Drive Your Managed Portfolio into the Ground

Invert, always invert.” - Charlie Munger, the Vice Chairman of Berkshire Hathaway and Warren Buffett’s partner.


Munger borrowed the idea of inversion from 19th century German mathematician Carl Jacobi. Jacobi believed the solution to complex issues could be simplified if looked at backwards (or inversely). 


The Behavioral Value Investorblog applied the invert principle to write an amusing piece on “How to Lose the Most Money Investing in Stocks.” This got me thinking…what’s the worst advice I could give to a person looking for an investment manager?*


   1.  Make Sure Your Financial Advisor has Regulatory Marks


Preferably an advisor with multiple violations across many different institutions.  If they have served jail time for securities offenses even better.  Investing is too easy.  Why not add an element of fraud risk to your personal wealth?


   2.  Maximize Your All-In Cost of Investing


Pay well over 1% for investment management.  Ideally, all your holdings would be mutual funds with average annual expense ratios of 1-2%.  Bonus points for paying your broker sales charges, commissions, and kickbacks on the mutual funds.

Verify your hard-earned money is siphoned off regardless of your investment outcome.  Even if the market happens to be up, you want to optimize your broker’s compensation to ensure they live a comfortable lifestyle.


   3.  Don’t Forget to Pay Uncle Sam


Our government is ~$19 trillion in debt.  Choose an advisor who blindly trades, maximizing your capital gains tax every year.  Best if he/she uses tax-inefficient mutual funds that pass along capital gains even in flat & down markets.  The U.S. government is clearly the superior entity to allocate your tax dollars.


   4.  Your Advisor Must Place Their Interests First


The most important beneficiaries of the professional relationship are a) your advisor b) their company’s profits.  Your advisor should provide the bare minimum service to keep you from leaving.  In an ideal world, hire an advisor with outsized annual sales goals to keep their focus on generating new revenue, and not on you.  Find a publicly traded company for best results.


   5.  Relationship Success Should Be Based Charades


Events, game tickets, meals & entertainment need to be on-point.  Selfies and social media besties are encouraged.  Focus on your new friend and the social calendar, not the investment results.  Your new advisor buddy will encourage you to bring other friends to join the party!

This is obviously a tongue and cheek post.  A savvy consumer would look for the opposite characteristics in a professional advisory relationship.  However, the same message delivered a unique way can enlighten investors on egregious arrangements that exist in financial services.


*Extra disclosure: don’t do any of the above.

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