Thursday, December 4, 2014

Convergent Wealth Advisors Part 2: Losing Advisors, Or Not?

If you haven't read my first entry on Convergent Wealth Advisors, check it out here

I should start out by saying this is a major tragedy for the Zier family and all of the innocent clients and employees at Convergent. In no way do I want to make light of what happened in October or cause any more harm than has already been done. They have it tough enough as it is. 

That said, the rabbit hole goes deeper and all of the cards are not on the table. 

Until December 2nd, the trail had gone quiet on Convergent. A release came out stating that a former director at Convergent landed a new gig elsewhere. 

The next day, December 3rd, a piece at Investment News came out announcing the news that Douglas Wolford, formerly COO at Convergent, had been named as the internal successor to David Zier at CEO. 

Wolford does everything possible in the Investment News story to convey that everything at Convergent is A-OK and the squeaky clean RIA was about to enter a new era - even comparing the firm to Apple after Steve Jobs departed. Note to Wolford: Jobs didn't commit suicide via cancer

While painting his rosy picture of Convergent, I can't help but notice a glaring inconsistency in Wolford's story. First, Wolford says none of the 45 advisors at Convergent have left. What about the December 2nd story linked above? The former director's new job title is "senior client advisor." I have to think this qualifies as an advisor leaving Convergent to be an advisor elsewhere, but maybe I'm a little confused. Maybe Doug can clear that up. 

Second, I have a source who indicates at least FOUR advisors (nearly 10% of the "roughly 45 advisors") have already left Convergent and that the situation is much worse than depicted by leadership. If true, then Wolford is lying to the press in order to suppress possibly important information about the firm he now supervises as CEO. That would not be a very good start. 

Wolford also states assets under management (AUM) lossses have been minimal. Let's say that's also a fib - what do we have? We'd have a wealth management firm bleeding not only crucial points of contact in advisors, but also the clients who provide the firm's top and bottom line. Client assets are notoriously "sticky" in that they are typically retained because of a trusting relationship, and not necessarily because of the name on the logo of their statements. If advisors are heading out the door because they don't want "Convergent Wealth Advisors" on their resume, and clients are exiting because they are losing trust, we have what could be a pretty ugly spiral.

City National has clearly not put its foot down here, as allowing the promotion of an internal successor does nothing to wipe the slate clean, so to speak. What was festering below the surface was allowed to continue. An outside CEO would have a chance to clean house. 

Where is City National in all of this? Why won't they put their foot down? 

More to come, I'm sure. I'll keep you posted. 

Wednesday, November 5, 2014

What's Going on at Convergent Wealth Advisors?

Beverly Hills-based City National Corp ($CYN) owns City National Bank, which has a wealth management arm controlling Convergent Wealth Advisors, an $8B Registered Investment Advisor (RIA).

On October 15th, Convergent's CEO David Zier committed suicide. He was a highly rated financial advisor, snagging a #1 ranking for the state of Maryland in 2013 from Barron's.

Long story, short: Zier had allegedly been managing a sizable amount of friends and family money outside of Convergent (usually a big no-no and a major headache to surveil) and his death on the 15th marked the bottom of the recent market correction. It was reported that Zier was under fire in early October as compliance found irregularities within his trade reports. It is said that Convergent's client assets are safe - but, well, reports seem to be mixed on that subject. Were Convergent assets also in the mix? That's probably the $64 question here.

At first glance this looks like somebody who blew up the accounts of his loved ones and could not deal with the grief it undoubtedly would cause. Add in the fact that Zier was being investigated and it gets more interesting.

One fact raises a major red flag. The CEO of an $8B wealth management firm killed himself and the firm has avoided addressing the situation and appears to be ducking RIABiz and Barron's. The FBI is involved and isn't commenting. The silence here is pretty notable.

Advisors lose client (and family) money frequently. The market goes up and down. Potential jail time does not come along so often. That is just a theory.

Convergent controls around 20% of the assets under management at City National's wealth management division, according to their most recent 10Q. City National has no mention of David Zier's death in their Newsroom section, nor does Convergent. The departure of a CEO, whatever the circumstances and as wholly owned subsidiary or not, must be addressed if only to adequately inform the clients and employees of the firm. This is fishy.

