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Free Lunch

Now I want to talk about sandwiches. Not regular sandwiches, but the ones that decide how you are going to retire one day. So you ask what kind of sandwich that could be, and I tell you about your sandwich portfolio.

You see, if you have a big box broker, or even an independent advisor, they undoubtedly have sold you more than one sandwich investment. Let me tell you how it works.

When a mutual fund company, or an annuity company or anyone for that matter, wants to sell you stuff, they start with buying your salesman financial advisor a sandwich. That advisor gets ushered into a conference room where there are at least 4 different types of sandwiches, and maybe even different kinds of chips are served.

They sit for an hour, eating this sandwich, listening to the sales rep pitch the fund. The advisor's eyes glass over, except for the few extra sandwiches floating around during the meeting that you are keeping your eye on for later.

Depending on how much commission the thing pays how appropriate the investment is for the client, it might even be a nice steak dinner. But let's just focus on what the majority of your portfolio is made up of. I can bet green money that at least 50% of your portfolio was sold to your advisor over a free sandwich.

Now it is not a crime to bribe convince your salesmen advisor with sandwiches, but the performance of these investments is what I want to talk about. I am sure you can think of a few mutual funds in your possession that were sandwich buys.

Folks, Wall Street was built on free sandwiches. You can actually tell how dangerous the thing is for you by how nice the sandwich is. If it is steak dinner, you can expect to lose a bunch of money.

If it is just a run of the mill sandwich, you can just add a year or two to your retirement date and that should suffice.

Well the reason for all this talk about food is that the Hedge Fund performance figures are out and it is starting to look like they have been eating a bunch of sandwiches lately.

The entire hedge fund universe is not anywhere close to performing as well as the S&P, and that is before the 2% upfront and 20% of profits. So the point here is that maybe 2% and 20% was the old normal, and we have entered the NEW normal where lower returns and lower fees are appropriate.

I still say that unless your separately managed fund does not eclipse the benchmark they are chasing for at least a 5 year average, it makes no sense to own said sandwich fund. . Hedge fund investors are just rich mutual fund investors anyway. These investors are hungry for Alpha.

Which brings me back to sandwiches again. Your portfolio is like a sandwich. Think about it. You are piecing together components. Bread, meat, cheese, vegetables, dressing. They are just like stocks, bonds, etf's, cash and insurance.

Just think about this: if you were making sandwiches to sell from a food cart, and you were making sandwiches to eat at halftime of the football game, which sandwich would YOU want to eat? Probably the handmade halftime sandwich. Why? Because you made it for yourself. Probably put a little extra meat on it. Exactly as much mayo as you like. You probably even sorted through the loaf for the two best pieces of bread.

Folks, if you want to eat sandwiches, make your own. Because when you buy one from a big box deli (mutual funds/ hedge funds), they are not made the same. Same goes for your portfolio. Your advisor does not make your sandwich like he would make his own sandwich at halftime. He makes it like you are a customer of his food truck.

As good as he makes you feel, do you think your sandwich and his are comparable? Not even close. So as we go over performance for the year, look through your investments and tell me how many sandwich picks you have? How have they done? How many are you going to keep? Next time you are with your advisor, bust their chops a little.

As we move into 2013, sandwich picks are going to become more and more prevalent. Shiny brochures and slick bullet points are the tell.

As soon as you see glossy anything, run for the hills. It is a high margin sandwich with flimsy meat and wilting vegetables. Think about what is in that sandwich, and what we could do to replicate it at home. Because any and all "good ideas" are going to get roasted this year as everyone who manages money pulls every available napkin out of the stack to keep the kitchen open.

A closing comment: that sandwich was bought and paid for a long time ago. The only thing that is left is your investment. Let it go. More clearly: make sure you want to be invested in every single security in your possesion. Because the reality is: there is no such thing as Free Lunch. Thanks for taking the time to catch up on my thinking and reading The Rainmaker Investor Report.