Jorge Posada’s (Financial) Slump

Add Yankee great, Jorge Posada to the long list of names of professional athletes who have been misled by their investment advisors. There are of course several accounts of this around the web but according to the NY Post, he lost millions on a real estate deal, and in a hedge fund run by his advisors. The Post implies he has not been totally wiped out but that Posada and his wife, who are referred to as naïve in the article, have taken a meaningful blow to their net worth.

For the past week I’ve had a post from Streettalk Live open in my browser titled 10 Legendary Rules From Legendary Investors that I planned to write about. I think I can marry that and the Posada story together in one post.

In past blog posts we have looked at how to keep investing simple, and the extent to which I think the ‘legends’ of investing who can break it down into the simplest, plain English terms are the ones that most investors should try to learn from.

Included in with the rules was this from Howard Marks of Oaktree Capital Management; “The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.” 

Often, the types of investment products that did in Posada are sold in such a way as to appeal to vanity by way of exclusivity. The Post article cites comments from Posada’s attorney that his window for making an income was short and could have ended at any time. While that is not 100% accurate from the standpoint that contracts in baseball are guaranteed. A more suitable path would have been to pursue simpler investments that would have allowed the Posadas to maintain their lifestyle after his playing days had ended. Whether that meant no income, or reduced income if he found work in broadcasting or coaching.

This is of course the same issue confronting many investors who will either try to solve for themselves, or hire an advisor.

It can’t be said enough, for most people this is solved with a simple portfolio constructed with funds, and individual issues in a brokerage account. A simple indexed portfolio combined with an adequate savings rate can get the job done. Straying too far from that is what gets people into trouble like with Posada.

However, indexing and holding on no matter what has proven to be very difficult for a lot of people. While things are going well in the markets, investors need to consider the future drop of 40-50%, and note that whenever the next big one comes, it will be followed by a new high at some point in the future. But we’ve seen that during the heat of the decline, people lose the ability to reason which is why I believe in active management.

Planning to hold on no matter what can certainly be a valid strategy, but you need to hold on…no matter what. With a nod to Marks, this is where people face the greatest challenge.

For some investors, the context of active management is trying to beat the market, but as I have been saying for years, beating the market is not necessarily the most appropriate goal for every investor. Obviously it would be great to beat the market every year, but doing is essentially impossible. The conversation quickly becomes about risk taken rather then attempting to beat the market.

We’ve referred many times to the 75/50 portfolio constructed by John Serrepere. The portfolio is designed to capture 75% of the upside with only 50% of the downside, note it is not a static portfolio. If successful to the last basis point it would obviously lag often, but spare investors a lot of pain. Put another way, its objective is to smooth out the ride which I believe appeals to many investors. It is the approach I try to take (smoothing out the ride, not necessarily 75/50).

Investors who build a portfolio that places emphasis on dividends are not necessarily trying to beat the market either. They may or may not beat the market but in trying to create a certain income stream through dividends. Their primary objective is the income stream.

The most important thing is giving yourself, or your clients, the best chance possible to have enough when you need it. The way you plan to get there has to be suitable for your temperament. A valid strategy, ill-suited for your temperament, has very little chance of success.