Sales people on Wall Street are always selling something and for them, it’s always a good time to buy. Most people don’t realize they are pedaling more than just stocks and bonds.
Today I want to share an email I received from a friend asking for my thoughts about an investment they were considering.
investors, investment decisions, fund, investment, emotions, wall street, return, compare, index, sold, barclays, unique opportunity, portfolio, bond, high yield, lead, basis points, alarm bells, investing, factor
Hi, I'm Bill Woodruff. I found in well factor because investors deserve better. Wall Street in the media businesses rely on keeping you engaged. This focus on the short run is more likely to hurt you than help. I'm pleased to offer this week's wealth factor refocus, where we cut through the noise and focus on the long term. sales people on Wall Street are always selling something, and for them, it's always a good time to buy. Most people don't realize they're peddling more than just stocks and bonds. Today I want to share an email I received from a friend asking for my thoughts about an investment they were considering. My alarm bells immediately sounded when the first sentence included a pitch for a unique opportunity. In all my years of research and manager different diligence, I can say two things with absolute confidence. Rarely Is there ever a truly unique opportunity. And when there is that rare, unique opportunity, it's not sold directly to the public. Now for some more hair raising and sometimes irrelevant claims, an 8% return before fees, my response. So what the net return your investors get after fees is the only relevant return. It's like reporting gross profit without mentioning expenses. This is critically important and especially in a private funds structure, such as the one being sold in this email. They also positioned the current environment as a good one, and that they are likely to get an additional 100 basis points in gross yield. This lack so much context and perspective is both scary and sad. high yield spreads are up close to 400 basis points this year, which would suggest that 100 basis points is Not a lot of additional compensation for the increased risks in this current environment. Also, they're using the s&p 500 and the Barclays aggregate bond index for comparative returns. This is like comparing apples to green beans. Neither of these indexes has a material lightness in investment strategy or underlying assets within this fund. Additionally, investing in something where the underlying borrower is going to pay out a gross yield of 9% or more is risky. This is key. investors need to understand that return and risk are related for salespeople to compare this investment to high quality fixed income
like what's contained in the Barclays aggregate bond index is misleading. Next, the fund structure is an evergreen Fund, which means new investors become immediately exposed to be existing assets in the portfolio. This wouldn't necessarily be an issue However, we can see from their straight line Performance Reporting that they value their private nodes at par value. This aspect is of critical importance. While this may make sense in normal times, in our current environment, this practice can lead to a massive price disconnect between the actual fair market value of the portfolio and what someone investing in it would be paying. buying into this fund today at no discount will likely benefit existing investors at the expense of new ones. Although their email was shortened length, there are many issues with the brevity. Beware of things that wall street says when they sell products, especially those that sound too good to be true and are overly simplistic. I spent a lot of time talking about how important it is for investors to have and stick with an investment plan. This illustration shows an analysis performed by a research company named doll bar and compares asset class returns over For a 20 year period, including those of the average investor. More than anything, this chart demonstrates how our emotions and tendencies lead to poor investment decisions. A properly crafted investment plan is a great tool for avoiding costly investment decisions. Large swings in asset prices, which are constant in public markets lead to fear and greed and strong emotions. Statistics like this are a solid reminder that we need to put short term emotion driven decision making aside and focus on the long term.