Hope springs eternal.
That’s an apt saying to describe the plethora of products slung at investors and stock pickers every year.
The word “products” has different meanings in the legitimate financial services world. It can refer to mutual funds or annuities, for example. Many of those products, when constructed properly and applied appropriately, can have actual utility in a financial plan.
Not so for the other kind of product: Books and trading programs touting get-rich schemes.
I come from that world, and I know it very well. Do some of them work sometimes? Can you make some money by discerning a proper ascending base chart pattern, or spending your evenings poring over income statements, or trading Forex over different timeframes?
Sure. But it’s a lot of effort for results that are proven to be inconsistent, and, more importantly, have no relationship to any kind of financial plan. These are hobbyist methods, designed to sell newsletters, software and seminars. But ask an attendee at a chart-reading seminar about his financial plan or investment philosophy. He’ll probably stammer something like, “To make money.” But that’s neither a plan nor a philosophy.
Just yesterday, I heard someone mention Phil Town’s book, “Payback Time: Making Big Money Is the Best Revenge!” One of the publisher’s notes for the book reads:
Payback Time’s risk-free approach is called “stockpiling” and it’s how billionaires get rich in bad markets. It’s a set of rules for investing (not trading but investing) in the right businesses at the right time — rules that will ensure you make the big money.
Risk free? Stockpiling? Right business at the right time?
Do you believe that institutional investors use terms like that?
I’ll save you the trouble of thinking about it. The answer is no.
Phil Town has a compelling backstory as a former Green Beret and river rafter. I think that contributes a lot to his popularity, especially among men.
But market-timing single stocks, which can sound terribly sophisticated to do-it-yourselfers, is ultimately a losing game. When you gamble – and that’s what betting on single stocks is, no matter how brilliant anybody’s methodology seems – the house always has the advantage.
It’s appealing, because you’ll inevitably have some “big wins.” (That sounds a lot like gambling, doesn’t it?) Just like at stepping away from the slots at Circus Circus with a cupful of nickels in your hand, your adrenaline rushes when your bet on Silver Wheaton or EBay works out in your favor.
The data are pretty clear: Over one-year time frames, it’s impossible to consistently predict which asset classes or sectors will lead or lag. An investment philosophy is based on the knowledge that capital markets do work (yes, even in 2008), diversification is not a synonym for “mediocre,” you get a higher return for taking on risk (but this has to be done scientifically, not willy nilly), and the structure of the asset classes within your portfolio explain your returns.
The philosophy then translates to the utility of your portfolio: What are your investments designed to do?
It’s OK to make some fun little stock bets that give you bragging rights. Just don’t confuse that with a portfolio that produces a retirement income stream.