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Protective Instincts
Plus November Market Report

John Gorlow | Dec 16, 2018

The disgraced Wall Street investment manager Bernie Madoff wrote the playbook on how to defraud investors. Make investments sound exclusive and special, make the club difficult to join, mingle with the rich and meet their closest friends. Before Madoff’s house of cards collapsed, he stole tens of billions of dollars, escaping SEC attention despite many red flags. Madoff was a fraud, pure and simple. But what about those high-rolling hedge fund managers who lose millions through completely legal means? This month we look at important safeguards that every investor should understand before chasing high-stakes returns. First, a quick review of November markets.

November 2018 Market Report

Volatility continued in November, but to a lesser degree than October. That translated into better overall results for investors. Global stocks (MSCI All Country World Index) returned a positive 1.46%, after losing 7.49% the prior month. The US market (S&P 500 Index) returned 2.04% and ended November with a 5.11% YTD return. US Small Cap stocks (Russell 2000 index) finished the month plus 1.59% and returned to positive territory for the year. Emerging Markets (MSCI Emerging Market Index) remained deeply in the red YTD but had the best month since January, returning 4.12%. International Developed stock markets continued to trend downward, returning negative -0.09% for the period. Real Estate Securities delivered solid returns for the month, with Domestic REITS up 4.85% and International REITs up 1.27%. The 10-Year US Treasury Bond closed the month at 2.99%, down from last month’s 3.14%. Junk Bonds fell 0.86% for the period, but held steady YTD. Oil fell to $50.72, down significantly from October’s close of $64.96. Gold was up, closing at $1,227.40. Propelled by uncertainty abroad and expectations of higher US interest rates, the dollar jumped to its highest level in a year. Commodity prices fell.

All in all, November offered a textbook lesson in taking the long view rather than fixating on returns for the week, month or year. A sell-off in the first part of the month wiped out 4% of the S&P 500 index, briefly piercing October’s lows, before rebounding 5% to deliver a 2% total return for the month. Markets rise and fall, but even when prices fall and volatility and fear are on the rise, investors are still buying. The market rewards those who remain disciplined.

Feature article

Chasing High-Stakes Returns? Read This First.

Just last week we heard the story of James Cordier, founder and CEO of the hedge fund in Tampa, Florida. Cordier managed to lose more than $150 million—all the money that nearly 300 clients had invested with him—on an unhedged short trade on natural gas options. When the market went up rather than down, he was doomed. But it gets worse. Some of Cordier’s clients lost more than 100% of their money because margin money was borrowed from their linked retirement accounts to close short-call positions. Now they’re on the hook to repay the brokerage house, too.

In an ironic twist, that same week, the Wall Street Journal reported that Bernie Madoff’s victims had been repaid 75% of their original investment (some $17.5 billion) due to the diligent work of two attorneys. That’s an incredible recovery rate for a Ponzi scheme. Of course, Madoff’s victims will never be compensated for their remaining 25%, or for missing out on the returns of a 9-year bull market. They’d have been better off hiding their money under a mattress.

So here we have two perfectly horrible financial stories. In one, clients were taken in by a scheme that was 100% fraudulent. In the other, clients were taken in by a completely legal hedge fund operation. The clients who invested in the legal scheme fared worse. Go figure.

Most investors like to believe they’d never be tempted to invest with a Bernie Madoff or a James Cordier. They’re too sophisticated for that. But keep in mind that Bernie’s investors included nonprofit organizations with high-powered Boards of Directors. And one of Cordier’s investors was Tampa Bay Lightning owner Jeff Vinik, a former Fidelity Magellan manager who’s been around the financial block a few times. Sophistication isn’t the issue. The issue is how investors allow greed to overpower rational thinking.

Many of these same investors (and millions like them all over the world) are perpetually chasing the promise of outsized returns. Once the curtain has been pulled back a few times, you’d think they’d understand that a lack of transparency is a warning sign. Chasing outsized returns returns can be hugely problematic, especially when you’re unable to evaluate the risks you’re taking.

