Comparison shopping

When you go shopping for a house, TV, clothes, or car, you understand that you need to shop around.

Shopping allows you to better understand the nature of the product you might buy. What are the options? What is the price range? How is the product sold? How is it supported after purchase?

If you don’t do a good job of shopping around, you are very likely to pick an inferior product or pay too high a price. So, it pays to shop around.

The same can be said when it comes to looking for investing or financial advice: you need to do some comparison shopping. (In fact, I think that the expense and impact of good or bad financial advice far out-weighs the cost and benefit of a house, TV, clothes or car. But, then again, this is what I do for a living.)

But, many consumers don’t comparison shop for investing advice. They pick the person they already know who does it, or a golfing buddy. Some people ask for referrals from friends, family or coworkers, but then don’t find out who else is out there or what they have to offer. How do you know what you’re getting is any good if you don’t know what else is being sold and at what price? The worst way to pick such advice is to wait for someone to come to you–you know, the shark with his fin showing.

What types of things do you need to find out from a potential adviser? Start with their track record: how are they doing with their own money?

Would you want to work with a plumber who can’t fix her own pipes, or a doctor that can’t successfully diagnose patients? Then, why would you want to work with an financial adviser who hasn’t succeeded financially themselves (or are on a clear path to doing so)?

It is shocking how few advisers follow their own advice. Most mutual fund managers don’t put but a small amount of their own cash into the fund they manage. Many sellers of insurance and annuities buy the minimum required so they can say they buy the product they sell. A good adviser puts most of their money into the product or service they sell. If they say it is good for you, why wouldn’t they be fully invested themselves?

Another thing to find out from an adviser is how they are paid. If they are paid a commission to sell a product, don’t expect much support after the sale. If they pass you off to someone else after the sale, you just bought a service from a rainmaker–good luck with that. The best situation is when their pay is aligned with your interests in some way. If you don’t understand how they are getting paid or they are evasive in answering your questions, be wary.

Another question to ask is how much a potential adviser charges? Be careful, because you may be comparing apples and oranges. A Porsche doesn’t sell at the same price as a Yugo, so don’t expect a good adviser to be lowest cost. Make sure you understand how much you would be paying relative to similar services. If the rate is above or below average, then assess whether it makes sense to pay more or less. Higher touch service is higher cost, so is higher performance service. Price is not a figure in a vacuum, it belongs in the context of the value you are getting.

Finding good financial advice is hard. There just aren’t that many people out there who are good with their money. Also, the investing advice business is structured to sell products and services, not specifically to help clients, so investors are understandably wary.

To get good advice, you need to shop around. Find out what services are available at what price. Talk to many people in the field to get to the point you understand what you are buying and the quality of the person you are buying from.

As they say, if you don’t know jewelry, know the jeweler. To get good investing advice, you don’t need to know investing, but you do need to know your investing adviser.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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Comparison shopping

Investment advice isn’t only about maximizing returns

Generating above average returns isn’t the only way investment advisers help clients.

As Vanguard has recently pointed out, investors on their own tend to make bad mistakes that destroy returns over time.

Investment advisers can help their clients make better decisions in key areas that dramatically impact long run returns:

  • keeping clients on an even keel emotionally by guiding them to be fearful when others are greedy and greedy when others are fearful
  • guiding clients toward tax-efficient investing without making tax planning an all-consuming goal
  • keeping client investment costs low
  • guiding clients to rebalance their portfolios: selling what has gone up and buying what has gone down

According to Vanguard, such measures can improve an investor’s returns by as much as 3% a year.

I agree with Vanguard’s findings and believe it highlights what many investors may be missing: investment advisers help clients reach their goals not just through investment selection, but by providing prudent and effective advice that can significantly impact returns over time.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Investment advice isn’t only about maximizing returns

Buffett’s advice

Part of Warren Buffett’s annual letter to shareholders appeared in Fortune magazine this week (click here to read the article).  It’s short and worth reading.

In it, Buffett spells out the investment advice that he and his mentor, Benjamin Graham, have spelled out for years.

“Investing is most intelligent when it is most businesslike.”

Buffett describes two real estate investment he made that have done well: one a farm in Omaha and the other a New York City retail property.  In both cases, the properties were purchased when no one wanted to own them, so he bought at very reasonable prices (10% yields with the potential for asset growth over time).

