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The Lost Art of Investing

Call it Investing, call it Risk Taking, call it Speculation, call it Stock Picking, or even call it Gambling if you must, but realize there is an art to the process and avoiding such truth is the opposite of opportunity.  Investors used to make money because someone worked at it, not simply because they made a deposit with whimsical money.

Case in point: as of this writing, a well-defined portfolio invested in well picked stocks and managed according to a system of maintenance, from 5/5/03 to 12/12/10, has produced a 194.8% return while the S&P has produced only 35.9%.  Is that dramatic?  Yes!  These numbers are from an investment service.

Here’s the point.  They used to call them Company’s Men (when it was still okay to call men Men), then the title changed to Stockbroker, and after that came Financial Consultant.  Legalistic challenges as well as opportunity to help clients forget “Stockbroker” as a derogatory title, have caused them to become today’s Financial Advisors.  Is there a difference between a Stockbroker and a Financial Advisor?  I believe so and I also believe the big firms want a major difference to exist.

Stockbrokers kept their jobs by performing well.  They had to perform in up and down markets by constantly looking out for risk and actively seeking opportunity.  Not all of them did a good job of this, but just like any profession some failed and some did well.  If you worked with a good stockbroker you likely made a good return as performance overshadowed losses.  That’s how it is done by the way.  There will be losses at times or there would be no risk, and if there is no risk, there is no longer investment opportunity.

In the two decades from 1980 until the end of the century, stockbrokers had a vast opportunity to expand on the notion that such effort had value!  By the end of that time many millions had been made on behalf of clients, both through methodical investment as well as the tossing of good after bad in the tech bubble of the time.  Do not believe it if someone implies a bubble never happened before.  The “Nifty-Fifty” of the early 1970s, the run-up of the markets before the great crash and depression, the multiple bubbles from 1900 to 1929 are examples of human nature in action with investment ideas, schemes, and opportunity.  Some won and some lost.  The problem of today arose when those same methodical stockbrokers began to warn clients of a market top.

First, to understand the contrast, let’s compare two things.  Imagine you are an investor and your account just jumped over a 7 year period from $50,000 invested to a market value of well over $1 million.  Your broker calls and starts telling you that it could be a good time to exit the market to a degree and protect your new-found net worth; your broker is protecting you as a client.  In comparison, now imagine you are the national sales manager of a large firm and the stockbrokers under you are signaling to clients that it may be prudent to exit positions they own; from this view the broker is reducing opportunity for trading fees.  In the first case you are grateful of the opportunity to reduce risk.  In the second case you blindly see that clients will potentially be pulling money from their accounts and reducing the pool of assets at the firm.  This is how the opportunity arose for the industry to begin focusing on investing everyone’s money into everything, through the use of allocation in managed portfolios.  This is the reason why stockbrokers who make money for and protect their clients are becoming extinct, because they increase the risk to the firm they represent since deposits will decrease in a down market and the firm would like to increase or maintain deposits during a downturn and maintain their fees on client assets.  The firm’s attitude often is one of belief that all assets on deposit belong to the firm, not to client, and so they protect the fee’s instead of focusing on performance.  Funny thing, if performance is good, then fees increase anyway, and would probably be much higher than they currently are. 

The days of the fighter pilot style, intelligent, hard-working, and ever opportunistic stockbroker have gone, for now, because the firms would rather hold your money in a more stagnant form in which their fees are not damaged or don’t cycle up and down in a wide pattern.  This does less good for the client and better for the firm. 

Don’t believe it?  Two things help make the point, one is that a market rate of return minus fees nearly guarantees lower performance, and the second is a high majority of managed accounts under-perform the markets.  Many financial advisors are effectively reduced to being no more than a teller at the bank.  You deposit the money and the advisor has little idea of where it goes and how it works even after expensive and broad training to allow them to be labeled with CFP, CFA or the like.  A lack of real practice tends to void the value of the education.

Now you may wonder if there is a solution to this.  Yes, you can do several things.  One is to pay for what you get.  If an advisor and the firm’s portfolios aren’t producing higher results than the markets, you need to realize you are paying for nothing.  Look for an advisor who can perform well.  You can learn to manage your own account.  I have seen many people try this and I have yet to see anyone, who has a career different from being a stockbroker/financial advisor, do well with this.  You can follow a good investment service which has true performance like the Investor’s Business Daily.  There are other things you can do like join a good investment group, and you can even change your career if you want to try the 5 year learning curve it takes to truly be good at it.  It is beyond the scope of this writing to provide a real answer since there is so much involved in assessing a person’s capacity to participate, including their own business ventures. 

In all, just realize there is no reason to fear investing directly in stocks, and there should only be fear in the inability to adjust to the reality of being wrong or missing opportunity.