2017 First Quarter Newsletter & Outlook1

If MCS clients’ investments were treated as one large portfolio including their cash, on average clients gained 1.67% after fees through March 31, 2017. The range of individual client returns was from 0.03% to 4.94%. For comparison purposes, the S&P 500 Total Return Stock index earned 6.07%, and the Barclays Aggregate Bond Index was up 0.82% through March 31st.
The highest client return was 4.94%. Clients who outperformed had higher equity balances and/or a higher allocation to prison bonds that recovered. The lowest client return was 0.03%. Clients who underperformed were either new clients with funds recently invested in short term bonds or those who had both lower equity allocations and more of their equity positions in Ballantyne and Matthews, both of which did poorly this quarter (BTN -25% MATW -12%) after substantial gains in years past.

“I’m from Missouri: Show Me” continued…

In my previous newsletter, I expressed skepticism of the markets’ reaction to the 2016 election results. In my view, actually lowering taxes, reducing regulations and ramping up infrastructure is a lot harder and more time consuming than it sounds. I am staying the ‘Show Me’ course while remaining mindful that US economic growth should remain on track and global economy ex-US is finally improving.
Political Polarization is an increasing, yet difficult to quantify, investor risk. I am focusing my research in the following areas:

  • Understand the psychological drivers that motivate Democrat and Republican choices.
  • Understanding how the breakdown of trust in society impacts its members and economy.
  • Understanding how the ‘Dark Triad’ of personality traits affects leadership and outcomes in organizations. The Dark Triad refers to well-established research about how people who exhibit a specific constellation of traits – subclinical psychopathy, narcissism and Machiavellianism – influence others, and what the consequences of their actions can be. Here is the Dark Triad definition from Wikipedia:“All three dark triad traits are conceptually distinct although empirical evidence shows them to be overlapping. They are associated with a callous-manipulative interpersonal style.
    • Narcissism is characterized by grandiosity, pride, egotism, and a lack of empathy.
    • Machiavellianism is characterized by manipulation and exploitation of others, a cynical disregard for morality, and a focus on self-interest and deception.
    • Psychopathy is characterized by continuing antisocial behavior, impulsivity, selfishness, callousness, and remorselessness.”
      Figure 1
      Differentiating the dark triad within the interpersonal circumplex
      The Dark Triad

    People with these traits are often enjoy highly successful careers, or appear to. Studies indicate that dark triad personalities are more often found in finance and civil service careers. These traits can have both positive and negative consequences to the individual, organization and other stakeholders. If you are interested in learning more about the Dark Triad, here are three links. Please let me know if you’d like more.

  • Based on my research, I believe that the President fits into the Dark Triad personality.

Hence, Donald Trump represents the party of Donald Trump, the personal brand, rather than the fractured Republican Party. (For the record, my political position is an independent, having voted for both Republicans and Democrats.)

In 2016, a large percentage of Americans wanted a ‘change’. Trump brilliantly seized on the sentiment by telling voters they were being screwed by insiders and outsiders and that only he could put an end to it. Machiavellians know that a climate of fear, anger and mistrust is tremendously useful in manipulating people to meet their needs. Fear, Anger, Mistrust shut down critical thinking and in doing so turn the listener into putty. Listen to the President (or newscasts) and count how many times fear or anger or mistrust are evoked. Americans are being manipulated.
A key conclusion from the research: “All three of the Dark Triad admit prejudice against immigrants and, more generally, proclaim a social dominance orientation (Hodson, Hogg, & MacInnis, 2009). All three are rated high in ruthless self-advancement (Zuroff, Fournier, Patall, & Leybman, 2010).” The most worrisome aspect is that, in a corporation, such an unchecked leader can create a reckless culture where the desire to constantly ‘win’ eventually results in a huge crisis.
Finally, I should emphasize that these personality traits appear to have a genetic / evolutionary basis. Bold, rich men are attractive to women and as leaders of other men. Most citizens do not like chaos but dark triads tend to thrive in chaos and may through their actions encourage it.


I am unsure of whether my dark triad research will offer any more insight than this: In many cases leaders with ‘modest combinations’ of dark triad personality traits create excellent results for investors, while ‘too much dark triad’ leads to a crisis a la Bernie Madoff, Enron or Volkswagen. Most political crises have minor impacts on financial markets however in the current situation significant economic policies and global relationships are in play.
In the period leading up to the 2000 Dot-Com Crash and the 2008 Real Estate Crash, I warned clients early and repeatedly that things were amiss and the environment was high risk. Clients ‘suffered’ by not participating in the euphoric period that preceded those disastrous events. In some cases, I was fired by those dissatisfied that they were not keeping up with their friends. I accept that risk. I’d rather lose a client than lose their money. Later, those who persevered with the lower risk strategy did much better than the risk chasers.
Unattractive US stock and bond market valuations combined with a toxic and uncertain political environment add up to a high risk situation for investors. While I am maintaining existing stock and bond positions for most clients, as cash becomes available, I feel the best risk-reward tradeoff is in short term bonds. Short term bonds can be described as not much yield, not much risk but today’s yields are the highest in the past 6 years. Yields on two year investment grade bonds are around 2%.

What if you don’t share my concerns and prefer a higher risk / higher return strategy?

No problem! I’d like to hear your perspective and can tailor the investment strategy to reflect your outlook. Last quarter, I worked with a client who felt he wanted more return potential in his portfolio. The result was investment in Europe and Japan stock indexes.

1 MCS Family Wealth Advisors (MCS) consolidated client returns are dollar-weighted, net of investment management fees unless stated otherwise, include reinvestment of dividends and capital gains and represent all clients with fully discretionary accounts under management for at least one full month in 2016. Individual client returns represent client discretionary accounts under management for the entire period – starting on 12/31/2015 and ending on 12/31/2016. These accounts represent 97% of MCS’s discretionary fee-paying assets under management as of 12/31/2016 and were invested primarily in US stocks and bonds (17.5% of client assets on 12/31/2016 were invested in tax-exempt municipal bonds). The Stock Index values are based on the S&P 500 Total Return Index, which measures the large-capitalization US equity market. The Bond Index values are based on the Barclays Capital US Aggregate Bond Index, which measures the US investment-grade bond market. Index values are for comparison purposes only. The report is for information purposes only and does not consider the specific investment objective, financial situation, or particular needs of any recipient, nor is it to be construed as an offer to sell or solicit investment management or any other services. Past performance is not indicative of future results.