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« The Psychology of Why People (Used to) Hate Annuities, Part 2 | Main | For Those of You Looking for a Tasty July 4th... »

June 30, 2009

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This is a very timely article for an issue I've been struggling. I hired a financial advisor 3 years ago. We bought stocks then and have never sold or bought again yet my value dropped by 40%. All these guys preach is buy and hold. I'm sorry if you have a loser you need to get rid of it, or if you see a stock that will appreciate faster than your existing portfolio then you should buy it. This is a huge financial advisor company that seems to have taken my commissions and monthly fees and forgotten me. I really think I would have done better on my own. The only thing is that my advisor is a nice guy and I can't bring myself to fire him. I know its foolish but it is what it is. However I will likely do it in the next few months and do my own.

Anyone else struggling with this issue?

Although I've never had a financial adviser, I think I can understand the allure of hiring an "expert" to handle your money. Marketing and titles, "financial adviser" can be powerful inducements to act. A long time friend has recently left our company and became a financial adviser,he then convinced a number of our friends to allow him to handle their investments. He had been a top salesman for our company and definitely a "nice guy" but 6monthsof company paid training does not an expert make. Remember, Bernie Madoff is reputed to be a nice guy also

Buy-and-hold isn't really an issue. The real issue is expense ratios and fees. Regardless of market performance, you're always guaranteed to pay that amount into the pockets of professional managers.

Good entry overall.

This is a nice article exposing the myth about so called expert money management by professional fund managers, but, I think one can not stay away from equities as an investment tool. Best option is to go for index fund, Buy and hold strategy has worked so far and should do so going forward. With the knowledge that every boom is followed by bust and every bust is the precursor of next boom , one can use this knowledge to cash out of equities at the top of boom and reinvest in bust. Easier said than done though.

Allow me to tell you what worked for me. I retired in September 1992 after a 32 year career as an engineer performing structural analysis on ICBM components such as rocket motors, reentry vehicles and various related components, so I obviously have a good background in mathematics, science and computers.
Two or three months later I took over managing my 401K by moving it into a self directed IRA at Fidelity investments. I also moved our taxable investment money to the same institution and started managing it using only no load mutual funds. I had also recently subscribed to Investor's Business Daily (IBD) where I became a convert to its editor William O'Neil's philosophy of 'Momentum Investing' which he categorizes as "Buy High, Sell Higher".

The crux of this method is to buy a fund that has broken out and has started trending higher, you hold this fund as long as it remains in an uptrend. When you become convinced that its uptrend has failed you switch horses, i.e. you sell the fund and conduct a search for a new uptrending fund. If you cannot find a good fund that meets your requirements then, by default, you are out of the market and in a money market fund. In a nutshell, Buy and Hope doesn't work, but market timing and fund selection can work very well but they require skill, judgment, and a lot of time and effort.

Obviously for this to work you either need to follow someone else's advice as what to buy and when to exchange into something else, or, as in my case, you educate yourself in the technical analysis of stock and fund trends, and make all of your own decisions. For this, the first requirement is to have your own mutual fund database on your own computer, and have it updated every day. Fortunately at that time there was an ad in IBD advertising just such a database of mutual funds. The database also came with some very good charting and analysis software that contained the tools that I needed so I became a charter subscriber and still am today.

The database structure was also made public to selected subscribers so I was also able to construct my own software that used this database to perform a wide variety of statistical analyses on mutual funds.
I used this approach, with frequent refinement, from 12/28/92 until when on 11/1/07 I made the important decision to stop trading and to move into the slow lane, holding just CDs in our IRA accounts and individual municipal bonds in our trust account, all to be held until maturity. This minimized our income taxes which by this time were getting quite onerous, avoided the stress and anxiety of worrying about the market every day, eliminated management fees paid to mutual funds, while still providing far more income than we need.

During this almost 15 year period that included the fabulous dot.com bubble, my annualized compound rate of return was 21.58% and my total gain was 1719.6%. I don't believe that my experience can be easily repeated given the dire state of the current world economy and also because investment bubbles like the dot.com bubble between 11/2/99 and 3/10/00, when the Nasdaq Composite hit 5048, probably only occur once in a lifetime if you are very fortunate, so like everything else in life, luck certainly has a large role to play.

Having an advisor was good during the steady boom of the late 90s and from 2002 - 2006, but I think buy and hold will be dead for some time. You are better off trading yourself (what I'm doing) or staying in safer assets until things shake out in the next few years. The gov't response of borrowing more to stabilize the system will just prolong the pain to years and decades instead of months and years.

