you craft a plan and the requisite behaviors to get there? He was providing answers and opinions to questions that are largely unknowable.  We can’t know, with any reliability or predictability, whether the market is in fact too high, or if a pandemic will spread globally, or if an election will affect markets.

However, the core questions that must be answered ARE knowable.  What does your ideal retirement-yours not anyone else’s-look like?  Do you want to retire in the first place? What does a safe and secure retirement look like to you? What kind of life expectancy does your family have?  Do you want to leave a legacy to your children or to charities? What do you need in annual income in retirement? What amount of investment assets do you need to throw off that income?  What do you have in retirement assets today? It’s a process getting to your vision of your goal. You don’t come in and define it in a meeting. You start gradually and frame the need broadly.  Over time, this vision is refined until it is uniquely yours.  

Having a sound, tailored and adaptive financial plan is a necessary first step on the road to sound investing. Necessary, but in my experience, not sufficient.  Even the best plans can be hijacked by a litany of common behavioral investment mistakes. In my view, the plan must be augmented with a process that works to keep the client focused on core principles, long-term goals, aware of common behavioral mistakes, and accountable to the plan. 

While there are common patterns of investor mistakes, each client has their own unique strengths and weaknesses.  It behooves a client to work with an advisor who will work to understand these. Some clients are hyper sensitive to short-term market volatility, others are fairly immune.  Some are prone to large, emotional swings in their investment temperament, others are all calm equanimity. Some people are doom and gloom, and others see nothing but optimistic, best case scenarios.  My role is to continually reinforce sound investment principles and tailor my guidance to each client’s investment and behavioral needs. Most importantly, my role is to build enough trust and credibility for the handful of times in a client’s investment lifetime when they are being lured into making a profoundly wrong decision. Given enough time, markets will work to find our unique weaknesses and try and expose them.

Working to become a better investor is a never-ending journey. I thought I’d leave you with a couple general investment thoughts. I’ve always loved the poem “If’ by Rudyard Kipling.  Like all sublime writing, you glean fresh insights with each reading. While the poem is deeply resonant for life in general, it certainly can apply to investing.  

“If you can keep your head when all about you are losing theirs…”

Periodically, markets become manic and highly emotional.  The market’s siren song occasionally becomes so strong, the impulse toward greed or fear so resonant, that it seems nobody is capable of resisting its emotional vortex.  In these moments, having a calm and experienced advisor who can reorient you on your goals, reframe the investment landscape, and push you toward better decision-making is so important.  At a time when market enthusiasm and bullish prognostications are thick on the ground, working to keep level-headed and rational is particularly important.  

“If you can wait and not be tired by waiting…”

Investing is a long-term game, and yet virtually everything you hear about investing is short-term oriented.  The media, Wall Street, and our culture celebrates the now. An advisor needs to work to constantly reinforce patience, discipline and delayed gratification to his clients. The more you can get a client focused on long-term decision making, and the near-term behaviors needed, the better their results will be. All good things take time.  

“If you can meet with Triumph and Disaster and treat those two imposter just the same…”

I love this line, and yet it is a constant battle to implement-personally and with clients.  In life, and in planning and investing, the unpredictable happens. Life and markets are cyclical, and dole out their fair share of Triumph and Disaster to all of us. Building emotional ballast in clients is hugely important. Most people’s natural tendency is to magnify the impact of what they are currently going through, and extrapolate it into the future. I strive constantly to get clients to build their capacity to deal with unforeseen financial outcomes, while building a rational mindset.

To summarize:

Don’t make investing decisions before you’ve defined what the money will be for.  Trouble awaits down that road. Always begin with the end in mind.  

Don’t do it alone.  The odds of achieving long-term financial and investment success are increased dramatically when you have a rational, calm, and seasoned copilot by your side. Don’t self-sabotage your investing.

www.dolanpartners.com

Fed Up With Lame New Year’s Resolutions? Embrace Real Financial Change

By: Ryan P. Dolan

“My New Year’s resolution?  I will be less laz…”

 Jim Gaffigan

It’s late January.  

Your New Year’s resolutions, which you set with such expectation and hope, are starting to fall by the wayside, as your willpower and motivation start to crack. Think about this time last year.  You came to the end of 2018, with a gnawing sense that you weren’t living up to your potential in many different areas. 2019 WOULD be different, you told yourself. 2019 WOULD be the year of sustainable growth and change.  You started the year on a mission to eat healthier and lose weight, start going to the gym, learn Spanish, get promoted and achieve a certain income goal from work, spend less and save more, spend more quality time with your kids, watch less Netflix, etc., etc.  As 2019 rolled on, like clockwork, the motivation ebbs, the old comfortable habits reassert themselves, and one by one, your resolutions were ditched. This cycle leaves you feeling increasingly deflated at your lack of willpower and discipline, your capacity to change and grow.  For many, this inability to make progress throughout the year culminates in the holiday season binge, when all remaining discipline is thrown out the window. In the last few days of the year you vow to yourself that next year will be different. And the self-delusionary cycle begins again.  

