Transparency Sets May-Investments Apart

Flying is inherently scary. Would you rather fly inside a cargo plane with no view of the earth below, just trusting in the pilots’ skill? Or is it better to be able to see what’s going on around you? Transparency – being able to see where you are and what’s really happening – generally makes for a more enjoyable ride.  Transparency in the financial industry, however, is the exception rather than the norm.

Whether it is Citigroup hiding subprime mortgages off its balance sheet, or AIG making huge bets in derivatives in a small subsidiary insulated from reality, lack of transparency is the Freddy Krueger of the financial services industry. Handling uncertainty about the future is one of the great challenges of investing, and this problem is compounded when investors don’t understand how their own portfolio is currently invested. When markets turn down, as they did in 2008 and early 2009, this lack of understanding turns to fear and leads investors to make costly emotional decisions.

High fees and complex products go together like Bonnie & Clyde. Made for one another, they target sophisticated investors because that’s where the money is.  Investors often don’t understand the investment strategies being employed in their portfolios. Bernie Madoff refused to explain his “proprietary” trading strategies to anyone. Because Madoff was well connected with the industry regulators, and because of how he dressed and the cars he drove, many investors bought into his “black box” investing style, which turned out to be nothing more than a ponzi scheme.

The industry’s lack of transparency results in emotional decision-making by clients. If you don’t understand what you own, but you see its value cut in half, you are far more likely to sell (probably at or near the bottom) than if you understand the investment you’ve made and are therefore willing to ride out the tough times. Moreover, this isn’t just a theoretical problem. Most of us probably know someone that lost tens of thousands of dollars, if not more, by bailing out of stocks at or near the market bottom in 2008/9.

May-Investments approach has been to be as transparent as possible, as often as possible, in as many forms as possible. The key to this approach is having an explainable discipline.

Having a discipline to explain portfolio construction, rather than a hot story for each investment, makes it much easier to communicate. May-Investments uses an electronic newsletter, a free audio book, its company web site, and traditional marketing materials to make this discipline as transparent as possible. In addition, the firm hosts seminars and workshops to focus on specific issues and encourages clients and other friends of the firm to attend as many of these as they can.

This new eMag focuses on a much broader range of topics of interest to retirees, and those preparing for retirement. After all, enjoying retirement is not just about the money. Retirement is about the relationships and activities that clients pursue in retirement that give purpose and enjoyment to that season of life.

On the other hand, the firm’s Audio Book explains in detail how investments are chosen for clients’ long-term investment portfolios. May-Investments is an active manager, changing the portfolio as the investing environment evolves. This is very different from an industry which espouses “buying and holding” the same investments throughout the cycle, and simply riding out the sell-offs in hopes of owning the right securities when good times return, which we call an “asset storage” approach. Simply being an active asset manager, these days, is unusual. Being able to explain the discipline is priceless.

May-Investments just finished hosting its annual Economic Update Forecast luncheon where clients and friends of the firm learn about May-Investments expectations for the year ahead. We don’t get things exactly right. Indeed, the past two years have turned out much better than we had anticipated (thankfully). What’s important is that by developing the forecast, and monitoring its key elements throughout the course of the year, we (and clients) are better able to understand the current investing environment.

Our firm belief, however, is that there is value in forecasting, even if you don’t get it right every time. There are good reasons to actively manage the portfolio, even though you’ll never know exactly which asset class or industry sector is going to come out on top each quarter. The question of how you allocate portfolio assets is a critical issue, and much too important to ignore just because some in-house compliance attorney would rather not have you admit in public that your forecast might be wrong.

I’ve got news for the compliance department. The public already knows that we’re often wrong!

In addition to the large Economic Update seminars, May-Investments also hosts small educational workshops on specific topics. We have used these more intimate meetings to explain to clients current portfolio holdings, to help people wrestle with questions such as whether or not to convert from a traditional IRA to a Roth IRA, and to examine bigger issues such as how to organize your financial records, to be better prepared in the event of an emergency. The only difficulty is in finding enough new information so that we are actually able to have them walk away having learned something they didn’t already know. (Having a practice that targets sophisticated clients has certain disadvantages!)

We have also used small workshops to teach people how to use our free financial planning software, which we make available to subscribers to our monthly eMag. The software provides people with complex retirement calculations and for those able to use it without additional input from us, we make it available free. For those who need additional help, for a reasonable hourly fee an advisor can help clients initiate a retirement planning process that can help guide them down the path to a life well lived.

Having a plan and investing with a discipline make it easier to adjust to the uncertainties that impact us in retirement, which can be a stormy time. Like relying on the airplane instruments when flying in a storm when visibility is bad, a discipline enables us to react proactively to extremes in volatility and uncertainty and helps us stay on the flight path as intended. Being transparent throughout the process, even during times of turbulence, makes the journey better for everyone. 

Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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