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Popular in the 1980s before regulations limited some benefits, Master Limited Partnerships (MLPs) fell out of favor in the 1990s as multiple brokerage houses lost settlements to investors who sued claiming they were misled as to the risk of the investment.

By 2009, decade long poor performance by large U.S. companies, rock bottom interest rates and surging energy prices made for perfect timing in marketing MLPs.  Ever since, the search for higher yield without additional risk has been a common, but misguided theme for investors.

What was it that George Santayana famously said about those who cannot remember the past?  (full disclosure – I went into this blog thinking it was Churchill’s quote)

Perhaps the biggest risk in a MLP investment is the underlying complexity of the product.  We often promote the notion that if you can’t understand something, it doesn’t belong in your portfolio and MLPs are awfully tough to understand.  The basics sound great.  They’re tax advantaged, theoretically payout lots of income, and are primarily invested in energy and natural resources.  Investors often ignore the high fees, complex rules involving the general partner and the cost of digging through K-1s when filing tax returns in the interest of higher yields.  Besides, this is energy, a space constantly under demand stress which theoretically drives prices up and up forever, right?

Have you filled up your gas tank lately?  Notice anything?

A recent Wall Street Journal article, among many others, notes the impact of lower oil prices on these products.  Many partnerships have been forced to cut distributions while their values plummet, some by as much as 70%.  That’s not to say oil prices will remain low or there isn’t the potential for recovery, but isolated as a solution to low yielding cash and bonds, this overly complex fad is not even a remotely suitable alternative.

My goal today is not to beat up on one investment product in particular, but to instead frame how we view principles, trends and fads in the context of investment philosophy.  MLPs and similar investments have their place in the market, but typically not in the portfolios of the average individual investor.  But they end up there because they make those that sell them a lot of money and they appeal to our desire to follow the fad, the “hot” idea du jour.

The notion of dividing the world up into fads, trends and principles was developed by David Zach, a self-proclaimed futurist.  I’ll attempt to describe them and apply them to investing below.

Principles – These are your absolute fundamental beliefs that provide the foundation or core of a philosophy.  They don’t change no matter the market or economic condition.

Trends – These are movements within the global economic environment that linger or take hold for some period of time.  They need to be noticed, and plans adjusted to accommodate their impact.

Fads – These are fickle, hot ideas that come and go like the wind.  They’re sold until the buzz wears off or until a prettier, shinier object grabs our attention.  In investing, these are where costly, catastrophic decisions are made.  Picture betting a large sum of money on the latest Ariana Grande song (yes, I have young daughters) to rule the charts for the next 30 years.

At TAAG, we’ve believe success comes when you…

Hold steadfast to your principles.

Identify, adjust and plan around trends.

Ignore the fads.

Have a great week!