Beware of salespeople and products market records bring

By DAVID MOON, Moon Capital Management, LLC
June 9, 2013

When the stock market reaches either new highs or cyclical lows, people increase their propensity to discard reason.

In the late 1990s, as the Dow climbed from 3,000 to almost 12,000, cab drivers quit jobs to invest for their friends and family. There was a group of physicians in Indiana who started their own advisory firm. (Thankfully, I’m not aware of any financial planners who switched to orthopedic surgery.) I know drug reps, professional athletes and middle managers who left lucrative careers to pursue ultra-wealth in the investment industry.

Then 2000 happened. Then 2008. Followed by more career changes. And no ultra-wealth.

As Mark Twain reminds us, history may not repeat itself but it does rhyme.

As the Dow Jones Industrial Average increased 130 percent from its 2009 market bottom, we see more clutter and less logic filling the investment landscape.

Weird, complex investment products with exorbitant fees. Simple, amateur-ish investment products with exorbitant fees. New investment advisers hanging out shingles and soliciting clients with little but the promise of riches or some back-tested model that would have worked had it been employed in the past.

At new market highs, almost any strategy will suffice, as will almost any adviser background.

Investment pitches based on hypothetical, back-tested models are some of the most troubling. Anyone can create a successful set of investment “rules” that would have worked during a cherry-picked time period.

I cringe when hearing ads touting systems or products that would have provided an investor all of the upside return of the market with little or no exposure to potential loss.

“Just put your money in our Super Tactical Conservative Aggressive WOPR Allocation program. It accurately predicted the market in the last five (or 50 years.)”

From 2008 to 2012 the number of adoptions at the Young-Williams animal clinic increased 80.60 percent, from 2,541 to 4,589. Over that same period, the Dow Jones Industrial Average also increased almost 80 percent.

Perhaps we should start the PSP investment model, or the Puppy Stock Predictor. “All of the market upside, with none of the risk!”

Don’t laugh.

We now have mutual funds dedicated to investing in stocks with liberal and conservative political leanings. The Vice Fund buys sin stocks, whatever those are.

The SEC mercifully shut down the Stock Cars Stocks Index Fund, after its inexperienced managers proved themselves to be as incompetent at compliance as they were at investing.

Some funds merely give the appearance of being unique. The Monetta Young Investors Fund aims to invest in well-known companies that produce things recognized by children and teenagers.

Except as noted in the fund’s SEC reports, half of its assets are invested in a handful of exchange traded funds, or ETFs.

People are paying a management fee to own a fund that owns four other funds, along with Disney and McDonald’s. My teenage children could manage that fund.

In 2009, following the market collapse in 2008, 488 mutual funds closed and another 336 were merged out of existence. As the stock market recovered in 2012, 484 new funds were launched.

It happens every time.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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