Using narrative in your decision making

Open link to read just the headline

When you read the headline of the article

In addition to the aggregate absolute narrative – (try to ignore the source) – just look at what the headline means on a global basis – who is it coming from? What are the real implications for mood (and stocks)?

It’s coming from a guy who appears to be fully committed for the greater good. 

More importantly, who are his like minded friends?

Warren Buffett

What do they have in common?

The Giving Pledge

What else?

If you dig you’ll learn that David Rockefeller became a major influence on Gates and if you understand “the Rockefeller philanthropic focus” and why Rockefeller University came into being in 1901 it was all about Rockefeller Sr. putting his money into science for solving problems. Note according to the Wikipedia Rockefeller University profile you’ll learn the university has 36 Nobel laureates tied to it. This is real deal fiduciary roles and duty at the highest level.


Buffett is the ultimate fiduciary investor who is both smart and successful. His decision making involves:

  • Fundamental factors
  • Finding qualities of ingenuity and innovation
  • Reasonableness (a fiduciary quality)

I’m guessing Gates as a philanthropist shares a similiar decision making process

It seems, they are both fiduciaries committed fully to helping others, so you have to take them seriously

So the current market environment based on (“CAPE” or Mkt Cap/GDP as example) is telling us:

  • Stocks are way overpriced. For the fiduciary-investor this simply means “unreasonable.”

This is the reason Buffett is not a bull believer

It’s that simple

He will not buy stocks that are unreasonably priced, in an

unreasonably priced market environment

  • Furthermore “unreasonable” also means that regardless of some theory or narrative behind a product, technology and market cap, you should never buy something aka stock because of just the narrative.
  • The underlying fundamentals have to be connected and in line also.
  • There can’t be any disconnect.
  • And if there is an extreme disconnect, you have to make a prudent decision to adjust/trim your positions and allocations.

How do we know this?

Just take Buffet’s role as an investor and look at the approach and factors he uses:

  • Reasonable book-value plus a growth narrative for individual investment selection
  • Reasonable Market Cap/GDP for the overall equities/fixed mix
  • And as an example I’m speaking of a 70/30 mix in a bull to 50/50 or 35/65 in a bear.

Read more“Buffet-Gates-Narrative-Indicator”

The IMF adds to shifting narrative and mood

We need no reminder of the headline news, just look at the pop in the “fear index” aka S&P 500 VIX to understand a change in the narrative, and definitely the mood may be underway.

Link to report

IMF Revised Forecasts

More than 75% of the global economy is stepping into phase one reopening and several countries are experiencing a new second wave.

Without a vaccine anytime soon,

“the strength of the recovery is highly uncertain”


“We are now projecting a deeper recession in 2020 and a slower recovery in 2021.”

Projected Cumulative Loss

$12 trillion over 2 years

(2018 US economy was about $20 trillion)

Crisis & Recovery

“This crisis like no other will have a recovery like no other.”

Upside Risks

Better news on vaccines and treatments

Downside Risks

  1. “Further waves of infections can reverse increased mobility and spending, and rapidly tighten financial conditions, triggering debt distress.”
  2. “Geopolitical and trade tensions could damage fragile global relationships at a time when trade is projected to collapse by around 12 percent.”

Debt is an issue and challenge again

“Public debt is projected to reach this year the highest level in recorded history in relation to GDP, in both advanced and emerging market and developing economies. Countries will need sound fiscal frameworks for medium-term consolidation, through cutting back on wasteful spending, widening the tax base, minimizing tax avoidance, and greater progressivity in taxation in some countries.”


Full Summary

“At the same time, this crisis also presents an opportunity to accelerate the shift to a more productive, sustainable, and equitable growth through investment in new green and digital technologies and wider social safety nets.

Global cooperation is ever so important to deal with a truly global crisis. All efforts should be made to resolve trade and technology tensions while improving the multilateral rules-based trading system. The IMF will continue to do all it can to ensure adequate international liquidity, provide emergency financing, support the G20 debt service suspension initiative, and provide advice and support to countries during this unprecedented crisis.”

Read moreThe IMF adds to shifting narrative and mood

Why actively managed funds have no place in 401k plans

It’s not about the mountain of research against active funds based on performance.

It’s about one term that get’s to the heart of the construction of 401k plans: fiduciary duty.

