The Quarterly Report

  • The Quarterly Report
  • Second Quarter 2014
  • Chuck Osborne

The Things People Say

Do you really write “The Quarterly Report”? I get that question a lot. The answer is yes. Most people who know me well think my wife actually writes the report. Her career has been in corporate communications and she is a good writer, but she simply edits. (She will actually tell you she only proof reads my writing, but that is just because she is too modest.) In my opinion it takes two skills to be able to write well: First, you have to be able to tell a story; I learned that from my father. Second, one needs knowledge of language and something we are increasingly destroying in our 140-character culture: grammar.

I learned most of what I know about grammar in the eighth grade. My eighth grade English teacher was a volunteer; her husband was a successful doctor and she didn’t need to work. She volunteered her time at my church-run school because she felt it was her calling to teach middle schoolers how to speak and write in proper English. My hands are beginning to shake just thinking about it now – she was the toughest teacher I ever had, and my first report card that year had on it something that my mother had never seen: a letter other than A – and it wasn’t B either. Mom threatened to not let me play basketball. My father interceded on my behalf and made a deal – I could play my favorite team sport as long as I got that grade back up where they expected it.

So I did just that. I worked harder in that class than I probably did in any other class until I got into my major in college. Along the way something happened that I really didn’t appreciate until many years later: I learned the English language. While that skill can be very helpful in one’s career it does have one very negative side effect: I get chills up and down my spine when people abuse our language, which they increasingly do on a daily basis.

Some things one just has to learn to live with, such as the misuse of good and well, especially in sports. Golfers, for example, will start their post-round interview saying, “I hit the ball really good today,” and I want to stand up and scream at the TV, “No you didn’t! You hit it WELL!!” But, I resist that urge because the proper use of well and good is a battle that cannot be won. Please don’t misunderstand, I am not judging; it is just a knee-jerk reaction ingrained in me by teachers who would respond to the question, “Can I go to the restroom?” with, “I don’t know. Can you?” Then one would sit there holding it in until the correct, “May I…” was presented. I suppose those teachers would be brought up on child abuse charges in today’s schools.

What really bothers me is when people use words that are not really words, especially in an effort to seem more intelligent. Irregardless is a classic example. The fact that it isn’t a word does not seem to discourage those who either do not know what regardless means or just feel that it is not sophisticated enough. Resiliency is another good example. A few months ago I was watching a sports event and the announcer kept saying it: resiliency. It was like fingernails on a chalk board. As it turns out, resiliency is a word. It means resilience, but people stopped using it a few hundred years ago because why in the world would one use a four-syllable word when three syllables do the job. It has unfortunately returned to some popularity thanks to the pseudosophistication movement. Resiliency, it seems, has a great deal of resilience due to its more sophisticated sound.

This poor use of language is not just a problem for those of us who enjoy watching sports. It is rampant in corporate America, where it is seemingly more important to be able to construct sentences with nonsensical industry speak than it is to actually know anything. Branding was the first example I experienced at my first annual conference with Aetna Retirement. Until that time I thought branding was something a cowboy did to a cow in an old western, but there I was listening to some guy high-up in the marketing department who talked for 40 minutes, used the word brand or branding 250 times and somehow said nothing. I felt like Tom Hanks in the movie “Big.” He was a young boy who woke up in the body of a grown man after wishing to be big. In his first business meeting he simply raised his hand and said, “I don’t get it.”

In no industry is this truer than in ours. The investment world has a language all its own, and it gets used and abused. The degrees of abuse range from simple confusion to practical dishonesty. It starts with how we refer
to ourselves: In the good old days when people spoke plain English the investment world was made up of bankers, brokers and investment advisers. Bankers helped companies raise capital to get started or more often to expand operations. Brokers brought buyers and sellers of investments together. Investment advisers managed other people’s investments. It was fairly simple.

Then technology brought buyers and sellers together without the middle man, and the broker, instead of going away, became the financial adviser. They used that term because they were prohibited from calling themselves investment advisers. Investment advisers really didn’t mind however, because they had long been known as money managers. So financial advisers became wealth managers. Every time I have heard someone use the term “wealth management” I have asked what it means. No one has yet given me an intelligent answer.
This is not all harmless marketing spin. Most of our individual clients come to us with accounts from the big brokerage firms, Merrill Lynch, Morgan Stanley etc. Clients over a certain age will say, “I manage my money, and Bob at Merrill Lynch is my broker.” Younger clients will say, “Morgan Stanley manages my money.” They say that because they don’t understand the difference between wealth management and money management. Well, it is the same as the difference between irregardless and regardless. One is a real word, the other isn’t.