At best Convergent is an isolated incident with serious compliance issues and will likely see some wrist slapping or pay some fines and they'll lose a few clients and employees as the above linked articles seem to indicate. This scenario probably has no meaningful effect on City National Corp.

At worst, this is an issue reaching, or stemming from, the parent company. This is a major failure of supervision and a poor response. Should it be uglier than an isolated incident, one can imagine lots of scenarios, especially a major loss of AUM, whether or not they see 3 lettered federal agencies barking up their tree.

To me, if it's isolated to outside friends and family money then they (Convergent) would be majorly incentivized to wave the "all clear, we're squeaky clean here" sign to clients and employees. They have waved no such signal.

Here's a shiny summary of how great Convergent is, penned by its COO and Media Contact, Douglas Wolford. He even quotes himself.

$CYN seems to be unfazed and is mostly tracking with the market right now. It is near an all-time high and according to the Fed is the 38th largest commercial bank in the US. A lot more research to be done on this one. Just for reference, Uncle Bernie had about $17B AUM so this is potentially a sizable problem.

UPDATE: the ambulance chasers are already moving in.

Tuesday, September 9, 2014

The Facebook Investor's Rationale

Let's say you're a Facebook bull. That's fine, they're a fine company. What's your thesis? You better have a good one if you own the stock right now at 101x trailing earnings, 20.06x sales and 10.86x book value.  My guess is it involves one, or both, of these arguments:

1 -- "Facebook is going to become the backbone and the homepage of the internet across the world."


2 -- "Facebook is the next Google, in that it will become a staple of the technology world for decades."

Argument 1 is the 1990s AOL argument. Please don't continue to make this argument.

Argument 2 is one I'm willing to entertain and I'll break it down for you, FB stockholder, because this is probably the bet you're making.

Today was a very interesting day for the Facebook/Google comparison. Take a look at where each company's respective market capitalization ended up at market close:

That's right, FB and GOOGL market cap ended up at almost exactly $200 billion and $400 billion on the nose. Pretty stunning.

Let's continue the "FB is the next GOOGL" argument. Let's say that you figure it'll happen in five years' time.  FB has done a hell of a job building a profitable business to this point, I will give you that. They certainly have momentum and stunning user growth across the world.

In five years, let's assume FB gets to "official GOOGL status" meaning the same market cap and earnings GOOGL exhibits today. In short, it's how they go from $200B market cap today to $400B in 2019. I will assume that you're a reasonable investor and you expect the multiple will come down, so I will factor in the same 30.49 P/E for FB in five years that GOOGL shows today.

How does Facebook get to a $400B valuation from its current earnings situation if we're giving it a 30.49 P/E in 2019? Simple, in 2019 they need to earn the same as GOOGL did in the last twelve months. This amount is $13.20 billion over the four most recent quarters.

Facebook's earnings over the last four quarters? $2.37 billion.

In order to reach "GOOGL status" five years from today, meaning same market cap and multiple as GOOGL today, FB needs to grow earnings at exactly 41% per year (just below the 49% growth rate of earnings for the last two years since its IPO).

Try it yourself. $2.37B x 1.41 x 1.41 x 1.41 x 1.41 x 1.41 = $13.20B.

If you expect Facebook to be "a Google" by 2019, this is the bet you're making. From 2009 to 2013, Apple grew earnings at a very similar rate (45% per year). The long FB bet is that Facebook executes as well as Apple did during the iPhone/iPad growth era, which is probably the greatest earnings growth story for a large capitalization company in history. For further comparison, Microsoft also grew earnings at 45% per year from 1995-2000. In 2019, if Facebook ends up earning the same as Google earns today, it'll go down as one of the best earnings stories in history.

Yes, P/E is a simple comparison subject to plenty of estimates and management trickery and this takes no account for inflation, nor is it usually smart to try to predict valuations for a given point in the future. This is a simplistic comparison to show you how things need to pan out for Facebook to be valued as Google is today, on a reasonable timeline of five years.

The results show that the earnings story must be on par with Apple's explosive growth in the iEra, as well as Microsoft's growth at the end of the tech bubble.

Typically companies can ride one great achievement for years or even decades. Take Microsoft and the PC, Apple and the touchscreen device, Google and the search engine. Will the social network also be a powerful tailwind for Facebook? Only time will tell.

