Unobstructed Thoughts

You Get What You Pay For


Price is what you pay. Value is what you get. – Warren Buffett

You’ve determined that you need and/or want to invest in the stock market. You are attracted to the liquidity, easy access and relatively trustworthy information of public companies (stocks) as well as historical returns of the stock market. To meet your retirement or legacy goals, you think like a prudent person and decide that your portfolio needs X % of stock market exposure. Great, I likely agree with you (depending on your specific financial situation). The stock market is probably the best place to invest capital the world has ever seen. Certainly better than ‘casting thine bread upon the waters’ as was done in ancient days.

But you don’t have the time, the money or the expertise to choose stocks to buy. You also don’t like the idea of buying a little bit of every stock in the market either. There are publicly traded companies out there that might as well be filling out their annual financials with a Crayola crayon. So, you decide you need to buy a professionally managed fund.

The competitive landscape for mutual fund and ETF managers is ever intensifying. The easiest way to compete is on cost. Find a way to do it cheaper and charge the customer less. Well, there’s this index that is constructed for us by some wizards and/or actuaries called the S&P 500. It’s done pretty well over the years, and we can gain access to the stock picks for a marginal sum. Also, the wizards don’t buy and sell a whole lot, so our trading costs will be de minimis. Their munificence knows no bounds.

However, the reason the S&P 500 index is so cheap to construct and implement in a fund is because there isn’t that much thought about the stocks that go into it. It is designed to be a proxy of the U.S. economy. So, if technology stocks are in a bubble like the late 90s, the index will hold a larger-than-normal number of tech stocks. If housing and mortgage banks are in a bubble like 2006, the S&P 500 will hold a larger-than-historical average number of housing and mortgage bank stocks. When things are going well, when the wolves of Wall Street frolic alongside the benighted lambs of Main Street, the S&P 500 is tough to beat. Essentially and by design, it is momentum driven.

But we are sensible people and know that although we may occasionally find a great deal, we usually get what we pay for. While index funds have cheap expense ratios, they are typically buying a lot of awful companies. They are buying more of the expensive companies. The indices also tend to overpay for stocks (in aggregate). Right now, in December 2017, the S&P 500 is currently buying $1 of annual earnings for $21. They are paying over $2 for every $1 of annual sales. Mind you, this isn’t an exceptionally high price given how efficient the stock market is. But if given the opportunity, wouldn’t you rather pay less for the same amount of earnings and sales given the same or greater expectations for growth of said sales and earnings? Of course you would! Do you know the shareholder yield on the S&P 500?

In a world obsessed with fund and manager expense ratios, we have lost touch with much more important qualities. This isn’t to say to go out and buy the most expensive funds you can find. Only, don’t use cost as your sole criteria for investing. At Hightower Twickenham, we have found that being much more thoughtful about investment selection has reaped significant rewards both in returns and in reducing volatility.

Please feel free to contact me if you would like to discuss what we are investing in at HighTower Twickenham and what makes sense for your financial objectives.

John Gibson | 256.213.1150

HighTower Twickenham is registered with HighTower Securities, LLC, member FINRA and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and HighTower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of HighTower Advisors, LLC, or any of its affiliates.