I won’t need to work ! The story of an investment trap

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Seeking to live solely on investment returns is both a big fantasy and a big mistake. Avoid it at all cost.

 

“This guy retired at 35 with this amazing and safe investment strategy. Want to know how? Click here”

Biggest financial clickbait. I see it regularly, and you probably do too. It usually features a very handsome young man/woman on a yacht, clearly not working for his/her living, and having a load of money anyway.

Beside the obvious scams that those ads are not hiding very well, the underlying message, the biggest investment myth ever, stay strong. This myth can be expressed by this sentence :

“By investing correctly, you can easily earn enough money to stop working, and your life will be wonderful”.

A lot of websites, including some that are not scammers but true believers, advise how to make it, how to get a life where you will never ever have to fake liking your boss or your client again. What a relief !

As you can read this promise is twofold : it promises you that “you can easily earn enough money to stop working” AND it promise you that “your life will be wonderful” if you do.

Both promises are untrue. Do not believe them.

Let’s get into those one by one…

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What about your mother ?

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Financial analysis education became too analytical and de-humanized. It needs  to get back to more balanced, human, basics.

3 years ago, as every year for 8 years now, I volunteered as a “mentor” in a student financial analysis contest known as the “CFA Research Challenge”. During the French final, one of the student team was confronted with a very harsh and deep-meaning question about investment, a question they did not expect, a question they should have been taught about.

It was memorable because, while anecdotic at the time, it reached to something bigger, a problem that undermine the way young investment professionals (and some older) relate to their job. A question about the meaning of it.

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A battle is lost, war is not over

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The asset management lobby just won one more battle in France. The transfer of life insurances between insurers still won’t happen… for now.

You probably missed it completely, but a few days ago a battle of the highest importance for French investors and the French economy took place. It was short, it was brutal.

Indeed, last Thursday, two brave MPs, Amélie de Montchalin and Joël Giraud, proposed, finally, to allow, finally, French life insurance plans to be transferable.

I do know what you think now: “Wwoooo… This post is going to be so boring…

Think again ! On the contrary, it is of upmost importance for French and worldwide investors to read this as a reminder of what is currently at stake and why we fight !

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Global warming. What can we really do about it ?

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Global warming is frightening, and hope is thin to contain it. So maybe we should start not only fighting it, but also preparing for it.

In my last, and more obscure, post about data-mining bias ( that you should of course read, see here ) I illustrated my argument with the example of extreme weather news reports. To sum it up, my point was that while the increasing regularity of extreme heat/frost waves is probably a consequence of global warming, one separate occurrence was absolutely not sufficient to prove anything about it.

In the meantime however, summer passed in the north hemisphere, and it was hot. Damn hot all around. And while still not proving anything “by itself”, it did make me think about global warming. And I am sure you did too.

Global warming is here. No doubt. What was once upon a time a scientific theory became a few decades ago a scientific and political issue. Now it is starting to turn into a scary and material reality for everyone. And it is probably just the beginning.

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ESG investing – How to improve it

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This post was originally published on October 11, 2016 on my company website. It is still relevant and interesting for those who have not read it yet. I’m posting it here with some minor updates.

Environmental Social and Governance (ESG) investing is a good concept, and its growth is strong. But are the desired goals achieved?

 

It had been a while since I wanted to look at it more closely. Environmental Social and Governance (ESG) investing has always sparked interest in me, even though it was unfortunately a little bit confidential. I always saw it as a very welcomed way to link investment and finance in a positive way.

This is why I gladly accepted when I was offered to go to the “Responsible Finance Workshops” organized by a French company specialized in this investment field.

Environmental Social and Governance Funds (ESG) choose their investments according to financial criteria and social criteria. For most of them, this is expressed in practice by a refusal to invest in companies that are not respectful of the environment, or have a bad carbon footprint, or are not very respectful of their employees. The variations are numerous, but globally those funds have a discriminating approach of investment: they refuse to buy the lame duck.

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The great ETF dissection of active funds

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Active mutual funds can be mysterious black boxes. Here is a method to sneak a peek inside.

Mutual funds are very opaque structures. There is so much we don’t know about them, so much we are refused to access, even when we invest in them.

It is indeed very hard to access the actual composition of their assets (the individual stocks or bonds they own). This information is barely disclosed by managers for various reasons. They might fear to see their ideas and work “stolen”. They might fear being criticized for every decision they make. They might even fear that everyone realize they charging active fund fee level for passive management (which is called “closet indexing”, and is very bad, look out for it).

The main information they often give us about what we really own, is the “benchmark”. This benchmark is supposed to be a good proxy of the fund asset composition and potential risks. But most of the time the benchmark they choose seems a bit off or even misleading. It is always an index, and is therefore very theoretical, but it is not its biggest flaw.

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The 8 deadly investment selling traps

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Financial brokers and private bankers use specific investment selling traps and tricks to get you into buying their products. Here is a list. Read it carefully.

I am always amazed by the success met by dishonest financial “advisors” ( brokers would be more appropriate), private bankers and insurers representatives in selling what could be considered very low quality, even toxic investments. Those products are obviously and ultimately designed in the sole purpose of earning the largest margin for their sellers with very little or even negative interest for their buyer. How is this even possible ? Clients are not stupid, their are prudent and educated people, with professional and investment experience, and well-aware of the inner motivation of those salespeople. So why ?

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Asset management and the risk of moral disruption

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Beware! A disruption can hide another one!

This is quite a good advice, while crossing a railway, always to check for the train coming the other way, hidden by the first one. You know those kinds of signs that say: “Look the other way or you risk death and a $20 fine”.

Well this reminds me very much of the current situation of asset management. They are so deeply obsessed with the disruption train that they see, that they are not watching for the bigger, hidden train coming the other way.

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Active managers survival guide in a passive management jungle

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This is a very depressing time for active fund managers, as the attack of passive asset management is brutal, flanking them from both an aggressive media coverage and strong cash outflows. Who indeed could have predicted that John Bogle, yes John Bogle Vanguard’s founder, would become such a rock-star today! His pictures and quotes are just all over my tweeter feed. And it is not going away soon…

And cash inflows/outflows are just even more worrying for them. As more than 30% of US assets under management were passively managed at year end 2016, and a clear momentum for a continued increase in 2017 dawns, traditional asset managers can actually start to be scared, at least. With good reasons to !

However, the current never ending beating up of active management became that strong and mainstream, while the answer given by active managers that shaky, that we could rightfully wonder if this is not getting a bit too far. Well, of course I must confess that I am among the first ones to give them a friendly slug when I can, sorry about that, but I also consider that they might need a helping hand guiding them out of this. There are some limits to plain criticism and being more constructive is possible.

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Active and passive management, where is it going to end ?

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This post was originaly published in French on the website quantalys.com as an answer to Philippe Maupas’s posts on the subject.

Hello Philippe and thanks for you post.

Two points drew my attention while reading your posts. First of all, it is clear in the various studies presented that costs still constitutes the best leading indicator of future performance, may they be active or passive.

No surprise here, this is both intuitive and widely proved. It is still a good thing to remind to investors though.

Then, you raise the possibility that the growth of passive management, very strong for now, might get slowed down by the the upcoming arbitrage opportunities that should logically appear above a certain threshold of assets managed with a passive strategy, strategy which is uncorrelated with underlying economic reality and therefore prone to arbitrage.

But telling at which level this might happen is far from easy. There will be, I agree, a equilibrium level between active and passive asset management, but which one ?

Continue reading Active and passive management, where is it going to end ?