Richard Abramson offers some uncomfortable truths about investing

By Dian Vujovich
Special to the Daily News

Bernstein Wealth management director Richard Abramson presents some uncomfortable truths about investing

The Palm Beach Business Group's February meeting was titled "Where do we go from here," and featured speaker Richard S. Abramson, but perhaps a more spot-on title would have been "Can you handle the truth when it comes to investing?"

Abramson, senior national managing director of Bernstein Global Wealth Management, didn't mince words. In addition to pointing out mistakes investors typically make, he talked about reasons their returns aren't always the same as advertised market returns. He also gave his outlook on the economy and the markets.

In his presentation, Abramson used a clip from the movie A Few Good Men of Jack Nicholson's line "You can't handle the truth!" to set the stage for highlighting some obvious, yet not always acknowledged, realities of investing.

Investors typically make three mistakes, he said: "People chase market returns, sector returns and management returns."

Chasing market returns translates into getting into -- or out of -- the market at the wrong time, he said. In the two decades from 1992 through 2011, for instance, $1 million invested in the S&P 500 would have seen a 7.8 percent growth in returns while the average investor saw only a 3.5 percent return over that same time, according to Abramson, who manages $8 billion in assets.

When looking at longer-term returns, in the decade ending in 2011, during every 20-year rolling period, "Investors got killed relative to what they could have made had they stayed in the markets," Abramson said. "They just continuously make the wrong moves."

He used Ken Heebner's CGM mutual fund as the example to highlight results investors can face when chasing management returns. According to Dalbar, a Boston-based securities research firm, during the decade ending in 2010, the CGM fund had an average annual compounded return of more than 12 percent.

"But the average investor in this fund lost 11 percent. How is that possible?" Abramson asked.

"Because in 2007, (Heebner) was up an amazing 80 percent and money flocked into the fund just in time to get hit in 2008 when (the fund) was down 60 percent. So the average investor didn't make money even though Heebner was a great investor over the decade."

One reason investors have difficulty selecting a money manager is because they tend to use a rear-view mirror approach in their selection process -- looking at a manager's past performance and expecting it to continue. Said Abramson, "It's usually a mistake."

Making sector bets can be tricky.

When technology and dot.com stocks were booming at the end of the last century, for instance, investors had little interest in commodities, where the big money was actually being made. "Commodities boomed and technology stocks collapsed," Abramson said. "And the rate of return was almost double for commodities vs. technology."

Then there is chasing those yields.

Because people haven't been able to live on the income generated by conservative fixed-income products in this low interest level environment, they've taken more risk by chasing higher-yielding investments.

"It could be yield in stock, yield in bonds, yield in junk bonds, in master limited partnerships, preferred stocks -- anything that has yield people want because the yield on traditional bonds has collapsed," he said.

What advice does Abramson offer investors?

First, understand the importance of core capital.

Core capital forms the foundation for one's long-term financial security, and securing it requires a blend of stock and bond investments. It represents the amount of money you'll need to care for your family's lifestyle now and in the future, after inflation and taxes. Any excess in core capital can be passed on to your children, grandchildren, charities.

Next, be realistic about the kinds of returns the markets can provide. While corporations are cash rich now, the current low interest rate environment isn't going to last forever.

Looking five to 10 years out, Abramson says, equities could average about 8 percent. But he sees high-yield bonds as unprecedentedly expensive now and suggests investors seeking income look at unconstrained bond funds, where portfolio managers have free reign in picking the types of bonds and their durations for the fund's portfolio.

After 33 years of working within the financial industry, Abramson said he doesn't know any economist who can forecast the future correctly all the time, or anyone who knows what's going to happen. "Nobody can control it."

And as for that "You can't handle the truth" clip, Abramson suggested this exercise: Get out the Wall Street Journal and read whatever subject is written about in the right-hand column on the front page. Then, argue against what that column reports.

"If the right-hand column says there is global warming, argue against global warming. If we are going to have an excess of energy and the U.S. is going to be energy independent, argue against the U.S. becoming energy independent," Abramson said. "If you do that exercise often enough, you will be able to handle investing."

Approximately 50 people attended the PBBG meeting. Caroline Harless, a partner at Harless & Associates, was among them.

Harless, whose firm specializes in accounting and tax, said Abramson "was very well prepared. And had a lot of the data to back up his thoughts about where we are currently (in the market and the economy) and where we are going."