Whether it’s annual, quarterly or more frequently – there is one thing that is persistent in this industry – the need advisors and firms feel that they need to write an investment commentary report.

The genesis of this comes down to an old-fashioned need to show clients that “I’m on top of things”.

"I know what’s going on in the markets better than anyone else – trust your life savings with me".

I read one piece that referred to them as “table stakes for investment firms”.  Never mind that it was from a firm that is very much in the wealth management business.

There are two pieces of advice that I was given as young advisor which I cannot unlearn enough.

1.   ‘It’s better to have an opinion about the markets, wrong or right, than no opinion.’

2.   ‘Fake it until you make it’.

Quarterly or annual investment commentaries are the embodiment of these two.

Let’s break down how investment commentary pieces are created.

Part I – The Preamble

They lead off with an introduction, taking stock of the big events and headlines going on, a few buzz words here and there.

Somewhere in the introduction is something like “we can’t predict the future, but…”

As a rule, anytime the sentence has that “but”, you can be sure everything that follows is going to go off the rails that same ‘but’ said it wouldn’t.

The preamble is there to hit a few points:

1. Sound formal and researched,

2. Pepper in the buzz words,

3.  Also give the writer an ‘out’ if their predictions go wrong.

What follows, after saying they can’t predict the future, is a whole lot of future predicting.

Part II – Appealing for Subject Matter Authority

These set the readers attention on the writers of the piece. 

“[This analysis] leverages the brightest minds of a diverse group of specialists/industry experts/Oracle of Delphi.  Our team has an expertise/deep commitment/dedication to understanding the global economy/macro factors/magic beans – that is unparalleled”.
“Using our multi-asset approach we manage risk [better than any other shmucks out there, just ask us] using traditional and alternate asset classes to [make you richer than you thought?]”

The point they’re making is that this group, of all the groups in the world who have failed repeatedly at out maneuvering the stock market has something different.  They are the ones who can, they’re the ones who will triumph where others have failed, and nobody on this team will get poached by a competitor to dilute this team because they’re all focused on changing the world.

The reason these preambles exist is straightforward: they are scratching an ich our brains have by telling the reader that they are the authority on the matter. It puts our brains to sleep.  It’s designed to have us feel “right now I’m uncertain about [event du jour], this is a person who knows what they’re talking about, let’s listen in”. 

It helps our subconscious minds accept the information by turning off our critical filter.

This is perfectly embodied by a Payless Shoes marketing campaign where they rebranded a pop-up store to ‘Palessi’ and presented the same shoes you can buy at Payless as high-end Italian fashion.  They staged a grand opening, film crews were there, champagne flutes were filled, and an invited guest list of fashion influencers.

Needless to say, the fashion influencers ate it up hook, line, and sinker.  Have a look, it’s a good laugh, and highly relevant to this piece.

‘Palessi’ was doing what Hagen Daas marketers found with their ice cream and countless others before them – by changing the setting and the framing – they could charge more for the ice cream. 

Much like the avant-garde shoe displays, the presentation of a market commentary is designed to bypass the critical thinking part of the brain.  They want readers to feel like this firm, more than any other one, has its finger on the pulse, they know things all the others don’t, and that investors would be crazy not to believe it.

The glitz and glam that the fashion influencers at ‘Palessi’ experienced is what the ruse is about – make the clients feel like they just bought $600 shoes when really they bought $20 shoes – but here we’re talking about people’s life savings.

In Dr. Daniel Crosby’s masterpiece – ‘The Laws of Wealth: Psychology and the Secret to Investing Success’ he writes:

“Ben Graham was on to something when he said, “nearly everyone interested in common stocks wants to be told by someone else what he thinks the market is going to do.  The demand being there, it must be supplied.”  But this is more than just a misguided case of supply chasing demand.  It turns out that our brains long for forecasts in a very specific way.  Of all the metabolic demands made on your body, the brain is the greediest, gobbling up as much as 20% of all the calories you take in.  The body being an efficient machine, it is always looking for ways to conserve energy and nothing provides as big a return as slowing down the brain.”

The fashion influencers saw the presentation and the critical parts of their brains turned off.  Investment forecasts and market commentaries are designed to perform the same.

