Speculations, Side Deals, and Seeking Excess Returns

by Jeff C. Johnson

My brother and one of our closest lifelong friends have been my office partners for many years; we’ve been working together since the mid-1980s. Boy, could I write a book about our time together … and I have!

We’ve seen some changes through the decades. We refined and refocused our strategies for clients all with the intent of “doing it better” and improving results. We worked at brokerage firms, then at our own Registered Investment Advisor, and now in recent years at Buckingham Strategic Wealth.

As I review our results and the financial progress our clients made, I realized what I always knew, really: A consistently applied proven approach yields the best lifetime results, with some predictability over meaningful periods of time.

Take my friend, who I’ll call Denny. We’ve known each other for nearly 50 years. Recently, I had coffee with him to review his accounts and talk about his future now that he has retired. Though he didn’t inherit wealth or own his own business, he made a nice living but never earned huge pay. He retired with a comfortable, debt-free home, cash in the bank, retirement accounts filled with dividend-paying stocks, and a pension from his former employer. And a multimillion-dollar net worth with no financial worries.

The stocks and accounts fluctuated in value over three decades, but Denny added regularly to his savings. He still spent some of his earnings on the comforts and enjoyments of life and paid cash for private college educations for his two children. He kept a balance of fixed income and cash for emergencies and maintained a long view when considering his stocks and stock mutual funds. He feels understandably confident with his circumstances, and so do I.

Recently, several friends and clients have asked me to review private “deals,” such as illiquid ownership in new businesses, unique property offerings in real estate and business (i.e., “private equity”), and various other speculations. They do have a sizzle that makes conventional stocks and bonds seem dull. These sexy investments come and go, but it seems like they are back in vogue with investors and the sponsors that promote them.

Before I share my conclusions, I ask these questions:

  1. What is your true overall goal for your investments and your financial resources?
  2. Can you reach your goals without taking undue risks (even if it seems like a compelling story)?
  3. If you took on extra risk and lost money (or locked it up in an illiquid position), would it negatively impact your long-term life and financial situation?

Most people, when you dig deeper into their thinking, have a goal that sounds something like this: I want to have enough money and investments in place so that I can live reasonably for the rest of my life without having financial concerns.

Depending on when the investor started accumulating, most will realize that if they stay on track, investing consistently and sticking with a long-term plan, they can reach their financial targets without taking unnecessary risks. They also start to realize that a big loss or locking up resources in a “deal” might impair their ability to retire or reach other important goals.

After years of serving a variety of clients, I strongly agree with this approach to investing.

As my office partners and I look back at our clients’ efforts to take on additional risks for additional return with these “speculations and side deals,” we remember a few that worked out to be winners and a few that were complete blowups. But usually they turned out to be closer to average in their results while locking up money for years, sometimes indefinitely it seemed, costing investors high out-of-pocket management fees and extra tax accounting expenses.

For most people, a thoughtfully developed allocation to stocks and bonds, held through good times and the inevitable downturns, is the winning formula for meeting lifetime goals. Especially if you’ve “got it made in the shade,” the topic of my next post.

The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Wealth. This article is for general information only and is not intended to serve as specific financial, accounting, or tax advice. While reasonable care has been taken to ensure that the information contained herein is factually correct, there are no representations or guarantees as to its accuracy or completeness. No strategy assures success or protects against loss. The story about Denny is hypothetical and should not be interpreted as representative of any individual’s actual experience. IRN-20-1174