Welcome to the Coffeehouse
This non-commercial web site is for investors across the nation and around the world who recognize and embrace the sophistication of simplicity in their investment portfolios as well as their personal lives.
The Coffeehouse Investor does not provide financial advice - our purpose is to provide creative education for investors who want to build wealth, ignore Wall Street and get on with their lives by making informed, intelligent investment decisions.
From the Blog
Search for Simplicity
I don’t know if it is just me, or if the activities within our day to day experiences are becoming more complex.
For example, we recently installed a new Cient Relationship Management (CRM) tool at work on our computers, and I have to learn a whole new system for recording my communications with clients. The program overwhelms me with its complexity. I am slowly learning all its functions, but it is a slow process.
Oh, how I long for the simple CRM I used 10 years ago. It was easy, provided all the functions I wanted, and was very intuitive in the way one navigated around the program to utilize all its functions.
But as our company expanded, while at the same time the CRM of 10 years ago updated its software, it became unwieldy, which is why we eventually switched to the complicated new CRM software we are using today.
Or how about trying to sort through a medical or dental insurance bill? Last week I received a summary from my dental carrier about the services it would and wouldn’t cover resulting from a recent checkup. The summary was so darned complicated that I ended up calling the insurance provider for an explanation. Even that process was complicated, as I was led through a maize of automated push-button options in order to (finally!) connect with someone who could answer my questions.
Are our lives becoming easier as a result of technology, or more complex?
I was browsing through an old book of mine by John Main on meditation, which, according to the author, is all about simplicity. A few passages from his book caught my attention in my yearning for a more simple way of doing things amid our complex world.
“The process of meditation is absolute simplicity. In general, we are obsessed with the idea of techniques, methods, methodologies, and so on. . .”
“As a goal simplicity is something very unfamiliar to us. Most of us are carefully trained to see that only complexity is really worthy of respect.”
“In the world we live in we are so used to placing our hope and our faith in complexity. But I think all of us know, at a deeper level of our being, that real peace is to be found in profound simplicity.”
Profound simplicity. Maybe that is one of the reasons why so many Wall Street types despise the simple Coffeehouse Investor approach to building portfolios. Many people in the financial industry spend incredible amounts of time, money, and mental energy to devise complex research and trading methods in order to beat the market. They simply cannot accept the fact that a simple portfolio of 3 to 7 index funds will likely outperform their actively managed accounts.
Ironically, an article by Craig Karmin in the Wall Street Journal earlier this week revealed that sophisticated investing strategies of large endowment funds aren’t all they are cracked up to be. To quote,
The largest college endowments, long the envy of their smaller rivals for their sophisticated and profitable investment strategies, were left behind over the past year by the performance of smaller schools with far simpler approaches.
But forget about Wall Street for a moment. How do you, an investor who is managing your own portfolio to sustain you throughout your retirement years, look at the issue of complexity versus simplicity in building a portfolio? I have met with enough people in my lifetime to know that many can’t handle the wisdom of simplicity in portfolios. For some, it is an ego thing. Others are brainwashed by Wall Street. But whatever the reason, too many investors are too easily impressed with complex formulas that include beta and alpha and standard deviation and co-variance that include sophisticated looking charts and graphs than they are with my simple game of “Outfox the Box.”
For investors who embrace the profound simplicity of the Coffeehouse investing philosophy, the benefits are twofold. First, you maximize your return potential in each asset class. Secondly, and more important, you bring an abundance of simplicity into one component of your life where the experts are telling you that complexity is the answer.
I finish off my book with the following. . . “When we unclutter one part of our life, we enrich another part, and that is what this investment journey is all about. When we simplify investing, we take another step toward discovering our contagious spirit and our unique energy in such a way that we impact our world, making this a better place for everyone.”
Thoughts on working with a financial advisor
Last week I sat down with a gentleman, an old friend of mine, who wanted some advice.
First, a brief history . . .
Many years ago I had offered him some suggestions on how to allocate his Vanguard funds within his 401k plan. He ended up owning a Coffeehouse type diversified portfolio of low-cost index funds.
During our recent meeting he informed me he is switching jobs and thinking of rolling his 401k into an IRA. He had met with a financial advisor who wanted his business and had presented to him a proposal similar to his current allocation. However, this financial advisor didn’t recommend low cost index funds, but a line-up of 5 to 7 actively managed funds, all ranked 4 or 5 stars by Morningstar’s rating service.