 It seems the more excessive a person’s behavior in the prior year, the less anchored their behavior to their larger values and vision, the more fervor they bring to resolutions.  They have an almost puritanical urge to punish themselves and atone for their behavior. And so here you are, in late January doing Keto, you joined a gym, you’re not drinking, and resolving to cut spending to monk-like levels.  No more lattes at Starbucks, no clothes shopping, and no eating out. You’ve started a meditation practice. Deep down underneath all that superficial hope and positive thinking, you know this won’t work sustainably. And once again you’ll join the purported 80% of people who give up on their resolutions by February. 

I believe New Year’s resolutions persist and are so universally popular, despite their record of futility, because the core idea behind them is a sound one.  It is good to reflect on the year gone by and to plan for the year ahead. The problem is the way people approach, set and implement resolutions. I think many people approach resolutions primarily as a reaction to negative behaviors they don’t like.  They’ve put on weight, they’re not saving enough, they aren’t making as much money as they want. They look at a negative outcome, and set resolutions to counter that trend. The problem is they haven’t identified the true “why” behind what they are trying to achieve.  They are so focused on what they don’t want, that they haven’t identified and defined what they do. 

When we don’t have a clear, candid, and objective understanding of who we really are, where we’ve come from, our strengths and weaknesses, and our most important values, we can’t build a roadmap for where we want to go.  When you don’t start to concretely define your “why” you end up living in a way that doesn’t align with that vision. Deep down we all have that quiet, persistent internal voice which lets us know if we are living in a manner congruent with our “why.”  When we are not, it results in creeping frustration and anxiety. It is an all too human reaction to want to drown out those feelings with short-term dopamine hits: buying a new car, taking a vacation, eating bad food, becoming addicted to social media and distraction.  As we all know, these hits are ethereal, and wear off all too quickly. In the end our actions leave us more deflated than before.  

Rather than making resolutions based on a strategic vision, most would rather focus on tactics.  They focus on too many areas, make resolutions that are too vague, too lofty, or too short-term. With the exception of maybe losing weight, money is likely the most popular subject for resolutions.  For those looking to create transformational financial change and growth, I recommend that step one should be ditching resolutions. At best they don’t work, and at worst, they can be counterproductive.  Deep down, you know real growth can’t come from a short-term “hack” that promises much gain and little pain. The process to get there takes time, but when done right, sustainable progress can start to build fairly quickly.  The hardest part is the beginning.  

When I start working with clients, tactics are the last thing on my mind, which is unusual in a tactics-obsessed business.  The focus, rather, is on trying to build an understanding of the clients’ “why.” Typically, when I ask clients what they are hoping to achieve in their life, both personally and financially, most throw out a handful of common, standard answers: to save more money, put the kids through college, save for retirement.  Over time, and through a lot of questioning and listening, we begin to unearth a host of deeper priorities and goals that are much more personalized and deeply held by the clients. Initially, these revelations can come as a surprise to clients, but over time they realize how these newly discovered goals are deeply authentic.  When I do my job well, over time, clients begin to understand their own core motivations and mission to a degree they didn’t realize, both in themselves or their spouses.  

From this solid foundation of mission, we can start to build strategy and tactics to achieve them. It is much easier to improve near-term behaviors if the client understands the larger context behind them.  Just telling someone to save more is useless. Having them define a core long-term goal, building a series of steps needed to get there, and holding them accountable to that goal has a much higher chance of success.   Changing ingrained behaviors takes time, and it helps to keep areas of focus limited and achievable. But when near-term goals are hit, momentum builds, and confidence and tranquility increase.  

When this process continues proactively throughout the year, the year-end ritual is one you can expect to look forward to.  Your behavior in the past year will be more consistent and more disciplined, and you will have confidence in your ability to make further progress and growth in the year ahead.  

www.dolanpartners.com

Gameplan 2020: Align Your Money With Your Unique Vision of Success

By: Ryan P. Dolan

“Man pursues a great variety of goals, but the one he seeks as his ultimate end is happiness.  Everything else is a means...”

Socrates

As we approach the last month of the year, now is an ideal time to reflect on 2019 and to gamplan the year ahead.  When it comes to your money, strive to transcend superficial resolutions and goals. You owe it to yourself to think deeply about what success means in your life-to you specifically.

• Do you feel in control of your finances, or do you frequently feel like money is controlling you?  

