Who the hell am I to say that anyone can invest? Individual investing is all about taking control of your financial future. Would you rather abdicate your control of your financial future to a human (financial advisor) who believes in fairy tale spitting non-sense of rational markets being correctly priced all the time? The same advisor who has 50 to 100 clients they are looking after and on the low side with 50 clients and 480 minutes in a work day (8 hours x 60 minutes, assuming no breaks or lunch hour) could spend 8 minutes a day and some change on your account. That is until we factor in that they are constantly scouting new clients, writing reports to higher ups, creating the quarterly report for each of those clients which takes us to likely…2 minutes a day on your account making sure that they are providing the service they portrayed to you. Also, they don’t believe they need to do anything more than match the market, because what they are taught in school is that nobody can without just being a lucky monkey flipping coins.
Don’t believe me? They won a Nobel prize for it and it is the basis of Efficient Market Hypothesis which is the meat and potatoes of business school lessons today, which led to Modern Portfolio Theory (again look it up) which states that no one beats the market consistently and they are almost right. The real statement is that anyone who believes in this theory does not beat the market in the long term. Maybe they get a good quarter or three once in a while, but hands down, they do not beat the market period. This is right from their own mouths…that is unless you are willing to accept more risk. However, that really doesn’t work either. Diversification is what they preach and by putting you into 200-2000 companies somehow you are expected to make money in the long run.
How do they choose these companies for the fund? A computer program. Do not be deluded into thinking that they are spending an inordinate amount of time sitting in front of a computer, the Wall Street Journal or Barron’s open on their laps or even a crystal ball trying to figure out what companies to include and in what weighting. They put parameters into a computer program designed by someone who believes in their theory as much as they do and then buying what it tells them to buy. If that’s all the service you are being provided, why do you need them? The only reason at this point you keep them is that if they do poorly you have somebody else to blame.
Here’s a secret to life I learned a long time ago and truly believe in. You can delegate authority, but you can’t delegate responsibility. What does that mean here? You delegate your control (authority) of your financial future to someone who says they will take care of it for you for a price. You say, “Do what you will with my money, just make it grow”. They assure they will and then under their breath say, “As long as the market goes up I will”. You have just given up your right to be in charge of your own future. Then they buy whatever is hot, at the moment, remember when Tesla was up at $780 a couple of months ago and funds were buying hand over fist? Remember when it crashed down to $580 a month later? I will personally guarantee you that a lot of fund managers were selling right up to the bottom. How do I know? Because I know how they work. One person starts selling and other fund managers see it and know the person is a catalyst, they then start selling driving the price down further and further until someone hits a price that they are willing to take a chance on. In this case it was actually about $540, that is a change of $240 or 30%.
Who do you blame? Instinctively you will blame your financial advisor, fund manager or whoever you delegated your authority to, why? Because you trusted them to be looking out for your best interest. Now this is an extreme example… or is it? I won’t try to tell you how to feel, and I am aware you are heavily diversified meaning that it is only a portion of the fund…but probably one of the largest portions by weight, so you still had a bad month. Who do you blame? The only person you can blame is you, you cannot delegate or abdicate responsibility and then blame someone else, why? Because YOU picked them, YOU told them they could take charge of your financial future, and YOU didn’t think it was worth your time to do research and pick companies to invest in that didn’t follow the market because you knew something the market didn’t.
Ed Thorpe, the man who beat the dealer in Vegas and the reason why Casinos now use 3 decks, beat the crap out of card counters if not ban them and why you can’t use so much as a cell phone at the tables, said if he doesn’t have a reason to think he has an advantage he won’t play. Might shock you to know that he was also an insanely successful investor, while his plays were short term arbitrage, the point stands. You should never invest money unless you believe you have an advantage on others in the market. You are playing against the same managers who you’ve given your money right now, the big differences being that by representing yourself, you are small money and can dart in and out much faster than these huge funds, and second you are accountable to nobody but yourself. These managers must match the market every quarter, which is about how long they hold a position on average. I look for opportunities I can hold for 5 years to forever.
Let’s talk robo-advisors, when you start looking into using robo-advisors or choosing ETFs you run into the problem with modern portfolio theory. You are given the option of Long Term, Short Term, or Medium Term; we don’t care that much about those. Then High Risk, Medium Risk, Low Risk; High Return, Medium Return, Low Return. These two can be matched in every possible permutation except Low Risk, High Return, why? Because they do not believe it can be done and because they don’t believe that, they cannot legally offer it to you. I still say that is a load of horse crap. I can name 10 investors off the top of my head who have done it. Most of them are the gurus of my school of investing practice.
I have paid money to learn from them, yes. I have also made mistakes and lost huge because I broke the rules they set in place. I am now living by the rules and my returns are proof of concept to me. I believe I will be able to make money in bull markets and not lose money in bear markets. I even believe it is possible to make money in bear markets and more importantly set myself up to profit huge when the market breaks out of the coming correction which I argue might look more like a depression of 2008 scale.
Your money managers, robo-advisors, financial advisors, will continue to take a cut of your account whether they make you money or lose big. That is a fact, they will buy high and sell low when that time comes. The year 2000 saw a bubble pop where managers were buying Yahoo at 11,000 times earnings, buying Enron until the day that it went bankrupt. They still took cuts of those investors accounts, and even earned bonuses if they didn’t lose AS MUCH as the market overall did. Market loses 11%, they lose 10%, bonus time and you just paid 1% to 2% for their “Success”. I hope that means as much to you as it did to me when I realized I was paying 2% several years ago for 4% in returns. That is 2% net, but wait, that’s without inflation factored in. So that 2% in reality was 0% when you account for inflation and I’m being generous only calling it 2%.
Financial Advisors at the major firms go through training. All of them do, the company has an internal system. I can tell you several years ago from a reliable source, they spent no time learning to value a company and 100% of their time on how to sell their (the organizations) services. I can tell you from interviews I took to start a financial advisor position that I was told as a financial advisor I would not get an office of my own until I had sold “40 lives”, that is life insurance policies. No talk about investments, no talk about learning to value companies, no building a track record, just sales. Do not delude yourself into believing that anyone besides YOU cares about your financial future. These advisors care about their jobs and the money they make, they do not have the TIME, I mean the physical time to care about you as much as you can.
If you took 2 hours a week from your schedule you could likely do as well or better than your advisor, human or computer. You might even find you like it. At worst, you will invest in companies you believe in and want to see in the world 10 years, 20 years, 30 years from now. Don’t believe in smoking or that it is good for anyone, congratulations if you own the S&P 500 index, you own at least 3 major tobacco labels. Do you believe that guns shouldn’t be widely available, guess what? You own at least one company who produces them. It doesn’t matter whether you think about it or not, you own them. What does that say about your ideals? If none of that matters to you, then look at it this way, at least you know how much time is being spent on your future and at the end of the day the fact is YOU are responsible for your returns, so why not be responsible and have the authority to invest in what YOU want?