How does Cardiff Park protect you? 

The Cardiff Park business model is transparent with intentional, built-in client protections:

We don’t mix our advisory practice with a commission-based model. Being a pure fee-only advisory practice eliminates many potential conflicts of interest.
Unlike most advisors, we don’t take a cut of assets under management. This ensures that our advice is independent and objective and isn’t colored by self-interest.
We do not guide capital allocations to investment strategies with restrictive lockups or costly redemption policies that sacrifice liquidity.
We don’t accept custody of client securities. Our clients receive account statements, trade confirmations and tax statements directly from the qualified custodians who maintain their assets. This separation between investment management and custody of assets is the most critical protection against fraud-based losses.

We believe these are entirely appropriate policies. Taken together, they provide safeguards that every investor deserves: objectivity, transparency, and ready access to funds. But your protection doesn’t stop there.

How do you know your money in mutual funds is safe? 

Mutual funds and other financial products held in client portfolios at Cardiff Park Advisors are subject to strict US securities laws and regulated by the SEC. These include products from DFA and Vanguard among others. Multilayered safeguards are designed to benefit investors, beginning with fund prospectuses that detail objectives, fees, risks and other important information. Funds are also required to submit annual audited financial statements. Independent layers of management offer additional protection:

Independent layers of management offer additional protection:

The investment advisor decides which securities to buy and sell, consistent with the fund’s investment objectives.
•The trades are completed by a separate entity, the fund custodian, who takes possession of securities purchased or transfers securities sold. This separation between management and custody is mandated by law.
Most funds choose qualified banks as custodians. Banks are required by law to segregate mutual fund securities from other assets.
Accounting agents play another important role, calculating a fund’s daily net asset value (NAV) so investors can plainly see what their investment is worth and what it would cost to purchase additional shares. Daily determination of NAVs and investor access to daily redemptions are hallmarks of the mutual fund structure.
Transfer agents facilitate new investment and keep mutual fund managers informed about money coming in that can be used to make trades.
On top of these independent agents, oversight is provided by a Board of Directors that meets regularly, and a majority of the directors must be independent from the mutual fund company. The board is responsible for approving the hiring of a chief compliance officer (CCO). The CCO implements and oversees written policies designed to prevent securities law violations by the fund. The CCO reports regularly to the full board and separately to the independent directors, and can be replaced only with approval of the full board.

In sum, the regulated mutual fund industry is designed with built-in firewalls to help protect investors against misappropriation and misdeeds. Compare this structure to hedge funds, private placements and other-types of securities which are legally enabled to operate outside some of these investor regulations. For example, hedge funds are not required to provide the same level of disclosure that security laws require for most mutual funds. Hedge funds will tell you this is an advantage, making it difficult for competitors to copy their strategies. But it also makes it difficult to quantify where expected returns are coming from and what risks are being taken. On top of that, hedge funds place leveraged bets that lead to greater volatility. And fees are often sky-high, explaining why so many hedge fund produce less than spectacular results.

If you’re tempted to invest in unregulated or lightly regulated securities, consider your motivation and by all means consider the risks. Are they worth it? A better option is to stick to an evidence-based strategy, remain diversified and disciplined, and keep your focus on the long-term. Don’t be tempted by promises that are too good to be true. There are no reliable shortcuts to building lasting wealth.


Do you have questions or concerns? Call me. I am here to help.


All of us at Cardiff Park Advisors wish you happy, healthy and safe holidays. We are grateful to count you among our clients, and will continue to do our best work to retain your trust and confidence.

John Gorlow
Cardiff Park Advisors
888.332.2238 Toll Free
760.635.7526 Direct
760.271.6311 Cell
760.284.5550 Fax


Cardiff Park Advisors
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Carlsbad, CA 92011
Phone (760) 635-7526
Toll Free (888) 332-2238
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