He was investing in real assets, not pieces of paper on an exchange.  He evaluated the cash flow potential relative to the price to be paid, and recognized a good deal with limited downside.  He didn’t care if others liked or didn’t like the price.  He didn’t care if they generated excellent returns right away.  He was thinking long term, and he was thinking about the specific properties and his ability to evaluate them.

“You don’t need to be an expert in order to achieve satisfactory investment returns.”

“Focus on the future productivity of the asset you are considering.”

“If you instead focus on the prospective price change of a contemplated purchase, you are speculating.”

“Forming macro opinions or listening to macro or market predictions of others is a waste of time.”

“Stocks provide you a minute-to-minute [quoted prices] for your holdings, whereas I have yet to see quotation for either my farm or the New York real estate.”

“Owners of stocks, however, too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally as well.”

“When…I buy stocks — which [I] think of as small portions of businesses — [my] analysis is very similar to that which [I] use in buying entire businesses.”

“Most investors, of course, have not made the study of business prospects a priority in their lives.  If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power.”

“The goal of the nonprofessional should not be to pick winners — neither he nor his “helpers” can do that — but should rather be to own a cross section of businesses that in aggregate are bound too do well.”  By “helpers,” Buffett means financial planners or investment advisers who don’t understand how to value businesses, or choose not to make the effort.

If you or your helpers don’t know how to value businesses, then a low cost index fund is the way to go.

Don’t try to time the market by getting in when it is “hot,” and out when things look “scary.”  You will do worse if you try.

“Price is what you pay, value is what you get.”

After Buffett dies, his advice to the trustee who will manage his wife’s money is to invest 10% in short term government bonds, and 90% in a very low cost S&P 500 index fund.  He’s putting his money where his mouth is.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Buffett’s advice

Investing: simple but not easy

As Warren Buffett said, investing is simple, but not easy.

The concepts are simple to understand, but executing those simple concepts isn’t easy.

People shoot themselves in the foot by paying too-high fees, trying to time their entry and exit from the market, and by picking lousy advisers.  Our psychology makes us our own worst enemy.

Instead of doing the homework necessary to get and stay on the right track, most want short-cuts.  Those short-cuts lead to a ditch.

When picking an adviser, the most important thing to know is their character.  Not their credentials, not their schooling, not even their knowledge.  Smart people with bad character are just better at ripping you off.

How do you know a person’s character?  It’s not easy, but it is simple.  Look at how they are compensated.  Find out if they follow their own advice.  Talk to their current and former clients.  Are they willing to admit their own mistakes?  Are they forthright, or evasive?  Does such homework take some extra work?  Yes.  Is it worth it?  Yes.

If they have credentials, are those credentials legitimate?  Seeing that someone has some letters after their name is not due diligence.  Some programs are a sham done over a weekend.  Others take years and are excruciatingly difficult to get through.  If you don’t know the difference, how do you know how your money will be handled?

What is an adviser’s investment process?  Can they explain it, or do they talk patronizingly to you as if you were a 5-year-old?  Does it make sense to you, or does it sound shady?  If you don’t know how they do what they do, then you’ll panic at the first difficulty–and there will always be difficulties.  

Respecting and admiring your investment adviser is important; thinking that you’d like to spend your free time with them isn’t.  You aren’t looking for a buddy, you’re looking for sound financial advice.  If you want a loyal friend, get a dog.  Nothing is more likely to prevent you from reaching your goals as not wanting to hurt a friend’s feelings.

Be objective in this process.  Pick character first, check up on an adviser’s background, know and agree with their process at some level, and pick someone you respect over someone that seems oh-so-nice.

Reaching your financial goals is too important to take short-cuts.  Do the work, reap the benefits.  It’s not easy, but it is simple.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Investing: simple but not easy

Objective advice, or shady recommendations

Another great article in the Wall Street Journal: this one about how investors are confused about adviser fees and regulation.

The issues may seem nit-picky, but they have a big impact on investor outcomes.

On the one hand, you have fee-only advisers who are paid as a percentage of assets under management, a flat fee, a per hour fee, or a per task fee.  

On the other hand, you have fee-based advisers, who are paid by a combination of fees and sales commissions.  

If the issue seems trivial, let me explain.  A fee-only adviser will not get $5,000 for advising that you invest $100,000 in a particular mutual fund.  A fee-based adviser will.

When you ask a fee-only adviser for advice, you know they aren’t steering you toward a lucrative product which may not be right for you or any good.  With a fee-based adviser, you don’t know.  

Asking a fee-based adviser for advice is like asking a barber if you need a haircut–the answer will always be yes.