Part III – The Market Recap

We’re now in the glitzed-up shoe store or taking a bite out of some delicious Hagen Daas ice cream and our critical thinking has been largely put to sleep.

The dial begins to move up a notch. 

It starts with clouding phrases that sound good on the surface, but don’t make any sense, like ‘equity markets have had to contend with [insert whatever has gone on in the economy/world recently]’, ‘the markets showed resilience’ or ‘the markets are looking for direction after ________’.

Two things are really happening:

First - for those of us asleep, our brains just keep saying ‘yes’ subconsciously, and

Second – for those who are still skeptics, they are ironically talking about things that happened since their last commentary that didn’t happen as planned if to say ‘well, nobody could have predicted that’ so that the ones saying ‘your last commentary was off’ are hand waved away.

It’s the old ‘we were not wrong, the markets were’ line dressed up.

 Part IV – The Story: Where Astrology is Presented as Astronomy

The story is where the crystal balls that were promised not to appear are showcased.

They will start with a case for where we are in the economic cycle. 

They’ll talk about some headline speculation – like what will happen with interest rates, geopolitical events, what’s going on with oil, unemployment figures, politics, etc….

They paint an economic landscape that is cause for concern – what’s going on in the next short period is of critical importance they’ll have you believe.

They’ll mention some sort of uncharted waters that we’re sailing into, unprecedented times ahead or something to that extent.

One of the great paradoxes of investing – whether it’s in the stock market, bonds, real estate, fine art – we are always in unprecedented times of uncertainty…it’s the point of risky assets.  Without uncertainty there would be no risk.  For that reason, the unprecedentedness of the economic environment someone perceives is essentially the status quo.

We are not in unprecedented times.  There is no repeatable method of predicting the paths of the fixed income, equity, real estate or fine art markets in the future. 

There never have been.

The markets are voodoo. 

There is plenty of precedent for this.

The writers of market commentaries are well aware of this, and they proceed onwards nonetheless.

 Part V – The Case for ________

This is where the shiny objects come into play.

The writer is backed into a corner at this point. They might be a few thousand words and 20 charts deep at this point and truthfully saying: ‘this is all hocus pocus, speak to your advisor about what the purpose of your money is and ignore everything that has been written to this point’ might put the writer’s career in jeopardy – ‘why are we paying you if you don’t bring the magic?’ and undermines the narrative that they are ‘capital markets experts’.

They need something tangible that they can give readers to seemingly justify the piece to this point.

What products and strategy does the reader need in their portfolio right now, during the ‘unprecedented uncertainty’ of the time.

“Focus on quality” they might say.

What’s next involves changing the model portfolios they recommend. 

Switch this for that, reduce this, add to that – these are the actions that are being recommended. 

To be clear – switching from one investment to another or ‘we’re moving to a modest overweight of ______ and an underweight of ______’ is referred to as Tactical Asset Allocation.  This is nothing more than market timing with a fancy name. It simply doesn’t work.

 Commentaries are Nothing but a Ruse.

If market commentaries are table stakes for investment firms so to are the glitz and glam the Palessi experiment taught us about shoe sales: use buzz words and spend heavily on the presentation and people will believe you.

By presenting an investment strategy that knowingly doesn’t hold up to scrutiny, saying “all evidence points to following these recommendations as an inferior approach, but we’re going to follow it anyway” renders the role of the investment committee at these firms as people living out a hobby.

At the end of the Payless experiment, the customers were let in on the ruse.  “I can’t believe this is from Payless! OMG! You got me!”

Within wealth management there is no “lol, we wrote all this knowing that it was baseless and you bought it!”

It just keeps coming.

Wealth management, whether with me, or anyone else should be based on the expectations that clients won’t (and realistically should not to begin with) beat the market and that any opinion on the direction of the market over the short-term is nothing but disingenuous.

The sooner we understand and embrace that the markets are voodoo, the sooner we can begin the discussions with clients of the things that truly matter.

We know that all evidence points to market commentary being completely useless:

1.   Very few investment managers beat their benchmarks after fees.

2.   Market timing strategies to pick one market over another are detrimental to performance.

3.   Forecasting simply doesn’t work.

Investment commentary simply does not matter.

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