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Eight Lessons Investors Should Learn From Madoff’s Ponzi Scheme (WealthManagement.com)
Five years ago today, Bernie Madoff was arrested for running the largest Ponzi scheme. In a piece for WealthManagement.com, attorney Andrew Stoltmann writes that there are eight key lessons for investors to take away from the Madoff fiasco.
1. Clients should demand that their assets be held by a third party custodian instead of a sole firm. 2. Investors should not put all their assets in one investment or fund. 3. Madoff would not answer client questions about his returns or management styles, investors have a right to this information and should demand it. 4. Make sure the books and records of the fund or firm you choose to invest with are audited by a major accounting firm, Madoff’s books were audited by “a virtually unknown accounting firm.” 5. If the investment or the strategy can’t be easily explained, don’t invest there. 6. Go beyond the the central licensing and registration system for the U.S. securities industry and its regulators when looking for complaints or frauds. 7. “If it sounds too good to be true,” it is. 8. Be wary of firms where family members hold senior positions and where there are many young, inexperienced employees.
GMO’s James Montier is not a fan of the “risk parity” approach to asset allocation, a popular current investment trend. Risk parity refers to allocating in a way that puts an equal distribution of risk among the factors that drive various asset classes in a portfolio. In Montier latest paper he writes that risk parity “is the antithesis of everything at GMO we hold dear.” Montier has an equation for this investment trend: “Risk Parity = Wrong Measure of Risk + Leverage + Price Indifference = Bad Idea.”
John Rekenthaler at Morningstar highlights one particular argument that Montier has against risk parity. “What truly troubles me is something that Montier mentions in passing: the track record. Montier points out that per most risk-parity approaches, the stock weighting would have been increased in 2007 because stock prices were relatively stable (recall that in risk-parity schemes, the lower an asset’s volatility, the more heavily it is purchased). In 2009, the stock weighting would have been reduced because stocks were gyrating.”
Why Investors Shouldn’t Exalt Decisions That Have Brought Them Gains (Investment News)
The “free choice paradigm” experiment exhibits a human tendency that can be bad for investors, writes Daniel Crosby, a behavioural financial expert, in Investment News. That is, once a person has ranked one thing to be better than something else, they start creating a list of reasons why their choice was the right one to start with, and “begin to mount an offensive against the road not taken.” Their tendency to polarize push each decision that had initially ranked much closer, shows an “all-too-human tendency to exalt our decisions and abase the road not taken can have disastrous consequences for investors, however,” writes Crosby.
“Ideally, investors would be learning from each financial decision, coolly determining whether or not they’d made the right decision and resolving to learn from their mistakes going forward. This becomes impossible though when every decision is accompanied by a flurry of self-congratulation. What’s more, it leads us to attribute picking a winning stock as skill and choosing a dog as bad luck. This sort of misattribution is what leads investors toward overconfidence, a lack of appropriate balance and excessive churn.”
Wells Fargo And Morgan Stanley Bring On New Advisors (The Wall Street Journal)
Jennifer Daniels and Karen Levy, who managed $US151 million in clients assets and generated over $US1.3 million in commissions and fees annually at Merrill Lynch, have joined Morgan Stanley’s retail brokerage arm. The pair have joined Morgan Stanley’s office in Cincinnati, reports WSJ’s Corrie Driebusch.
Meanwhile, Wells Fargo has made some big hires as well. John Feast and Mary Marrett, who managed $US106 million in client assets, and generated $US1.3 million in commissions and fees annually, have joined Wells Fargo, from Janney Montgomery Scott LLC.
David Engel and Thomas Penrose, who managed $US250 million in clients assets and generated $US1.6 million at Morgan Stanley, have joined Wells Fargo in Philadelphia. Finally, Andrew Townes, Don Parsons and Charlie Mitchell who managed $US255 million in client assets at UBS Wealth Management, have joined Wells Fargo in Mississippi, reports Driebusch.
Companies usually adjust for write-offs when they announce their earnings. When a company announces earnings with few adjustments, those earnings are considered to be of higher quality. UBS strategist Julian Emanuel writes that earnings quality has improved significantly since the financial crisis. “Broadly speaking, earnings are cleaner — and the big spike in write-offs on 2009 is primarily due to distress in the Financial sector,” Emanuel told Business Insider.
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