A Bad Slice Of Investment Advice
The following blog was originally posted on Forbes.com.
The strangest things happen when you’re driving to pick up a pizza.
Having spent much of the day shuttling the kids around to various activities, my car radio was fixed on all things Taylor Swift, Adam Levine and Katy Perry. With a glorious 15 minute round trip by myself to pick up dinner, I immediately scanned the dial and the first hit was a financial advice show on how to invest my money more intelligently.
I was hooked, in the worst possible way. I actually sat outside the pizza joint for an extra ten minutes just to make sure I understood I wasn’t mis-hearing the message.
Fronted as a talk show with a friendly host and a couple visiting “experts,” this was a sly infomercial for an in-person trading seminar. Note: this was at 6:30 pm in Chicago on a very popular station, not a backwater outfit in the wee hours of the night. It being AM radio, I’m also confident that the intended audience was older Americans in or near retirement, a community to whom I’m dedicated to providing sound advice, which is why I was admittedly captivated.
The general thrust of the message was two-fold: The “market” and “the banks” are out to get you. And you can fight back with a very high winning percentage.
The black helicopter-style paranoia was sort of taken for granted, so the fighting back part was the thrust of the sales pitch. The proposed tactics, broadly defined, were to trade your own individual stocks — not only long but to short them as well — in order to capture the market upside, step out of the way with falling markets, and even profit from declines.
All of the upside, none of the downside. One of the testimonials admitted to having the occasional down day, but never a down week. Sounds great.
The expertise, should one purchase and attend the seminar, would develop through understanding how “banks” (who?) buy and sell stocks. With that understanding, one can front-run their moves — or at least know how to stay out of harm’s way. And so on.
For the life of me, I cannot imagine what these tactics could be. And if one knew them, why they’d be hocking them on AM radio. I have known and worked with some of the top hedge fund, mutual fund, and prop desk traders over many years, and only a small fraction of them could accomplish what was being nearly-promised on this radio program.
I feel the urge to write paragraphs about the complexity of markets, the nuances of market micro-structure, and the insanely detailed methods of high-frequency traders. And to explain that wealth accumulation as well as risk management have so little to do with trading strategy as compared to long-term perspective and investor psychology.
But why bother? The point is simple and profound: There is a zero — not 0.01 but zero — percent chance that individuals trading from their home computer can outsmart, out-maneuver, or out-anything the countless other market participants engaged in the art and science of day-trading and market timing.
(Can an individual investor choose the stock of a good company, hold it for years, and make admirable gains? Absolutely. But that’s not what we’re talking about here.)
One notable comment on this program was the description of mutual funds as a cage that imprisoned investors from making the necessary near-term changes to their portfolio in order to avoid losses. Explicitly, the hosts and the experts exclaimed that if the market is falling, you need to get out of the way — immediately. Because mutual funds trade only once per day at the end of the trading day, the individual investor is destined to get rooked by the mutual fund industry as well as one’s financial advisor (yes, your advisor is working against you too).
What’s needed, so the argument went, was access to stocks (and perhaps exchanged-traded funds, or ETFs) that could be bought and sold by the minute.
If you are managing your portfolio with the mindset that you need and want to frequently trade securities intra-day in order to get ahead, or at least not fall behind, I strongly encourage you to reconsider this approach. For the purposes of long-term — not just multi-year, but multi-decade — wealth accumulation, it just doesn’t work. The only ones who benefit from this approach are the brokers who take your money on every transaction and perhaps those who offer expensive seminars suggesting that this is the right course to take.
There are probably better lessons from this episode than to order delivery instead of pick up. A few I could flag: First, be skeptical, but don’t be paranoid. The former leads to behavior based on tough questioning and sound evidence; the latter leads to frantic, fear-inspired actions which are rarely wise. Second, the best investors I’ve known have mastered the art of Doing Nothing. Have a well-mapped out plan and stick to it. A critical part of that is resisting our hard-wired urge to tinker all the time. Third, a well-credentialed financial advisor is one of the sound tactics to help you build and maintain that plan. Fourth, anyone who is selling you something that seems too good to be true, IT IS. And finally, please: Turn off your radio.