While recently reviewing a client’s 401(k) holdings, I was reminded of an early experience with product marketing. In my grade-school days, lunchtime often consisted of slurping chicken noodle soup while watching reruns of Sea Hunt (catch the thrills here). On Campbell’s label, chicken gets top billing. But as I observed, the mix was more like 99% broth and noodles, 1% chicken. Words can move products. When considering investments, it’s best to look beyond the names. Some examples:
Growth – Everyone wants to see their money grow. ‘Growth’ funds seek to own companies with increasing sales and earnings. But having ‘growth’ on the label doesn’t guarantee a timely increase in one’s net worth. Time horizon is critical (examples here). After the S&P 500 peaked in March of 2000, it remained underwater for thirteen years. The Japanese are still waiting for the Nikkei 225 to get back to 1989 highs (here).
Quality – Mercedes Benz, BMW, and Lexus are all quality marques. With stocks, ‘quality’ is the term used to designate seasoned and profitable companies with good management, stable cash flows, low debt, etc. While these companies can better withstand economic downturns, ‘quality’ doesn’t protect their stocks from disappointment. Anyone who’s owned an out-of-warranty luxury car will understand.
Value – Attention Walmart shoppers. ‘Value’ stocks, i.e. those with low prices relative to sales and earnings, are usually former growth stocks that are aging out. These companies often feature cyclical earnings, high debt levels, and high operating and financial leverage. Making hay in these stocks usually happens when the sun shines, i.e. during an economic recovery. The Walmart logo offers a sunny little reminder.
Balanced – Stable, not crazy, feels … safe. ‘Balanced’ is the name used for funds having a mix of stocks and bonds, typically a 60%-40% blend of each. When inflation is low, one usually offsets the other to provide a positive overall return. However, during periods when inflation is not low—hello … 2022!!—the 60 and the 40 both fall off the seesaw.
Emerging – Ahh, visions of tulips in springtime. ‘Third World’ was the name a Dutch economist came up with for developing countries, ones often challenged by sanitation and infrastructure issues. These countries do indeed offer plenty of room for improvement, i.e. growth. However, investing in ‘emerging’ markets often involves two major risks: lack of legal protections and political instability. But catchy names can help. In 2001 the investment firm Goldman Sachs came up with the acronym ‘BRICs’ (Brazil, Russia, India, and China) to promote the emerging-markets investment theme. For investors trying to build net worth, these ‘bricks’ have pretty much sat on the ground during the past fifteen years. And surprise, surprise: this year, BRICs was shortened to BICs. Way to go, Vlad.
Private – Why not rub elbows with Chumley at the country club? But the members-only cachet of ‘private’ often comes with high fees, not to mention operational, management, and leverage risk. Much like publicly traded issues, private offerings do present opportunities for attractive returns. But investing in these securities typically means little to no liquidity. Should one happen to catch a whiff of smoke in the clubhouse … sorry, old chap. Exiting may be—shall we say—a bit difficult.
Alternative – Something different. ‘Alternative’ investments are temptations for investors who ‘can’t get no satisfaction’ with ordinary stocks or bonds. The category includes private equity, private debt, private real estate, hedge funds, commodity futures, collectibles, and structured products. Investing in ‘alts’ is much like stepping out on a stale marriage; perhaps some excitement, but guarantees are few and disappointment is not uncommon.
High Yield – Gimme some of that! The percentage payout is what catches the eye, but that’s not the only factor in the equation. ‘High yield’ is a Wall Street euphemism for junk bonds (non-investment-grade debt), speculative regarding the timely payback of principal and interest. In tough times, the high yields and prices of these securities are frequently cut low by defaults and bankruptcies.
Treasury Inflation Protected Securities (TIPS) – Treasury (part of the Federal government … check) Inflation-Protected (defense against a bad thing = good thing) Securities (sounds like ‘security’ … safe). Through September, headline inflation was running around 9%, yet the iShares TIPS exchange-traded fund (symbol TIP) lost almost 9%. The TIPS fund is first and foremost a bond fund with a duration of 7.1 years. Rising interest rates have greatly negated the protection against ‘unexpected’ inflation which TIPS are designed to offer.
Lifetime Income – Sounds wonderful, like a gently flowing river of cash. A term typically associated with insurance products, a lifetime income can indeed be provided. One typically surrenders (yes, forever) a lump sum in order to receive monthly payments for life. The math is straightforward. How long will you live, how much is given up, and is the check worth the trip to the mailbox?
American Conservative Values Fund (here) – “That’s what I believe! Here’s my money!” I spotted this one recently, and present the name as an example only, not a recommendation to buy. From a marketing standpoint, the combination of the patriotic with the political provides a one-two punch. History shows, however, that on Wall Street there is no correlation between enticing names and hoped-for results. On a related note: if an investment brochure features the Stars and Stripes, a bald eagle, or smiling retirees walking the beach, please read the prospectus carefully until the excitement wears off.
Regarding all of the above, note well a common theme from four of Wall Street’s respected names:
“In the end, your returns will not be a function of the stories you believe most but rather a function of the price you paid in the first place.” – Merryn Somerset Webb
“Price is what you pay. Value is what you get.” – Warren Buffett
"Operations for profit should be based not on optimism, but on arithmetic." – Benjamin Graham
“Success in investing doesn’t come from buying good things, but from buying things well, and it’s essential to know the difference.” – Howard Marks, Oaktree Capital
What’s In A Name? As the world was reminded last month, a good reputation is everything. Queen Elizabeth II, R.I.P.
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