For nearly 25 years, McDonald's (MCD) roadside signs boasted how many “billions and billions” of hamburgers the chain had served. The tacit implication, of course, was that billions and billions were served safely and satisfactorily. Over decades, McDonald's developed – and maintains – a reputation for clean, quick, value-conscious meals in a familiar setting you trust. Reputation is a business’s most important asset. As Warren Buffett and others have famously remarked, it takes years to build but only seconds to destroy. And in a free market it must be earned, not bestowed like knighthood from the king.
Buried among last month’s market carnage was the curious tale of Kenneth Starr, not the Clinton-era Whitewater prosecutor, but a New York financial advisor who counted celebrities including Martin Scorsese, Al Pacino, Sylvester Stallone and Uma Thurman among clients. Starr is accused of stealing $30 million to fund a lavish lifestyle, including a $7.5 million apartment, where the FBI found him hiding in the closet at the time of arrest.
Last year we noted how victims of Bernie Madoff cited his regulation by the Security and Exchange Commission as among the treasons they trusted the fraudster. Same story for those duped by Allen Stanford, now awaiting trial for what’s described as an $8.5 billion Ponzi scheme, who assumed Stanford stationary and business cards carrying the Securities Investor Protection Corporation (SIPC) logo meant their money was safe. I suspect you’ll see similar stories emanating from those swindled by Starr, whose firm was registered and regulated by the SEC, and who himself was a registered investment advisor.
Reputation is built by honest dealings over “billions and billions served.” McDonald's would empty immediately if customers started dropping dead from their McNuggets or hot apple pies.
Regulation disrupts that process: any shyster is able to easily meet SEC’s arbitrary requirements and gain a government seal-of-approval. The agency’s own web site assures the public that “all SEC-registered investment advisers must maintain true, accurate, and current books and records.” Apparently Madoff…and Stanford…and Starr missed that memo.
Despite such obvious failures, we are quick to entrust even more authority to the porn-surfing public servants at the SEC. A far more effective watchdog? A free market led by the skeptical, self-interested investor with his own cash on the line.
With so few stocks now notching new meaningful highs (only 26% are now above their 50-day moving averages despite Wednesday’s rally), investors with an appetite for risk might consider an alternative to straight equity exposure via iShares Diversified Alternatives Trust (ALT).
Launched last November, the ETF offers a mix of hedge-fund-like strategies including yield arbitrage, relative value and technical momentum across three separate asset classes. With a goal of absolute return and low correlation to stocks, the portfolio now holds exposures ranging from a short position in Japanese bonds to a long position in Dutch stocks.
Different Strategies, Not Different StocksiShares Diversified Alternatives Trust (ALT) – 6 months
If stocks and other risky assets come back into favor, investments like ALT, IQ Hedge Multi-Strategy Tracker ETF (QAI), Schwab Hedged Equity Select (SWHEX) or other surrogates like we highlighted earlier this year will undoubtedly lag. But even a cursory glance of ALT when compared with the S&P 500 shows an investment that most certainly moves to its own beat, and is outpacing the market year to date.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.
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RT @JonathanHoenig: How Regulation Kills Reputation http://bit.ly/cmXQEC $MCD $ALT $QAI #Madoff @chrisdodd
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