If Facebook does indeed grow earnings at 45% for the next five years, it is likely that Mark Zuckerberg will become the richest man alive. If they are to pull it off, they better get cracking on cranking up that cap-ex budget, since according to Mark they literally have to build out the internet infrastructure to reach new markets. A noble goal, no doubt, but doing it profitably is the big question.

Monday, September 1, 2014

Opportunity in Spin-offs?


I did a few posts in 2012 on the Conoco Phillips spin-off of Phillips 66. From anecdotal observations I suspected there may be an exploitable pattern with spin-offs. The main idea is that there is a large base of shareholders who are essentially given an asset they don't really want and the psychology involved in the decisions of this large group creates a predictable pattern of price action.

Simply put, my hypothesis was that spin-offs are initially sold off as shareholders discard what they don't want, and then the spin-off is bid up aggressively by either value investors or indexers/buysiders who need to hold the stock in their portfolio for various reasons. I was partially right in that the spin-offs are bid up aggressively but I got the timing wrong. They are bid huge early, sold after two weeks, and then aggressively bid up again. I'll explain in more detail. 

I decided to take a look at a large group of spin-offs. Here's what I THOUGHT would happen when taking a larger sample, and to an extent this did happen with the COP/PSX spin-off:

It seemed like a reasonable expectation: people with little or no information on the new company sell their shares hot off the press en masse to those with more information or those who simply must purchase the shares for an index or fund benchmarked to an index. 

The way it actually works out is pretty incredible, and appears to be very actionable. I'll try to illustrate it using another cheesy drawing and then I'll show you the stats of the informal study I worked on this weekend. 

The behavior here makes sense. It's all about the priorities of the two distinct groups of investors involved: the existing shareholders and everybody else. 

The existing shareholders have very little pressure on them. It's easy for them to see a spin-off as a "gift" like a dividend from the parent company so it doesn't require any immediate action. They can deal with it another time, throw it on the back burner. They won't be waiting with their fingers on the trigger - they might as well wait and see. 

Everybody else, on the other hand, has been preparing for the event for months. They have been salivating over this shiny new object. They've been running valuation models, crunching numbers and preparing their trades for the moment the bell rings. And there's only one thing they can do: buy. They don't have any shares to sell so immediately there is a huge asymmetric balance of buyers and sellers. Half of the owners of the spin-off probably have no idea they even own the new company! That's the recipe for a rally, and it shows in the numbers. 

I took 20 examples of spin-offs from the last five years for my study. I didn't include any BS like pharma companies or $2 stocks, nor did I include anything that had complications. I wanted to only include clean spin-offs without any trailing issues.  I don't care about individual performance: it's all about performance relative to an offsetting hedge. In this case I compared returns for 60 days to both the parent company and the S&P500 via SPY.

Here is the raw data of the results:

Click to embiggen
If it seems crazy, it's because it is. I prefer to watch the "median" data. If you can buy a spin-off at the open of trading on its first day while shorting the market, you would expect to earn a virtually riskless 5%. In just one day. 

Hold the trade on for two weeks and the gain swells to almost 12% median return versus SPY. Hell, putting the trade on at the close of trading of the first day would net you about a 7% gain in the next 10 trading days on average. Let's say you put 10% of capital into this very trade every time there's a spin-off that's not suspect ( here's looking at you pharma, Chinese, precious metals or MLP BS) - you would expect to add roughly 1% to your portfolio's yearly gain on each spin-off. Let's say you find ten worthy candidates in a given year - tasty. 

You probably want to know which companies I used so here's the list of the 20 pairs (Parent - NewCo):


More of the study:

The value of using SPY as a hedge is evident in much higher Sharpe Ratios (return adjusted for volatility)

The outperformance truly is this strong - at least in the 20 cases I studied

Conclusion: as soon as you can get your hands on a newly traded spin-off, buy it, hedge it with SPY and dump it after two weeks. Do it until it doesn't work anymore. That's what I'm going to do. I expect there to be a few rotten eggs in there - but as long as you keep your exposure limited (10% of capital seems appropriate), then over time I expect this quirk of market/trading psychology to persist.  

