The Investment Scientist

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It just caught my attention today that buried deep in the CNBC website was this headline:

Ameriprise Puts Retirement Savers at Disadvantage in High-Fee Funds, Says SEC

As the consequence of getting caught, the billion dollar company agreed to pay a fine of $230,000. If this is not a slap on the wrist I don’t know what is. Is it going to deter Ameriprise or any other brokerages from ripping off their clients? Nah, I don’t think so.

In a statement, Ameriprise pointed out “… It’s important to note that this is a long-standing industry topic and numerous firms have settled with SEC and FINRA on similar matters.”

This is actually a very honest statement that makes it clear that the dishonest practice of costly hidden fees is quite prevalent in the industry. I only take issue with their use of the word “topic” as if no harm has been done.

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If you go to the Morningstar website to do research on a very popular fund, the Vanguard S&P 500 Index Fund or VFINX, you may find this information after some digging around:

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The Investment Return is basically what the fund produces. (If the fund is a S&P 500 Index fund, then its investment return is basically synonymous to what the market produces.) The Investor Return is what the average fund investor receives. So why on earth would the typical investor get less than half of what the fund produces?

The answer is actually pretty simple: most investors just don’t have the mental wherewithal to stay in the market when it drops. They pulled out at the bottom of the market, thereby missing much of the rebound rally in 2009. See this fund flow chart below.

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Tara and Rance, From left to right, Rance Rizzutto and Tara DeFrancisco, both Comedians & Instructors from Chicago, Photo Credit Tara DeFrancisco.jpg

DC Metro Theater Arts, the largest performing arts publication in the Mid Atlantic region, just did an article about the upcoming improvised musical show I am producing in Bethesda. Tara and Rance, the two performers from Chicago, deservingly got the lion share of coverage, but the publication did say this about me:

Their upcoming show at Imagination Stage in Bethesda will be their first in that venue and in Maryland. This opportunity landed on their radar through Michael Zhuang, a resident of Bethesda, nicknamed “The Investment Scientist” for his founding of MZ Capital Management. Mr. Zhuang has traveled the world and spent countless hours researching, studying, and practicing his love of musical improv. In 2017, he began sponsoring up-and-coming talent from the improv-comedy meccas of New York City and Chicago to perform locally, with the goal to embed musical improv into the fabric of Bethesda’s growing arts and entertainment culture.

“My vision is to see Bethesda’s performing arts scene flourish,” said Zhuang.

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Here are my 2017 highlights:
  1. I published my first book “Physician Wealth Management Made Easy” and it got  off to a strong start. It was Amazon’s  #1 Hot Release in the Physician category for a month.
  2. I auditioned and was accepted into the cast of the DC production of the Broadway musical, Chess. I even got to sing five lines of solo in the opening scene, “The Story of Chess.”
  3. My business grew 33%. Now $100mm AUM is within reach. I was also recognized as one of Top 100 Influential Advisers by Investopedia on strength of my knowledge

    contribution.

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  4. I performed an improvised musical format called Spontaneous Broadway at San Francisco’s Bayfront Theater. I also performed an improvised musical solo at the Source Theater in DC.

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bitcoin.jpgThe Origin
Bitcoin was invented by a Japanese man named Satoshi Nakamoto. Or was it? He has been in radio silence since 2011, and nobody has seen him or has been able to verify his existence. To say the least, the origin of Bitcoin is shrouded in mystery.

The Technology
The underlying technology of Bitcoin is called Blockchain. It is legitimate and it is being adopted by companies as diverse as Alibaba and Walmart. The technology ensures high security and prevents counterfeiting. However, the technology is in the public domain, meaning that anybody can create an alternative to Bitcoin. In fact, there are more than 1300 “cryptocurrencies” out there as I write this.

The Early Adopters
The early adopters of Bitcoin were  anarchists who hate governments and who think fiat monies issued by governments are just means for control and wealth expropriation. They like the fact the Bitcoin is not issued by any governments and is not managed by any “trusted” third party.

The Next Adopters
Money launderers and criminals were  the next adopters of Bitcoin because  it is anonymous and untraceable.

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According the book “Becoming Seriously Wealthy” by John Bowen and Russ Alan Prince, in a study  of 199 billionaire families, 186 of them had stress-tested their family finances in the last five years. In other words, they had brought in outside experts to examine every facet of their financial situation to make sure everything was  done right. That’s a full 93.5%!

Similar surveys of business owners and physicians have shown that these people are much more careless about their hard-earned wealth. Only 11.1% of business owners and a measly 4.3% of physicians have obtained a second opinion about  their financial situations. See the figure below.

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blog_155_it1_roland_berger_tam_artikel_richard_thaler_image_caption_w768.jpgA few days ago I got the news that Richard Thaler won the 2017 Nobel Prize for Economics. If you don’t know about his work yet, you should. He, Danield Kahneman (2002 Nobel Prize) and the late Amos Tversky are considered the founding fathers of Behavioral Economics. His insights have a great deal of practical application and here I am trying to sum it up in one page for you.


Does The Stock Market Over-react?

This is the title of his paper published in The Journal of Finance in 1985. I read the paper for the first time when I was a PhD student at Carnegie Mellon University. The short answer to the question posed by his title is YES. He found that the market tends to overreact and reverse itself. When you look at five year intervals, stocks that did best in the previous five years tend to underperform over the next five years compared to stocks that did worst in the previous five years. What can you learn from that? Don’t be a hot stock (or fund or sector) chaser.


Myopic Loss Aversion
Richard Thaler coined this term to describe a cognitive bias many investors have which causes them to be afraid of short term loss to the detriment of their long term wealth. As an investment advisor, I encounter this a lot. The question I get the most is, “What do you think the market will do in next few months?” Implicit in the question is their fear that the market might drop and their desire to avoid it. The fear of loss causes many investors to abandon the market prematurely. What can you learn from that? Be oblivious to the market. This sounds counter-intuitive, but it’s the same advice given by another Nobel Prize winner, Daniel Kahneman.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

Twitter: @mzhuang

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