• Do you have a well-articulated vision of what success looks like in your life and a clear understanding of money’s role in that?

• Do you have a blueprint of a life well-lived and a roadmap to get you there; one which balances your deeply-held needs, goals and aspirations today with those decades in the future?

These are not easy questions to answer.  And yet, in my opinion, taking a proactive, holistic and highly-integrated approach to answering them is absolutely critical in gaining mastery of your money.  

I was talking recently with a friend, Jim (his name and details have been changed), a particularly well-adjusted, thoughtful guy.  By almost any benchmark, he had achieved considerable professional and financial success. While we talked, it became apparent that something was bothering him.  When I asked, he admitted that while he couldn’t pinpoint the cause, he was experiencing persistent feelings of anxiety and lack of fulfillment. After an extended conversation, with a lot of questioning and listening on my part, we started to unravel some of the symptoms.  

When asked to think about his work, Jim admitted to being driven by feelings of insecurity and a deep fear of failure.  Despite his success, he was often plagued by feelings of guilt and unworthiness, of being a fake fearing inevitable discovery. He worried about everything being taken away from him. His default response to those feelings had always been to work harder to “deserve” his success.  As a result, he worked grueling hours, and increasingly felt less time for anything else, including his family. Worse, even when he was with his family, he wasn’t really present, and was usually distracted by thoughts of work.    

Jim had always taken pride in his role of provider for his family, giving his wife and kids the lifestyle and financial security he didn’t have growing up.  However, with his two kids now in high school, and soon to be out of the house, he felt pangs of regret at what little time he had spent raising his kids and building connections with them. He was beginning to realize that his life was deeply unbalanced.  He tried to ease this regret by providing his kids a lifestyle he never could have imagined when he was growing up. The problem was, his kids lacked any real appreciation for money, and very little gratitude. Jim worried about their level of initiative and drive, something that his own childhood had instilled in him.  

In general, Jim didn’t really feel in control of his life.  He never had time for anything. He invested so much time and energy in his company, that while he was financially successful, he was incredibly time poor.  At times it felt like his company has limitless demands and had overtaken his life. His health was an area that had clearly suffered. He had put on 25 pounds over the years, and used food and alcohol to cope with the pressures of work. He used to love to play tennis and mountain bike, but hadn’t done either in years.  Was this success?

Finally, Jim felt he wasn’t living the values that were important to him.  If he was honest with himself, his financial success had become a goal in and of itself.   Success now simply meant “more.” He admitted that money was increasingly being used to gratify his ego, and wasn’t be used in service to others.  He was raised in a family that always put a high priority on charity and giving, both in time or money, in spite of his parents’ modest means. His parents walked the walk of their values.  At best, Jim gave money half-heartedly. Lately, though, he had felt an increasing pull to start giving more, with more meaning, but was unclear how or where to start.  

Jim’s situation is far from unusual.  Money is a wonderful servant but a terrible master.  It’s been my experience that when people make financial success the ultimate end in their life, the result is often unrealized potential, anxiety, a lack of real fulfillment, and regret.  It is absolutely critical to engage in a process which allows you to unpack what your unique version of success looks like. This is not always intuitive, or something that can be done quickly.  And in my biased opinion, it usally can’t be done on your own. Often, when I work with new clients in this discovery process, it results in quite a bit of client self-discovery, where clients dig deeper than the superficial, and tap into a much deeper vein of values, motivations and priorities.  

Admittedly, it takes some time, introspection, and accountability on the client’s part.  Many say they don’t have the time. In my opinion, they don’t have the time not to think this way. The only rational time to do this is at the outset of the advisory relationship, well before any new courses of action or strategy can be determined.  “Begin with the end in mind,” as Stephen Covey says. We always prioritize a holistic qualitative understanding of the client before we look at the quantitative numbers. 

Jim’s example is very common with high-performing, career-driven people.  For many, success and accomplishment can quickly morph into the goal itself, which will solve every other issue in their lives.  To be clear, career and financial success are very important. Ultimately, however, they are there primarily to serve larger purposes. For Jim, money wasn’t serving his life, rather his life was serving his money-and the results were causing serious problems.  While the course of treatment will ultimately depend on Jim’s unique situation, step one for him was admitting there was a problem.  

As you look to 2020, consider how aligned and integrated your money is to your vision of a life well-lived.  Ultimately, money should be a means to foster the ends in your life that really matter. What those ends are is unique to you.  Start today.

www.dolanpartners.com

Don’t Let Your Behavior Sabotage Your Investment Portfolio

By: Ryan P. Dolan

“You will do far better, in real-life, with an empathetic, tough-loving behavioral coach than you will on your own, or with some portfolio manager/sophisticate babbling about standard deviation when you’re having a panic attack in a bear market.”   