Another issue is fiduciary duty.  An investment adviser (a regulatory designation: Investment Adviser’s Act of 1940) must put the interest of clients’ above their own.  A broker/dealer (Securities Exchange Act of 1934) has no such obligation.

When you see fee-based, think broker/dealer and barber.  When you see fee-only, think advice in your best interests.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Objective advice, or shady recommendations

Wal-Mart is dead, long live Wal-Mart

Full disclosure: my clients and I own shares of Wal-Mart.

Back on October 3rd, 2007, I posted a blog criticizing a Wall Street Journal article that claimed “Wal-Mart Era Wanes Amid Big Shifts in Retail; Rivals Find Strategies to Defeat Low Prices; World Has Changed.”

More specifically, I claimed the author of the article had picked the bottom for Wal-Mart’s stock.

On October 3rd, the stock closed at $45.13 per share. The most recent low for Wal-Mart had been $42.27 posted on September 10th, 2007.

Today, the shares trade at around $56 and have been as high at $59.80. At $56 a share, that’s a 24% gain in value, not including dividends.

On October 3rd, 2007, the S&P 500 closed at $1,539.59. Today, the S&P 500 is around $1,235. That’s a 19.8% loss (once again, without dividends).

In other words, the performance difference between Wal-Mart and the S&P 500 from October 3rd, 2007 until now was a whopping 43.8%!!!

Now, why am I bringing this up? Just to toot my own horn and brag how smart or lucky I got? No (okay, maybe a little).

My reason for bringing this up is the same reason I made the post on 10/3/2007, to highlight how far astray you can be lead by following the popular press for investment advice.

By the time the Wall Street Journal, or any other popular periodical, comes out with news about a company, it’s almost always figured into the price and then some.

In fact, the time to buy a company is when the popular press is saying it’s dead. The time to sell is when they are singing its praises.

As I said on 10/3/2007, “I’ll bet that in a few years I’ll be writing a blog saying that I’ve sold Wal-Mart because the popular press is reporting that Wal-Mart is back at the top of its game again.”

Perhaps that time will come sooner than I think…

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Jeremy Grantham “has almost never been this dire”

Jeremy Grantham heads one of the best quantitative, value-oriented firms out there, Grantham Mayo and Van Otterloo (referred to as GMO for short). In his quarterly letter (www.gmo.com, you have to register to read their letters, but it’s worth it and I’ve never received a bit of unsolicited email from them), Grantham puts forward the same message he’s been delivering for some time: the market is grossly over-valued.

Grantham has been preaching this for some time, but his record in being right, though almost always early, is excellent. Heeding his words back in the late 1990’s would have saved you a lot of heart-ache if you were invested in the tech and telecom bubble.

Grantham’s theme in the past focused on a reversion to the mean of corporate profit margins. In this letter, he doesn’t spend much time on that subject, but he does take private equity, corporate tax rates, global financial markets, subprime mortgages, etc. to task. He simply sees too much risk taking out there and predicts it will end poorly.

I’ll just quote Grantham here because he says it best, “To conclude, I have been trying to come up with a simple statement that would capture how serious the situation is for the overstretched, overleveraged financial system, and this is it: In 5 years I expect that at least one major “bank” (broadly defined) will have failed and that up to half the hedge funds and a substantial percentage of the private equity firms in existence today will have simply ceased to exist.”

Wow, that’s quite a prediction!

He goes on to say, “I have often been too bearish about the U.S. equity markets in the last 12 years (although bullish on emerging equity markets), but I think it is fair to say that my language has almost never been this dire. The feeling I have today is that of watching a very slow motion train wreck.”

He’s not mincing words there, either.

What’s his suggested solution? In a word, “anti-risk.” He doesn’t take much time explaining what that means, but I think I can guess. Some investements will do a lot better than others if or when risk becomes a four-letter-word again. That may include shorting the market, buying commodities or gold, buying Treasury securities, or finding business managers who can benefit greatly in a market situation characterized by a lot of risk aversion.

In this last category, I’d put companies like Berkshire Hathaway, Leucadia and Fairfax Financial, companies that have a lot of cash on hand or are short the market and are waiting for a risk averse market to put their money to work. In the interest of full disclosure, I own positions in all three of these companies both personally and for clients.

A more risk averse market like we are facing usually scares people to death. In contrast, I see such situations as golden opportunities to buy when blood is running in the streets. In addition, I’ve purchased securities that I believe will do well even if the market does fair poorly.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.