Understanding how our industry works is confusing enough. Understanding who is in the business of giving advice versus the business of selling products is a huge step. However the language barrier doesn’t stop there. Regardless (notice: no ir needed) of whether an investor wishes to DIY – that is the contemporary non-English way of saying do it yourself – with the help of a broker or to use an adviser, she must navigate a labyrinth of industry speak in order to build a simple portfolio. Concepts such as risk are described as “beta” and “standard deviation.” Philosophy and process are described as “value, growth, or GARP” – growth at a reasonable price. Portfolio construction is described as “diversification” and investments that cost more are called “alternative.”One is then told that the alternatives he invested in are losing money because they have a low “correlation,” and that is evidently something he should want. Following an index that constantly changes is described as “passive” while owning the same core companies for several years is “active.” The newest thing is “smart beta.” I’m not sure if that means regular old beta is dumb, but I saw an article just last week saying that “smart beta” is here to stay, so we better get some.

All of this is designed, whether purposefully or just by the subconscious habit of human nature, to make those of us in the industry look smart and you, the clients, feel dumb. But don’t! Albert Einstein once said, “If you can’t explain it to a 6-year-old, you don’t understand it yourself.” As I understand it Einstein was a pretty smart guy.

This has long been an issue with fast-talkers who are really more interested in making a sale and gaining a commission then they are in understanding what they are selling, or more importantly in understanding their client’s actual needs. Increasingly, however, it seems to be an issue with actual investors. We often meet people who are just dying to use the five industry terms they picked up to impress us, and I can almost feel their disappointment when we ask them to describe their objectives in plain language.

In plain language people don’t want exposure to beta, smart or otherwise; they want to stay in their home during retirement. They don’t want an uncorrelated alternative portfolio; they want to provide their children with an education. They don’t want market neutral alpha; they want a reasonable certainty that they will not outlive their assets. A 6-year-old can understand that.

Plain, correct language that any 6-year-old would understand is always the best way. An investor always plays one of two roles: she either owns something that she believes will increase in value over time, or she loans money to someone else who promises to pay it back plus interest. We call those roles equity and debt, respectively. Risk to an investor is losing money, not some mathematical formula. This is what we do at Iron Capital. We are investment advisers, or money managers if you will. We represent our clients, not any financial institution. We invest our clients’ money in things we understand. We know what we own and to whom we have loaned. We make prudent investments and structure portfolios to meet real needs while avoiding any permanent losses. It may be considered old-fashioned or boring, but it works. It is a lot like grammar.

Of course there will always be those who are too hip to speak properly and too self-important to speak simply. Irregardless of the truth, the folks who come up with smart beta and reverse CDOs and alternative strategies of every sort have a great deal of resiliency in their ability to produce marketing spin. Why wouldn’t they? After all, they do it so good.


Charles E. Osborne, CFA, Managing Director


Review of Economy

Back to reality. This year began with many economists saying 2014 will be the year we break out of this slow growth. Then GDP shrank 2.9% in the first quarter. Shockingly, economist are still predicting over 3% growth. It is not happening. The official unemployment rate dropped to 6.1% and shows some sign of gradual improvement. The private sector is picking up, which is good, but we still have a long way to go. Workforce participation remains at historically low levels. The Federal Reserve Bank (Fed) is tapering no matter what. As we wrote earlier this year, reading between the lines led us to believe the Fed has come to the internal conclusion that QE did not work. They want it stopped. Even a 2.9% drop in GDP will not slow them down, and it shouldn’t.

Review of Market

I cannot remember a quarter with a 5.2% return in the S&P 500 ever being so boring. Boring is good, I guess, but sometimes it is too quiet and it is beginning to feel that way. It was a good quarter and we will take it. Bonds were boring too. The Barclays Capital U.S. Aggregate Bond Index ended the quarter up 2.04%. With 10-year treasury yields at 2.53%, it is hard to be excited about bonds long-term. Hello political risk. While the markets seem to be on auto-pilot, the rest of the world is busy falling apart. Russia is still trying to take over Ukraine. Al Qaeda has re-branded itself as ISIS and is alive and well in Syria and Iraq. Gas prices are high but otherwise, no one seems to notice. We will see how long this can last.

Market Forecast

WE ARE BECOMING MORE CAUTIOUS ABOUT THE EQUITY MARKETS. For the most part valuations on equities remain reasonable, and that cannot be said of almost any other asset at the moment. But in the short-term it is hard to see this quiet rise continuing without some volatility. U.S. large-cap stocks still look attractive. Record high index levels are meaningless. We still have average valuations. International stocks would be looking better except for Russia poised to expand its borders. Emerging markets are perhaps the most attractive on a valuation basis and seem to be gaining some momentum. Small company stocks are the only area that appears overvalued. Bonds remain our biggest concern over the long term. Yields remain very low. Stocks may actually be safer.