Wall Street is Opportunistic

In the most recent episode of AWM Insights, Brandon, Erik, and Justin dissect BUZZ ETF, and discuss how to set up a long-term financial framework that works.

Don’t be fooled by the clever marketing of the extremely talented salespeople of Wall Street. When I played in the NFL I was convinced I was doing the right thing by having a broker at Merrill Lynch and even picking the newest hottest stock in my own brokerage account. I was ignorant of the things that actually mattered like growing my net worth, knowing my burn rate, and prioritizing my after-tax returns.

“A talented sales staff will trump a talented investment staff when attracting capital from investors. And this is all under the title of an unfortunate reality of the investment business. And I think this is just nothing new, right?” -Brandon Averill

Brandon is referencing this post from Ben Carlson’s blog, which I have also been a big fan of for 6 years now. Too often we are sold a narrative that does not even target our own priorities and outcomes that we actually want in life.  

A Better Way to Build Wealth

Don’t waste your time checking daily movements in stock prices and avoid chasing returns from the newest Wall Street product. Justin discusses the problem with momentum investing in that it generates an unnecessary tax liability. Portfolio turnover is something to keep low when building and keeping wealth.

Short term movements are unpredictable and random. They are meaningless to a diversified, long-term investor that has properly hedged their essential spending and is therefore immunized from interest rate changes and protected from personal or economy-wide shocks.  

“One of the core tenants that has been and always will be of a long term investor is you be patient, you don't try to trade the markets, because you have one net worth, you have one after-tax return, and it should be customized to helping you achieve your priorities.” - Erik Averill

A tailored investment strategy invests in coordination with the entire financial structure, actually hedges uncertainty, keeps taxes and expenses low, while increasing your expected after-tax return by investing in the highest confidence sources of compensated risk, and then is continuously iterated on as your life changes.

Private Investments

Whether this is real estate or private equity, just because something is NOT marked to market or priced at the close every day does not mean it doesn’t have volatility. Leverage is commonly used in real estate or hedge funds to juice returns. This is just an engineered risk on top of the underlying risk that you should always take into account in your personal financial strategy.

"And just helping people understand when you're putting leverage in, you’re putting debt, just because you can't see the price of this house changing, or this apartment complex changing on a computer every day, there is tons of risk in any asset class. And when you add leverage to it, we just want to make sure that you're not risking the things that are most important to you.” - Erik Averill

The results of too much debt can be seen in every crisis: margin calls like many investors received during the COVID crash, real estate investors that were completely wiped out in the Financial Crisis, or even the eminent failure of the massive US debt markets in March.

Debt is a double-edged sword that can engineer greater returns at the risk of greater losses. For certain uses debt can be a good thing such as non-recourse business debt. Also, Mortgage debt can allow you to pull forward future earnings and buy a home you can grow into. However, the way you use the debt and how it fits in your financial structure matters greatly. A mortgage, while maybe a good idea when younger, has a negative carry and in retirement should probably be avoided. Many financial advisors only care about your portfolio so will not advise on your entire net worth. A disappointing outcome is usually the result.

History doesn’t repeat itself but it often rhymes -Mark Twain

Human behavior does not change and so investor behavior oscillates between fear and greed. Our brains are wired to believe a good story over good analysis. This has been proven over and over in study after study. Every market cycle produces the same lessons that are learned and then investor amnesia kicks back in and people forget those lessons of history.

“Man is the ape that imitates, tells stories, seeks status, morally condemns others, yearns for the good old days. All of which guarantees a future with financial and religious mass manias.”

This quote is not from the podcast but from The Delusions of Crowds by William J Bernstein and highly recommend reading this book by the way.

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