“Nowhere does history indulge in repetitions so often or so uniformly as in Wall Street. When you read contemporary accounts of booms or panics, the one thing that strikes you most forcibly is how little either stock speculation or stock speculators today differ from yesterday. The game does not change and neither does human nature.”
The quote above will sound familiar to advisors who have had to tell worried investors about market cycles and the need to sit tight during volatile periods. What’s surprising is where this statement comes from: a 1923 novel, Reminiscences of a Stock Operator, written by American writer Edwin Lefèvre in a fictionalized investment biography of speculator Jesse Lauriston Livermore.
Although nearly a century has passed since the novel was first published, it still stands as one of the best investment books that Steve Blumenthal (left), the Philadelphia-based founder of CMG Capital Management and a Merrill Lynch veteran, has ever read. The book was passed on to Blumenthal when he was a young institutional broker at Merrill Lynch by his mentor, John Ray, a portfolio manager at Delaware Funds.
“In 1984 and for years that followed, I would walk a few blocks from 15th and Market in downtown Philadelphia to John Ray’s office,” CMG’s chief executive recalls in “The Blumenthal Viewpoint: Behavior Gap,” published on Aug. 23. “I was always nervous. I knew very little about the business but was hungry to learn. ‘John, what should I read?’ He handed me his copy and said, ‘I want it back.’”
A big part of the book’s appeal for Blumenthal is the way it distinguishes between investors and speculators.
As Reminiscences of a Stock Operator implies, broadly diversified portfolios will always underperform the top-performing asset classes at any given time. And nowadays, Blumenthal says, advisors are often faced with restless clients who compare their total investment portfolio performance to a single index like the S&P 500 Index.
What Blumenthal learned when he first read that novel back in 1984 applies today, he says, and it’s advice he gives to his advisor clients who phone and want to talk about investor behavior.
“Our industry’s canned response is to say that ‘We’re in it for the long haul,’ though I think you’ll agree this answer is not enough for most clients. Let’s see if we can break this down and give your clients some real data,” writes Blumenthal, who founded CMG as a registered investment advisor in 1992. Today, CMG, based in Radnor, Pa., provides other RIAs, financial planners and institutions with managed accounts, mutual funds and variable annuities.
Advisors should ask their clients if they view themselves as investors or speculators, Blumenthal recommends. “Investing is about broad risk diversification; speculating is about taking targeted bets. Both approaches are OK. Which one [are they]?”
For investors, Blumenthal offers some sober data to share:
- The S&P 500 Index is up 20% year-to-date; however, no broadly diversified portfolio is up 20%
- Global 60/40 portfolios are up approximately 7%
- U.S. 60/40 portfolios are up approximately 10%
- And while U.S. equities are the world’s best asset class, the U.S. bond market is down close to 5% (“take 60% of +20% and 40% of -5% and you get approximately 10%”)
Further, from May 22 to June 24, the S&P 500 lost 5.6%, the MSCI EAFE lost 10.1%, MSCI Emerging Markets fell 15.3%, the Dow Jones/UBS Commodity index fell 4.5%, the U.S. 10-year T-note fell 4.4% and the Barclays U.S. TIPS index fell 7.1%.
That sort of data is enough to convince any in-it-for-the-long-haul investor to buckle up for a long and bumpy ride. And as for speculators? There are no guarantees, Blumenthal says, and he doesn’t know anybody who can pick winners trade after trade because such an animal doesn’t exist.
“Few, even the greats, might make millions yet might lose the same on their next targeted bet. If he is an investor, coach him back to plan. If he is a speculator, there is a good chance he will not be your client for long,” Blumenthal advises. “This is a game of probabilities and while you might be 100% correct on a particular risk, you might just not have the time and inner belly to patiently live through the painful decline you’ll experience along the way to being right.”
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