So I offered my friend some advice: Stick with the low cost index funds and get on with your life. After our meeting, I got to thinking . . .
- Why aren’t there more financial advisors out there who embrace the simple Coffeehouse Investor philosophy when constructing diversified portfolios for their clients? Why are they all so obsessed with “beating the market?”
- When a financial advisor/stockbroker recommends actively managed 5-star mutual funds, they are setting themselves up for a fall, because the client is then inclined to judge the advisor on his or her ability to pick the top performing funds. What does the advisor do 3 years from now when a 5 star fund turns out to be a dog? Switching to another 5-star fund is what most advisors do, even though this strategy kills long term performance.
- Unfortunately, most advisors think that they bring value to a client by picking top-performing stocks and mutual funds. That is a big mistake, in fact it is ridiculous. The real value an advisor brings to a client is to help clients clarify financial goals, and then implement a plan, build a portfolio, and work with a client to achieve those goals over time through life changes and market changes.
- When a client and/or advisor start focusing on top performing funds, they focus their attention on something that is largely irrelevant, if not counterproductive to building wealth; one’s ability to beat the market. Instead, both client and advisor should be attending to financial planning issues that matter most of all, like building a tax efficient portfolio, like rebalancing and risk-monitoring, and discovering whether or not one’s saving and spending are on track to reach short and long term goals.
Sadly, I don’t think we are going to see much change in the dynamics of a client/advisor relationship anytime soon, which is too bad, because more folks than ever before could benefit from some common sense financial guidance.
Have you had any experiences like the one mentioned above when seeking out financial advice? If so, post a comment, and let the readers know how you stand on this topic.
Is “Efficient” the Same as “Rational?”
Larry Swedroe, nationally acclaimed author and principal at Buckingham Asset Management, on his blog at moneywatch.com, recently addressed the growing controversy over market efficiencies, and more specifically, the validity of the “efficient market hypothesis.”
Over the past few weeks there have been some prominent articles discussing the “efficiency of markets,” especially in light of the past eighteen months, when many global stock market indices declined by 50 percent or more.
Yale’s Robert Shiller and Jeremy Grantham of GMO, two individuals who have garnered widespread credibility with their work on the forces behind irrational markets, have been at the forefront of criticizing the efficient market theory.
The reasoning goes something like this . . . “How can markets be efficient if the Dow Jones Industrial Average trades at 14,000 one year, and twelve months later is below 7000? That is proof enough that there are major inefficiencies in the stock market.”
In my opinion, the authors of these articles, and prominent figures like Shiller and Grantham, misuse the word “efficient,” with “rational.”
I don’t think anyone would argue that markets aren’t highly irrational at times. Whether it was the tulip bulb craze of many centuries ago, or the dot com bubble of ten years ago, the emotions of investors, not wanting to miss out on a good deal, can drive “fair valuations” of assets to seemingly absurd levels.
Two points . . . First, from a market efficiency standpoint, even when markets are highly irrational, it is still difficult, if not impossible, for professional stock traders to take advantage of this irrational investing climate, which indicates that markets remain fairly efficient during these time periods as well.
Second, as Mr. Swedroe points out in his blog, even those who are critical of market efficiencies have not been able to exploit it through their management of money.
How do you weigh in on this debate? Do you try to take advantage of potential inefficiencies in the marketplace? Have you been able to successfully navigate irrational markets with your investment decisions?
Words from a Sage
Mel Lindauer was one of the founding members of the Vanguard “Diehards” discussion board. Over the years he has contributed countless hours to the formation and civil interaction of this nationally acclaimed online forum discussion group.
In addition to that, he has co-authored, along with Taylor Larimore and Michael Leboeuf, ”The Boglehead’s Guide to Investing.”
This week he wrote a guest column at Morningstar.com titled “The Secret of Wealth . . . isn’t really a “secret” at all.”
I am keenly aware of the many people in our society who promote “get rich quick” schemes to people like you and me. Just yesterday, on the yahoo.com financial page, a bestselling author was promoting something like ”thirty days to learn my market-trading systems” seminar as a way to build wealth.
The tragedy of that advertisement is that some folks actually start believing in it as the way to build lasting wealth; both emotional and financial wealth.
Take the time to read Mel’s column. He won’t offer you a “get-rich-quick” scheme. What he does offer is some common sense financial wisdom that benefits those who are serious about building wealth, ignoring Wall Street, and getting on with their lives.