Haggling in Haiti and the Financial Markets

If you have ever spent any time in a Caribbean country, you know that haggling over the cost of items for sale is commonplace.  I recently had the opportunity to do some haggling in Haiti. (If you want to know why I was in Haiti, click here: www.hoopsforhaiti.org.)  While in Haiti, I had the opportunity to buy goods produced by the locals; items such as plates, paintings, bracelets and chess sets, just to name a few.

 

After being offered a chess set for $45, I laughed and said “No, thank you” and I started to walk away.  The salesman quickly stepped to my side, leaned in and, with broken English, whispered into my ear: “This is where you are supposed to offer me a lower price and we can then negotiate.”  He didn’t realize that I was just not interested in buying a chess set, even though it was a really nice chess set.

 

A little later in the day, a very old woman tapped me on the arm as I walked by: “Monsieur, how about a bracelet?”  I asked “How much?”  Her answer: 2 for $5.  I smiled, told her “no, thank you” and walked away.  About an hour later as I was getting ready to leave for the day, the same woman stopped me and said “Monsieur, you still want a bracelet?”  Again, I told her that I did not and was probably not going to buy any bracelets.  This went on for 3 days.  Toward the end of the third day, she caught my attention and said: “I know you want a bracelet; make me an offer.”  I really did not care if I bought a bracelet or not.  But I did think that it would be nice to buy a few bracelets for my wife and daughters, so I decided to make a very low offer.  I said: “4 bracelets for $2.” Without even hesitating, the very old woman said, “OK, you come and pick which ones you want.”

 

Negotiations always work best for the one that is willing to walk away.  However, those eager to reach a deal often make the biggest concessions.  So it is with investing.

The financial markets are essentially giant electronic bazaars, filled with millions of participants haggling over the prices of individual securities.  Like shoppers and sellers at a Caribbean bazaar, participants in the financial market bazaars are all driven by varying needs. 

 

There are really three different types of shoppers at the financial market bazaars:

1.       The index manager.  Index managers have to track a particular index and go to great lengths to have “zero tracking error.”  This might be an S&P 500 index fund manager who looks to constantly have the exact exposure, and in the same proportion, as the S&P 500 index.  This shopper has to deal with high transaction costs, high turnover and often pays more for purchases than was originally intended. 

2.      The active manager.  Active managers make buying decisions based upon convictions associated with particular securities.  These convictions are so strong that the active managers forego concern about the prices they pay, the turnover generated, the transaction costs they incur or the taxes they cause.  These convictions are emotionally driven, not scientifically driven.  If you want a Caribbean bazaar example, ask me about a wooden cat I once bought in Jamaica . . . a very emotional purchase.

3.      The patient manager.  The third manager is neither obsessed with tracking an index nor in buying a particular security.  With no artificial push to buy, this manager has the advantage of being able to walk away if the price is not right.  This manager knows that there are plenty of stocks to choose from and is agnostic to one stock over another if both fit the manager’s criterion.  This gives the manager tremendous flexibility and allows for the market to come to the manager.  Just like the patient Caribbean shopper, the patient manager knows that there are many people selling.

 

The patient manager philosophy is embraced by Aubry & Eustice.  The patient manager adds value – in the form of increased returns. 

 

There are three killers to long-term portfolio performance:

1.       Inflation

2.      Taxes

3.      Fees

 

There is really very little value that a wealth manager can add when it comes to inflation and taxes.  Sure we can look for investments that will outpace inflation or minimize the amount of taxes an investor will pay.  But a wealth manager cannot control inflation or taxes; these are decisions made by outside forces.  While fees cannot be eliminated completely, the manager can seek to minimize fees as much as possible.  A wealth manager can have a direct affect on increasing or decreasing fees.

 

Managing a portfolio with no regard to costs, turnover or fees hurts the real return an investor receives.  Conversely, if a manager can minimize costs, decrease turnover and cause less fees, the investor receives an increase in real return.

 

Patient trading is smart, flexible and it increases returns.   Or, it at least gets you a bracelet for each of your family members.

 

To your success!

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