Tag Archives: investment counsel

Should investors buy individual stocks?

Posted By Financial Independence Hub | May 10, 2019

By Steve Lowrie, CFA

Special to the Financial Independence Hub

In most walks of life, rugged individualism is a virtue. No wonder so many investors still seem so determined to beat the odds by trying to pick the very best individual stocks (and avoid the stinkers). Unfortunately, the odds are stacked so high against these sorts of financial heroics, you might as well be buying lottery tickets versus trying to consistently outperform the long-term returns everyone can expect by embracing an evidence-based investment strategy.

I’ve posted on this subject before, in “How understanding statistics can make you a better investor.” Today, I want to take a closer look at why individuals should still avoid picking individual stocks – and, briefly, what you can do instead to come out ahead.

A Grumpy Advisor

There are numerous real-life illustrations that have crossed my path over the years … generally on opposite ends of the spectrum. On one extreme, there is using some mad money to buy shares (usually penny stocks) in an emerging technology or fad. The other extreme is cashing out a well-diversified portfolio and putting everything into one illiquid investment, promising high yields, but with significant hidden risks (mostly private real estate recently).

Often, these individuals would like me to help them with the transaction. I won’t do that. While I can’t stop them from proceeding without me, I can vehemently advise against it. If they’re a client and they still insist on getting in on the deal, they can do so directly, through a discount brokerage account.

Why am I so grumpy about it?

It’s my job

I couldn’t claim to be offering anything remotely akin to best-interest financial advice if I weren’t highly skeptical of investment “opportunities” that conflict with everything I know about how capital markets work. I can assure you, every bit of evidence I’m aware of (based on more than six decades of peer-reviewed, academically grounded research) informs me that dumping your entire nest egg into a single, risk-laden venture flies in the face of good advice.

It’s not even investing

Alright, so maybe you’re already with me on not staking your entire life’s savings on a single bet. But what about that modest stake in a penny stock? Is there any harm done in throwing a bit of fun money at a venture that, at worst, won’t ruin you; and, at best, just may pay off?

The problem is, most investors don’t realize that stock-picking isn’t actually investing. It’s speculating. In practice and expected outcome, it’s no different than gambling in a casino or buying a lottery ticket. As I covered in that past post of mine, the odds are stacked anywhere from mildly to steeply against you, making it far more a matter of luck than skill whether you “win” or “lose.”

This is where I see people running aground, even with seemingly “harmless” penny stock ventures. In my experience, if they happen to lose their stake, they tend to justify it as a “nothing ventured, nothing gained” adventure, especially if they weren’t hurt too badly.

Worse, if someone happens to come out ahead now and then by picking individual stocks, a bevy of behavioral biases (including, but not limited to: confirmation, framing, outcome, overconfidence and pattern recognition biases) tricks them into believing it was NOT random luck. For better or worse, we humans love to conclude we’re somehow smarter than the rest of the crowd. It’s so common, there’s even a name for it: “The Lake Wobegon Effect.”

It’s usually not only incorrect, it’s dangerous to mistakenly assume a successful stock pick happened because you or your stock-picking guru outwitted the entire market. Why is it dangerous? Because it increases the likelihood you’ll try your luck again, potentially with bigger bets. Eventually, you may convince yourself that stock-picking is a great way to invest in general, not realizing how much it’s probably costing you over time. This is especially so if you have no financial advisor to turn to: one who is committed to serving your best interests by showing you how your actual, long-term portfolio performance numbers stack up to a more sensible investment strategy. Which leads me to my final point today …

This rarely ends well

Based on my 25 years of experience, the vast majority of individual stock-pickers not only underperform the general market, they typically lose capital in the long-run. Recalling the casino analogy, even if you win a “hand” or two, the system (capitalism) is essentially set up so the house (the market) comes out ahead in the end, regardless of which players (investors) win or lose along the way. Continue Reading…

Would you accept portfolio advice from William Shakespeare?

Posted By Adrian Mastracci | August 2, 2018

“In giving advice seek to help, not to please, your friend.” ― Solon, (638 BC–559 BC), Greek lawgiver & politician

You are probably wondering what on earth William Shakespeare, the highly renowned English poet and playwright, has to do with dispensing portfolio advice. After all, he was around more than four centuries ago. Let the short story unfold.

Investors think of portfolio management strategies as modern day creations. Particular emphasis is directed to findings of the last fifty years. This area of study is commonly referred to as “Modern Portfolio Theory,” or “MPT” for short.

