Preach It!
A few weeks ago, I had the privilege of preparing and delivering the sermon at my church. I’ve done this a few times over the last couple of years, and I’ve always found it to be both enjoyable and stressful.
The preparation is so incredibly healthy. The whole process allows me to dive deeper into the text than I do during my daily reading, it helps me to refine my thoughts, and to better articulate my beliefs.
I taught about forgiveness, or perhaps better said, I taught about unforgiveness and how self-destructive unforgiveness can be. One of the points that I submitted to the congregation was that unforgiveness thrives on half-truths.
Half Truths
Just think about it; think about a time when you were stuck in the middle of two friends or family members in conflict. Each shares their side with you, and you see how those little twists from the truth become fertile ground for growing unforgiveness.
Upon hearing about my message and some of the content, a colleague suggested I listen to the audio version of Screwtape Letters by C.S. Lewis — specifically, the version narrated by Joss Ackland. I can’t recommend it enough — the narrator’s perfect accent for the part and the whole audio-versus-reading experience, it truly is just such an incredible listen.
For those not familiar with the book, it’s a fictional account of a demon (Screwtape) writing to one of his understudies (Wormwood), who happens to be his nephew, on how to torment his assigned human, referred to as his patient. The strategies and tactics presented are chock-full of ways Wormwood can twist the truth, distract his patient, and lead him down the path of destruction.
Investors Led Astray
With this sermon fresh in my mind and with how much I’m enjoying this audio account of Screwtape Letters, I started to think about how often investors have to wrestle with half-truths too. And, how these half-truths often lead investors down the path of financial destruction. So, what better place than TOM to unpack a few investing half-truths and help to caution our readers against their deceitful leadings.
First, let’s define exactly what a half-truth is. Oxford defines it this way, “A statement that conveys only part of the truth, especially one used deliberately in order to deceive someone.” You’ve heard the saying, “A wolf in sheep’s clothing,” well a half truth is “A lie in truth’s clothing.” Just enough of the truth sprinkled in to draw your attention, and then a whole lot of deception to steer you off course.
So, without further ado, here are three investing half-truths that I often see stumbling investors:
(1) Growth Means Growth
The finance industry is full of misnomers, but perhaps the titles “growth” and “value” are the most atrocious.
I can’t even tell you how often I get this question: “If I opt for a dividend strategy aren’t I giving up (missing out on) growth opportunities?” The answer is no, but the assumption is understandable.
The finance industry bifurcates stocks into two categories — growth or value. What specific metric separates these two categories? They are separated by how much you pay in price for each dollar of earnings that company (stock) creates. This is referred to as the price-to-earnings ratio (P/E). So, a high P/E stock is a growth stock, and a low P/E stock is a value stock. Now, the industry could’ve understandably and fairly called these two categories expensive and cheap, but ultimately, growth and value were the titles that stuck.
So, again, what are growth stocks? Expensive stock prices, and expensive for a reason. The market believes those companies will GROW their earnings at an above average rate that justifies their current price or valuation. So, here’s the truth part of this half-truth: these companies do grow their earnings typically at an above-average rate. The problem? The market knows this and prices these stocks accordingly. Priced for perfection, filled with high expectations, and often poised for disappointment.
Do growth stocks offer growth? Sure, during some seasons and time periods, but when these stocks take a turn for the worse, it gets ugly — real ugly! These stocks often rob the future of their returns to lump together a few eye-popping years of outsized returns that help to lure investors in before their neck-breaking stock price decent.
Here is the simplest historical example, the price of the Nasdaq was the same in the year 2000 as it was in the year 2016. Yes, some 16 years of go-no-where markets as “growth” stocks plummeted back to the planet we call fair valuation.
Growth doesn’t always mean growth.
(2) If this President, Then this Outcome
Let me keep this simple. Many of you are at the edge of your seats while you await the outcome of the 2024 election. I don’t blame you, as it’s perhaps the best reality TV show we’ve seen since Survivor season one. Yet, you may have been led astray. You may think this election will have a material impact on your portfolio, AND you may think you have a tactic or strategy to overcome or combat that outcome. You don’t.
Here’s the sprinkle of truth: the policies passed by Capitol Hill — tax implications, trade policy, regulation, etc. — do have an impact on the investing landscape. BUT those outcomes and changes are NOT solely decided by POTUS.
I could show you a historical chart of stock market returns under a republican or democrat president, but I am not sure if you’d be surprised. I think you’ve seen these charts before; the results are indistinguishable from one party to another. Whose president is something when it comes to your investment portfolio, it’s just not everything, so PLEASE don’t act as if it is.
Just so my advice is clear, I recommend that you DON’T make material changes to your investment portfolio or financial plan solely based on the outcome in November.
(3) Fees Are Everything
Some of the clients I serve either work in the finance industry or are retired from the finance industry. A majority of my clients, though, have never worked in the industry. Yet, they are successful professionals and business folk. The type of people that desire to be good stewards and seek to resource their common and general knowledge to complete their diligence on their advisor and portfolio.
With a limited background of vocabulary, philosophy, and an unrefined opinion on strategy, an investor will default to intuitive inquiries. The most common inquiries being (1) What are your returns compared to the S&P? (2) What are your fees? Good questions, appropriate questions, and questions in which context matters.
As someone who works in the industry and someone who greatly values due diligence, let me just tell you that fees are important, but they are not THE most important factor. Yes, a penny saved is a penny earned, so creating a cost-efficient allocation is prudent, but are fees the only variable that matters? No. Are fees the most important variable? I would say no.
For context, one of the most expensive fee funds in my personal portfolio is also one of the best performing over the last 7 years. I care about net returns, the return after fees have been removed. If a strategy — because of manager skill or unique exposure — can be both a relatively high fee and attractive net return, so be it.
Again, what you pay matters, but it is not the only thing that matters. Asking just about fees and performance is short-changing the due diligence process.
Fees are everything is a half-truth.
And the List Goes On
We simply don’t have enough time or ink to unpack all the half-truths misleading investors in our industry, but I hope you found these three both enlightening and helpful.
Again, a half-truth has the scent and resemblance of the truth, yet it’s just not THE truth. As they say, you can’t be half pregnant – you either are or you aren’t, it’s either THE truth or it isn’t the truth.
So, whether you are embarking on a big financial decision or withholding forgiveness from a friend, I would encourage you to inspect your fact patterns and sniff out any lies disguised as truth. We are human, and we love to revise history and justify our bad decisions.
As a wise carpenter once said, the truth will set you free (John 8:32).
Trevor Cummings
PWA Group Director, Partner
tcummings@thebahnsengroup.com
Blaine Carver
Private Wealth Advisor
bcarver@thebahnsengroup.com