Nick Murray

“The investor’s chief problem-and even his worst enemy-is likely to be himself.” 

Ben Graham

An article in the New York Times, “Investor’s are Usually Wrong. I’m One of Them,” by Jeff Sommer, looks at the common, all-too-human behavioral foibles that constantly bedevil investors.  “Forget about getting everything right. Most people are so consistently wrong that merely avoiding major errors is enough to set you apart from the pack,” states Sommers.

The article looks at data published by Dalbar, a research firm focused on investor behavior.  Dalbar’s annual study highlights a consistent trend: equity investors earning far lower returns then the major stock indices.  In 2018, for example, the average equity mutual fund stock investor lost 9.4% compared to a loss of 4.4% for the S&P 500. Over ten years, the average investor earned annual returns of 9.7% compared to 13.1% for the S&P 500.

As a caveat, there’s been some skepticism of Dalbar’s methodology and conclusions, which may exaggerate investor’s underperformance.  While that is certainly possible, and the actual long-term results are impossible to quantify with precision, my experience and intuition leads me to believe that many individual investors do underperform by a considerable degree due to poor behavioral decision-making.  These behavioral mistakes come in various shapes and sizes, but essentially boil down to investors consistently taking investment actions which, as Murray describes, “were the wrong thing to do, were done at the wrong time and for the wrong reasons.”  

Take a 45 year old with $500,000 in his IRA today.  Let’s say through consistent, modest behavioral mistakes his return over 20 years averages 6%, while the market returns 8%.  The long-term impact? When he turns 65 and retires, those mistakes cost him over $700,000. Instead of $2.3m, he has $1.6m. With large compounded deleterious effects over time for even modest levels of underperformance, it behoves all investors to put a paramount focus on their behavior. 

Nick Murray, a thought-leader in the financial planning industry, wrote “Behavioral Investment Counseling” in the midst of the financial crisis, a period which vividly illustrated the investing mistakes people consistently and repeatedly make.  Murray contends, and I agree, that virtually no one is born a sound investor, and that behavioral mistakes are hard-wired into us. As such, in the quest toward improving long-term investment results for clients, the sound advisor should focus his investment efforts on trying to inculcate in clients a mentality and belief system which works to reduce, and hopefully eliminate these behaviors.  

Murray’s solution? Focusing clients on the centrality and primacy of the financial plan, and relegating investing to the service of that plan. Most focus on investing and returns in a vacuum.  It really doesn’t matter what your portfolio returned last year or next. What matters is whether you have a portfolio and process which gives you the highest odds of achieving your various long term goals.  Only when you have a plan that works to address all of your long-term financial needs, priorities and goals, can you have a sense of what you need from your investments to achieve them. The investment portfolio, viewed in this context, is simply a tool in the service of reaching goals.

Often, when people put an excessive focus on investment performance, it stems from a disconnect in their financial plan (if they have one at all).  Typically, those most focused on near-term relative performance aren’t saving enough and know that the only way to achieve their long-term goals is to earn unrealistically high investment returns.  It is far easier to ratchet up your risk exposure, perhaps to improper levels, then to change your spending behavior today and begin to save more.  

Once the financial plan is constructed, an advisor works to educate the client on how best to build (and maintain) an investment portfolio, which gives the highest likelihood of success..  Murray highlights several behavioral principles which need to be internalized in a goal-based, behavior-focused investment program, including:

Long-Term Optimism: “In the long-run, I believe that successful investing is essentially a battle that takes place in the investor’s unconscious mind-a battle between faith in the future and fear of the future.” 

Patience: “Surely the most un-American of values.  We live not in an age of enduring investment truths but of late-breaking market news, and this places the investor under constant pressure to do something-to react to the events of the moment rather than action on the goals of his lifetime and beyond.”

Discipline: “The undisciplined investor reacts-he allow his long-term investment plan to be derailed by some trend or event, and the plan inevitably fails.  The disciplined investor continues to act, regardless of the terrors or enthusiasm of the season.”

The problem is we all know these market truisms.  People also know, intellectually, the principles for losing weight, and yet cannot consistently implement them.  The same in investing. Many simply cannot change their investment behaviors on their own. When the rubber hits the road, they cannot resist the markets frequent siren songs, compelling them to sabotage their long-term investing returns.  Whether it’s getting caught up in investment euphoria, jumping into technology stocks in the late 1990s, or residential real estate in 2007, or giving into panic and despair in bear markets, discipline can be lost very quickly.  

Take an objective, considered look at your investment behavior over time.  Could you benefit from working with an advisor who can unpack your behavioral investment tendencies, and craft a battle plan to address them, all in the service of achieving your long-term financial plan and goals?

www.dolanpartners.com