We've Got Something For That

This is from the Xentrex bit from SNL. It’s linked below.

If you’re old enough, you’ll remember the daytime commercials that aired on US networks for all sorts of direct-to-consumer drugs (“talk to your doctor about [insert name of drug]”).

I don’t remember what ailments the drugs were supposed to treat, but the ads all looked the same: an old woman or man playing with their grandkids in some field at dawn, followed by a clip of them looking at themselves in the mirror with pure deliria (the drugs had nothing to do with that!), followed by some optimistic scene with them lying on a beach or sitting on a sailboat as the graphic for the pharmaceutical blended into the image. Then there would be a good thirty seconds where the voice actor would disclaim every possible side effect at 3x speed.

The internet and a lot of comedians have had a field day with those ads, and the SNL skit from years ago about Xentrex, featuring Dwayne Johnson, is one of the best.

Though there aren’t direct-to-consumer ads for investment products, whenever a new and fancy investment idea is released to the public, I think of those pharma ads.

Have a problem you want solved immediately? Want to enjoy retirement on a beach or a sailboat as soon as possible? Can every possible disclaimer be listed in thirty seconds at 3x speed? We’ve got something for that.

I want to warn you about products that exploit the cognitive and emotional biases all investors suffer from. Though they make it look like they’ll get you to a comfortable retirement on a boat, all they’ll do is charge you unnecessary fees and leave you with regret. Here are the things to look out for.

Thematic investment products. These focus on something that’s making headlines. Here are just a few I’ve seen in my career: crypto, clean energy, robotics, AI, marijuana, psychedelics, electric vehicles, batteries, outer space, and IPOs. There have been a lot more, but I’ll leave it there. These prey on your fear of missing out. They are expensive and they seldom (if ever) pay off.

These aren’t going to get you playing with your grandkids in the high grass anytime soon.

Investment products that cap your upside and limit your downside. “Defined outcome ETFs” are how they’re marketed. “The best you can earn in a given year is X percent and the worst you might lose in a given year is Y.” But who wins when returns are better than X? And is the trade-off between winning and losing fair? Probably not.

A simpler method? Invest in line with your tolerance for risk and volatility. You won’t be faced with deliria when you look at yourself in the mirror, but you’ll know what you’re doing and why.

Investment products that ‘juice’ the risk/reward trade-off and focus on income over anything else. I debated someone about this back in May. If you want greater returns, you must endure greater volatility. Period. There is no debating that. Anyone promoting “bond-like volatility (low) with equity-like returns (high)” is full of it. It doesn’t work that way. You are compensated for the volatility you’re willing to endure. No potential volatility. No potential return.

Income is one of the two components of an investment’s returns. The other is price. Together they make up total return, and total return is all that matters to investors. Focusing on one and ignoring the other is absurd. “Hey my $100 investment is now worth a buck, but at least it’s paying me fifty cents a year!”

Juiced return and income-focused investments aren’t getting you on a beach or sailboat any sooner. But they are spouting off a ton of disclaimers at 3x speed.

When we see direct-to-consumer pharma ads we scoff, laugh, or ignore them. “Talk to your advisor” when you see these direct-to-consumer investment products because side effects may include nausea, drowsiness, pain in your extremities, nose bleeds, kidney failure, high fees, underperformance, and mild to severe regret.