Fiduciary Duty

Plan sponsors can easily be held liable if a group of participants figure out their investment fund offerings have fees that are not “reasonable.” There have been lots of lawsuits with big and small plans lately based on the concept of reasonable fees. Now, of course, that’s a relative term and there are all sorts of ways to defend aggregate fee levels through benchmarking comparisons that are today the core services provided by retirement plan consultants and other on-line service provider’s

Determining reasonableness comes down to justification of fees with active managers. It sometimes involves a plan sponsor in the middle of a subjective discussion on expected performance, how many portfolio managers have CFAs, and the potential for their style to make a comeback at some point in the future. This, of course, means that the plan sponsor is paying thousands of dollars in consulting fees over many many years with styles going in and out of favor and active managers being fired left and right every time their standardized performance over 3, 5, 1nd 10 year periods is not what was expected based on the expert consultant’s abilities to identify star managers with above-average persistent performance.

Why index funds are better for the plan?

The real question is what are the benefits from a fiduciary standpoint.

The bottom line, utilizing index funds is a prudent decision when it comes to fees, investments, and asset allocation. It’s a prudent decision both at the individual and aggregate plan level.

It’s like having a Directors and Officers Liability Insurance policy wrapper for the plan especially if you use only index funds in the plan.

  1. What if a plan sponsor took the index funds in aggregate to compare fees for reasonableness. They determined with the help of an indexation consultant which index fund providers were ripping them off based their methodology and execution costs. They would just drop them without hesitation.
  2. But where prudence plays a role, evaluation and due diligence with index funds is different than with active funds since fees represent more than getting what you pay for. Index fund performance closely matches the realized and expected performance of the underlying index it represents. The same underlying index which in many cases is tied directly to an asset class that is used in the asset allocation approach and process. Therefore participants will experience fewer periods in which their asset allocation strategy expectations have a mismatch with their own investment funds and their own asset allocation strategy performance.
  3. It eliminates the whole controversial debate about active vs passive which researchers say favors index funds and asset management professionals sometimes say they have a great fund that outperforms the respective index. The reality is there is no definitive process among fiduciaries that enables them to pick good active persistent managers that can prudently support the asset allocation approach. I’ve practiced investment manager research and selection on and off for 30+ years. I’ve seen empirical white paper research that says you need 15 years of cumulative aggregate performance measurements to justify active management fees yet fiduciaries and plan participants only use standardized measuring periods that usually end at 10 years utilizing compound annual growth rates. Both approaches may be acceptable on the surface to a plan sponsor but it’s very debatable across the fiduciary community that serves defined contribution plans and their sponsors. This is a hot potato. There is way too much debate around this which has left the defined contribution industry with no true protective riskless prudent standards for selecting worthy active managers. If you disagree I would be happy to provide you all the papers at the center of the debate nevermind all the marketing white papers out there on both sides of the debate.
  4. The bottom line, the whole idea of active management is very subjective on many different levels and extremely debatable which makes any prudent fiduciary evaluation process in a defined contribution plan fraught with risk(s) and therefore imprudent. 
  5. AND as a fiduciary investment consultant you should never expect plan sponsors to take your word for it on any recommendations to add an active manager to an investment menu based on an analysis they may not understand completely. OR probably have little or no ability to make even a reasonable guess on whether to hire the manager. As a fiduciary investment consultant it your responsibility to be both reasonable and prudent as to whether you can fulfill your duty to educate while enabling the plan sponsor to make a sound decision which is based on your relationship with the plan sponsor and whether “you know the customer” plan sponsor.
  6. Ultimately the plan sponsor could easily be held liable for breach of duty due to reasonableness.

The focus should be on the asset allocation process anyways. Isn’t that what’s been said all along.

Read moreWhy actively managed funds have no place in 401k plans

Active or Passive? A conversation with Ken Solow about his book, Buy and Hold is Still Dead (Again)

Source: Pinnacle Advisory The following videos are especially relevant today. What is behind the underlying strategic asset allocation advice you get? With: A 401k model portfolio A target-date fund An asset allocation portfolio analysis and recommendation A mean-variance optimization exercise Hint: It starts with a theory -From the book interview- “Buy and Hold” Investing aka … Read more Active or Passive? A conversation with Ken Solow about his book, Buy and Hold is Still Dead (Again)

Topping Process Appears to Come to a Halt (A Weekly Period Analysis)

We are still looking to identify the official start of Primary wave 3 down, but in this historic period for the stock market and economy we have to see the market top first. Just in the last 3 trading days, the weekly negative price change in the S&P 500 index has increased 53! after being … Read more Topping Process Appears to Come to a Halt (A Weekly Period Analysis)

An important reminder as we head into what could be a very ugly week for stocks

Before we get to the “important reminder,” the following chart is from the dynamic web-report, OECD Economic Outlook, June 2020, put out by the Organisation for Economic Co-operation and Development (OECD) twice a year. This highly followed report illustrates what Fed Chairman put into words in his recent speech, following the central bank’s two-day policy … Read more An important reminder as we head into what could be a very ugly week for stocks