On a plane flight from Omaha, NE the other day I had the good fortune to sit next to a recently retired Air Force Commander who’s specialty is information security (i.e. Cyber War!), and has spent the last 30 years criss-crossing the Globe in support of the technological safety of our way of life in the United States. In short, both a legitimate geek (in the most complimentary sense), and a real Patriot. Lest you get the wrong mental picture of my cabin mate, this fellow traveler was a 52 year old woman who is also recently widowed, starting a new private sector job, and thinking about life post-military and newly single. Pretty daunting stuff for some, and a source of new opportunity for others…..she was somewhere in between.
After discussing our reasons for being in Omaha, NE (she works there now, and I was visiting prospective investors for my other firm’s buyout fund) she asked me more specifically about my work, and I obliquely replied that I’m in the investment business (I’m not big on making recommendations about 401(k) plan options while trying to catch up on work on a business trip flight, so I usually keep it pretty vague). That’s when she proceeded to tell me that she had asked her Broker (big name regional firm- no investment banking, but plenty of conflicts elsewhere) to buy Apple (AAPL – NASDAQ, up 40%+) and Starbucks (SBUX – NASDAQ – up 50%) with some of her IRA Rollover about a year ago. He talked her out of those choices and guided her to AT&T (T – NYSE – essentially unchanged) and Citigroup (C – NYSE – down 30%+). Clearly, she’s either smarter than her Broker, or very lucky (S&P 500 is up ~ 8% in that time frame), or very skillful at both stock selection and timing (the kind of thing that earns you $Millions on Wall Street). The stocks he’d recommended instead had underperformed her picks, and turned in market like results, so she’s more frustrated than damaged by the experience, and she’s sticking with him (we’ll write extensively on the behavioral finance, anchoring, and the power of inertia in future posts). After nearly 30 years of working with individual investors, and as a student of the markets for nearly 40 years I can tell you a few things about that exchange with my seat mate:
1. None of this really matters empirically. It’s anecdotal, and there’s really no way to know whether the timing or the picks are accurate, and frankly the reason I recount the story is that it’s instructive of one investor’s experience specifically, and many investor’s expectations more broadly.
2. Investors aren’t necessarily all good, and Brokers aren’t all bad. In fact, my experience is that both are just doing their best, and bad eggs on both sides are the exception, not the rule. Her Broker’s recommendations were defensible because they were suitable for her age, experience, and objectives, AND they performed in line with the market, presumably the commissions were fair and reasonable, and mostly because she made money (as opposed to losing it while the market was going up). That doesn’t mean they were good….just that they weren’t so bad that she’d win in arbitration or litigation against her Broker. And while she was complaining about her broker, she had no plans to leave him. More on inertia and financial advisors in upcoming posts.
3. Picking individual stocks is a dice roll, and even someone with virtually no experience can outperform both a firm (presumably the Broker’s picks were the firm’s recommendations) and a seasoned professional on any given day, or over any given period. In fact, this happens all the time, and many publications lead you to believe that you have a solid chance (at that’s all it takes for most to try…) to beat the market, which seems to be like catnip for investors, and they just can’t resist the temptation.
But what if “beating the market” was irrelevant? For the past 10 years the S&P 500 (essentially, “the market”) has produced approximately 2% per year of return, and did so with approximately 15% per year of volatility (i.e. a range between -13% and +17% to end up with 2%). That’s a lot of work to earn just 2% annually, and since inflation has averaged ~ 2.4%/yr for the past decade, you essentially had less purchasing power (i.e. ability to buy things) than what you started with 10 years ago. AND that assumes you had no transaction costs, nor paid any taxes, both of which would have taken you further into negative territory. So, beating the market, at least in that sense doesn’t really provide for much retirement security, or for that matter many creature comforts to those who are now, or will soon be living off of the return from their investments. Reality is that most investors (professional or amateur) don’t even come all that close to out performing the indices (i.e. ‘the market’), but that doesn’t stop them from trying.
The past decade has been a tough one for individual investors, with many having dramatically having underperformed the market, and more importantly having experienced serious erosion of wealth at a time when many of them (at least the 75 Million+ Baby Boomers) are marching toward an uncertain retirement with little comfort to be taken from corporate, union, or government pension plans, many of which are hopelessly underfunded. Additionally, the values of their homes are down, and more importantly the equity in their homes is either significantly impaired or severely diminished.
So, what’s the answer? If investors need advisors, but advisors often disappoint investors (or worse), then what’s the solution? Better tools for the do-it-yourself investor? Maybe…..strides are being made there, and they’ll get better, but boomers still need advice. Will the regulators (FINRA, SEC, etc.) come to the rescue? Pretty unlikely…..regulators definitely find some of the bad actors, but they’re rarely useful when it comes to highlighting the good ones. Have you been through TSA screening at an airport lately? That’s a decent metaphor for regulatory intervention, and probably equally effective. Will investment advisors be held to higher standards? And if so, what are the standards? Performance? How will we judge that? Who decides? Better and clearer certifications? Most of these solutions miss the primary point, which is that investors need help, and the current crop of investment advisors, self-help services, publications, websites, and other resources aren’t producing better outcomes.
At Candor Advisors we believe we’re developing a better set of solutions, which when fully implemented will provide clearer, more efficient, and less costly solutions to investors, with or without the aid of advisors. The right tools will be education-centric for the do-it-yourself investor, and non-modifiable for the unskilled advisor. Think of something more like SET IT AND FORGET IT and you’re on the right track.