For example, Benjamin Graham is considered the father of value investing. His bestseller book titled “Security Analysis,” co-authored in 1934 with David Dodd, is still a course staple at various business schools. As an aside, Warren Buffett was a student of Benjamin Graham.

Many investors focus their attention on books, magazines, newsletters, educational papers and blogs devoted to MPT issues. The internet, television, radio, print and social media outlets cater to an array of MPT needs. The list keeps growing daily by leaps and bounds.

Moreover, today’s investors and professionals have a wide assortments of MPT tools at their disposal. Virtually anyone can track, analyze, select, benchmark, monitor and implement every imaginable portfolio nuance. Conversely, it is very easy to become mired in MPT matters.

However, you may be surprised to discover that portfolio theory is far from modern. It does not have to be complex to be effective. Further, nobody needs to become overwhelmed in MPT.

In fact, portfolio theory sports a long and rich history, spanning centuries. Its fundamental pillars have remained much the same. Even though countless tweaks have been made over time.

Shakespeare’s insights

A while back, I revisited some plays that I had studied during my days of high school English classes. “The Merchant of Venice,” a comedy written over four centuries ago by William Shakespeare, (1564–1616), comes to mind.

I rediscovered one notable excerpt from that play. A concise and insightful situation. It ought to interest practically every investor who thinks long-term.

Let us turn the hands of time back to the days of Shakespeare and focus on the plight of Antonio, the Merchant of Venice. This passage was spoken early in Scene 1 of the play:

SALARINO:
But tell not me; I know, Antonio
Is sad to think upon his merchandise.

ANTONIO:
Believe me, no: I thank my fortune for it,
My ventures are not in one bottom trusted,
Nor to one place; nor is my whole estate
Upon the fortune of this present year:
Therefore my merchandise makes me not sad.

Stop right there. Read it once more. Were he living today, Shakespeare would make a shrewd portfolio manager. I would happily encourage him to become a member of our team. I would empower him to continue dispensing that same eloquent portfolio advice from his day.

Even four centuries ago, Shakespeare professed the sage benefits of diversification. Antonio’s portfolio had various ships, heading to several destinations, with different cargo and spread out over time. A high priority for portfolios continues to be the assessment of what is prudent and sufficient diversification for each case.

Shakespeare’s wisdom is classic, sensible advice for the nest egg. It is also logical and straightforward. Had the Nobel Prize existed in his day, Shakespeare would surely have been nominated for his portfolio insights. Plus, he had skills to blend portfolio strategy into his play.

Time tested practices

Classic investment practices from long ago point to considerable common sense. I highlight a few:

Shakespeare’s portfolio insights have truly survived the tests of time. Something all investors aspire for the nest egg, especially retirement. Keep your eyes firmly on the objectives you seek. Slow and steady gets you to the desired ballpark.
Refrain from reinventing the investment wheel. The more things change, the more they stay the same. The approach to your plan of action is not materially different today as compared to one from centuries past. You have access to far more options and added distractions.
Methodical and logical decisions are best. Spread long-term investing risks by diversifying broadly. Develop and follow a sensible asset mix. Park your emotions at the door. It is a simple and effective base to adopt.
His advice on diversification is core portfolio strategy. It helps achieve and sustain investing success while keeping complexity in check. As in Antonio’s day, it also reduces the chances of the nest egg making you sad.

My take is that present portfolios benefit from applying fundamentals developed in centuries past. Vintage portfolio theory, perhaps, but very modern in its early days. Your mission is to make sense of bumps, curves and potholes that develop along your chosen path.

The broadly diversified approach of yesteryear is still superb, timeless, invaluable advice for your MPT needs. Choose solid, yet simple, foundations that support your financial castle throughout the long journey.

I say accept the portfolio advice. Shakespeare would be proud.

Adrian Mastracci, Discretionary Portfolio Manager at Lycos Asset Management, started in the investment and financial advisory profession in 1972. started in the investment and financial advisory profession in 1972. He graduated with the Bachelor of Electrical Engineering from General Motors Institute in 1971, then attended the University of British Columbia, graduating with the MBA in 1972. This blog is republished here with permission from Adrian’s website, where it appeared on June 19, 2018.

Are Investment Fees for suckers?

Posted By Financial Independence Hub | September 14, 2017

By Chris Ambridge, Transcend

Special to the Financial Independence Hub

Providing a service costs money, but paying a fee deemed as an unnecessary amount has come under attack from consumers at all levels. Think banking fees, or the perception of “hidden fees” on phone bills to brokerage and investment fees. Consumers are demanding more value and in some cases winning the battle.

There is more scrutiny on fees than ever before. Studies have shown many investors either believe they do not pay anything or have no idea what they do pay (Hearts & Wallets: Wants & Pricing — What Investors Buy & Competitive Ratings — 2016).

But everyone understands nothing in life is free and clients have a right to know what they pay.

The long-view of investment fees

For centuries, if an ordinary person had any liquid wealth the best they could hope for was meagre interest on their cash. Then, as the concept of companies developed, the notion of profiting from an equity investment emerged and stock exchanges were established in seventeenth century Europe to trade equities.

In Canada, much of the early development was raised in the London market, with public shares of large companies such as the Hudson’s Bay Company. The Toronto Stock Exchange (TSX) was created in 1861, and 17 years later the TSX was the second official stock exchange in Canada.

Commission-based Investing

At this time, being a stockbroker was a comfortable, genteel and very lucrative profession. By providing investors with access to markets, brokers earned fixed commissions of about 2% or more per trade. This lasted until May 1975, when negotiated commissions were introduced, leading to increased competition and a decrease in direct share ownership. Currently only 17% of the Canadian financial wallet is invested directly in stocks, down from 30% in 1990 when it was second in importance only to short-term deposits.

Asset managers on the rise

For less well-heeled investors, the first modern mutual fund was created in Canada in 1932. They were slow to catch on and grew very little between 1930 and 1970. However this was reversed in the 1970s when investors wanted greater stability following the oil crisis. Continue Reading…

It’s tough managing money: somebody has to do it, but not necessarily you!

Posted By Graham Bodel | June 22, 2017

Protecting and growing your retirement nest egg is one of your most important financial responsibilities. Ensuring that your nest egg is sufficient to fund your lifestyle in retirement often means putting at least part of it at risk in the stock market.

Unfortunately, too many people are swayed into believing that being a successful stock market investor means you have to actually beat the market. Beating the market is really, really difficult, especially over longer periods of time. It’s a tough job, but why is it so difficult?

Picking outperforming stocks is hard

A recent article from one of our favourite authors and commentators, Larry Swedroe, highlights some data points from studies that indicate why stock pickers might have such a tough time beating the market:

The Russell 3000 Index of the largest 3000 US stocks delivered an annualized return of 12.8% between 1983 and 2006
While that’s an impressive return over that period and achievable for anyone investing in a Russell 3000 Index fund (if there was one in 1983!), trying to beat that index by picking stocks would have been a formidable task – here’s why:
- the median annualized stock return was only 5.1% and the average stock actually lost money, -1.1% annually
- 39% of stocks lost money
- half of the stocks that lost money lost at least 75% of their value
- 64% of stocks under-performed the Russell 3000 Index
- just 25% of stocks were responsible for all of the gains.
- only 48% of stocks returned more than one month Treasury bill returns

No wonder it’s so difficult to beat market indices. Outperforming stocks are really hard to find!

Even the pros find it difficult

What’s a Fiduciary? Why does it matter?

Posted By Financial Independence Hub | April 13, 2016

By Graham Bodel, CFA

Special to the Financial Independence Hub

There’s a lot of furor in the US right now over the Department of Labor’s proposed legislation to make all those providing retirement advice in the US actually act in the best interest of their clients (I know, a crazy concept).

Regulators in Canada are also pondering the issue and no doubt we’ll eventually see some change here too. But interestingly most investors have no clue that there are two different standards (fiduciary vs suitability).

You’d think people would without question want to work with someone with their best interests at heart. There are relatively few who give advice in the investment industry either side of the border who are currently required by law to act in their clients’ best interest.

It’s not like this is a crazy idea – think doctors and lawyers – all required to act as fiduciary. Now clearly being an official “fiduciary” doesn’t mean you’re perfect and there are certainly many advisors who don’t technically have a fiduciary responsibility who still act in their clients’ best interests, but the incentives are strong and studies suggest there’s something to this.

The difference between fiduciary and suitability

Anyhow, I recently read an analogy written by Peter Lazaroff, a Forbes Online contributor, that I thought highlighted well the difference between fiduciary and suitability: Continue Reading…