But hey, keep talking about what Michelle Obama is wearing to keep you hopeful while the people in power keep borrowing money from our future and giving it to Goldman Sachs.

Cap and trade will be the next bubble, invest accordingly. And it will be another one that leaves us even worse off than now, if you can imagine this.

Sorry about the rant, figure it's appropriate for July 4th though.

-Mike

A few point to make in regards to this article.

Article: "Only 2 advisors provided their clients with the correct advice about the total collapse of the market in 2008-9."

This statement is not true. There are many (too many to count) Advisors who were completely out of the market before the downturn happened.

Article: "No advisor has fired him/herself. No advisor has returned their advisory fees and commissions."

This is a very deceptive statement. There are two advisors I can name off the top of my head who didn't charge a dime when their clients lost money. Mohnish Pabrai & Joe Ponzio. Both Advisors model their funds after Warren Buffett's early fund. If you don't make at least a 6% annual return, you don't pay them a dime in fee's. Since Mohnish Pabrai took a loss in 2008, he didn't charge any of his clients even one penny in fees of any kind therefore he had nothing to return. As for Joe Ponzio, he made a positive return for 2008, well above 6%.

Article: "The AVERAGE market return has been 12%, so a few managers will beat the average by luck—Just not the same ones every year."

The Average market return has been 7%, not even close to 12%. Not sure where you get your information but if its from an internet website, you're best to do it the hard way and get out a calculator. Furthermore, most value investor managers beat the market. Luck has very little to do with it in value investing. You simply don't know what you are speaking about.

Article: "you must pay the costs of the manager, her/his marketing group and operations, whether or not s/he makes you a dime."

Again, better research on your part is needed. There are many fantastic money managers that won't charge you a dime unless they can produce results. Finding them is the key and its obviously something that you haven't been able to find.

Article: "Third, managers are paid for increasing “ASSETS under management."

You are speaking of a "mutual fund" manager on these terms. Maybe the only thing we have in common is this: a mutual fund manager is not a manager of money in any sense of the word, they rarely know what they are doing.

Article: "It takes luck to pick successful stocks."

This is purely an uninformed statement. Countless books have been written by the best investors and investment advisors in the world of value investing who have all beat the markets year over year for periods of 20, 30, 40, & 50 years. Myself included in which out of the roughly 30 stocks I've owned in the last year, I lost money in 2 of them which equaled a whopping $100. I'm ranked #5 on covestor.com. That's not luck my friend. Its diligence.

Article: "many professional managers and Wall Street “insiders” place their core assets in index funds. As bond guru, Bill Gross, said, “professional money management is a gigantic rip-off."

Again, the author is getting confused between a "money manager" and a "mutual fund manager". Two completely different things. He is specifically talking about a mutual fund manager regardless if he knows it or not. Apparently, he doesn't know what he's talking about. That's very evident to a professional such as myself.

Article: "since no manager can consistently beat the market"

Countless people have beat the market. Warren Buffett has beat the market for the last 50 years, Charles Brandes, Joe Ponzio, Mohnish Pabrai, Edward Lampert, Bruce Greenwald, Seth Klarmen, Prem Watsa, Martin Whitman, Glenn Greenberg, Arnold Van Den Berg, Bill Ackman, myself, etc. All these people share the same investing principles. Everyone of them have beat the markets consistently for 20+ years. I could write a 50 page book of just names of people who have beat the markets since 1929. The notion that you can't beat the market is childish and blind. Completely incompetent.

"The notion that you can't beat the market is childish and blind. Completely incompetent."

That's a ridiculous statement. People who beat the market are nothing but lucky. Just because you can quote 50 people who beat the market, it just means that there are millions out there who lost.

Academic research has shown conclusively that beating the market is impossible. Warren Buffet himself (the so called market winner) has said that most people are better of buying and holding a set of diversified index funds.

Past performance of mutual fund managers of self-taught traders mean nothing. You may be ranked #5 in coinvestor, but can you maintain that ranking for the next year? For the next 10 years? Till retirement...

Market returns tend to have high kurtosis so you can be an above average performer by having average returns for 10 years and one good year at the end of the tail. This indicates one takes average risk with above average upside potential.

One can position themselves to take average risk, but get run over by luck should luck happen.

Academics looking at large data sets, with zero market experience should be trusted without question. Give me a large data set, and a basic statistics program, and I can tell you almost anything you want.

I can assure you there are a number of people who out preform on a regular basis. They take less risk for their returns. "Luck" as you call it is certainly a factor, but you have to be in the way to get lucky.


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