Sunday, July 20, 2014

Black Math

Bumpus Capital IT Basket

(All data from

eBay $65B (online marketplace, mobile payments)
Yahoo! $33B (digital content, search - #2 US web property in 2014)
Netflix $27B (video streaming)
Twitter $22B (social network)
LinkedIn $19B (professional networking)
Yelp $5B (local search)
Zynga $3B (mobile gaming)

  • $174B market capitalization
  • $81.53B ttm revenue
  • 2.13x sales


  • $176B market capitalization
  • $8.92B ttm revenue
  • 19.73x sales

Just sayin'.

Tuesday, July 15, 2014

Does This Behavior Look Familiar?

I'm not a bubble-caller nor a market-timer - but if we ARE in a bubble and we are anywhere near the top, then Facebook is AOL.

I will probably have a more lengthy post on this but the bull case on Facebook is shockingly similar to AOL's in the late 90s.

Be safe out there.

Friday, January 17, 2014

Fun with Indexing

This chart speaks for itself, but the punchline bears repeating.

Most indexes are no good. Capitalization-weighted indexing makes investors too dependent (overweight) on recent winners and don't even get me started on the price-weighted Dow.

Check out how much the equal-weight S&P index fund (RSP) has outperformed the traditional cap-weighted approach (SPY) since the bull market began:

Click me - I get larger

Joe Investor would be best served by holding a diversified portfolio of equal-weight index ETFs, but guess what? They're pretty hard to find - go figure.

Please comment below if you're shocked that the financial industry does not offer a practical solution that requires the disassembly of an embedded gravy train, but I don't expect anyone to answer.

Saturday, January 4, 2014

The Problem with the Right, in One Easy Link

A few months ago I started reading Scott Grannis' blog, The Calafia Beach Pundit. Refreshing, I thought: a guy who leans right but doesn't seem like a fundamentalist psychopath. And he loves charts. I was intrigued.

But after catching up on my reading, I came across this post from last week about Obamacare and the issue of subsidies for health plans. Read it for yourself, but it's the perfect primer for someone looking to see why the ideological, political and economic right are wrong and explains why they've been cast away to their bomb shelters for many years.

Scott applauds family friends as they have decided to forego healthcare for their daughter because they're too "proud" to take a government "handout." Earth to Scott: your friends qualify for subsidies, therefore they've been subsidized in various forms via progressive federal taxation for their entire lives. You know - that whole part about other people paying more so they can pay less. Or did they send extra money to the US Treasury every April 15th because that's what's "fair?" Didn't think so.

Grannis is disconnected and flatly wrong - choosing to protect your family with health insurance could literally be the only decision one may ever make regarding LIFE AND DEATH. Who gives a shit if now it means you have to take a subsidy to afford it? You take care of your family's health at any and all costs - pretty basic rule that most (non-cyborgs) live by. Pride should not be in the equation.

According to the teachings of Scott's ideologic leanings, his friends should have made better life choices so they could afford better insurance in the first place. Why isn't he shunning those poor decisions, and instead is applauding their absolutely idiotic one to forego health insurance?

These guys would rather let their family members DIE or declare bankruptcy (and thus becoming subsidized at the hospital anyway) before conceding that maybe, just maybe, they don't live in a libertarian utopia.

Wednesday, November 6, 2013

Art as an Indicator

There's no way to predict when a bubble will burst, but long live the bubble indicator!

That said, here's my favorite indicator for froth in the market. Will it flash its sell signal anytime soon? Your guess is as good as mine.

It's the chart of Sotheby's since its IPO in the 80s:

BID was very close in 2011 to flashing its signal but it wisely never got there, and the market has reached new all-time highs since then.

QEInfinity and an indefinite zero interest rate policy is causing investors to reach further out for gains. Will Sotheby's tell us when the party's about to be over?

Wednesday, September 25, 2013

Visa's Asking to Be Shorted

It's a pretty simple setup:

Twice, the stock pierced previous support on heavy volume only to close lower. The chart shows brief, exuberant spikes met with huge supply. I would expect these events to shift momentum in favor of the downside for the short term.

There's also a nice gap waiting to be filled around $179. A short position initiated on Thursday would provide a 2.5x reward to risk ratio if a stop is placed at $196.5 and a target of $179. Mastercard remains attractive so it could be a worthy long hedge to offset this short position.

Here's a wider view: