Hope Springs Eternal For Stock Pickers

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.



Price Targets? Really?

For more than three years, I’ve had the privilege of being a columnist at RealMoney.com, part of TheStreet.com, which was founded by Jim Cramer.

RealMoney draws a wide audience that consists of investors, as well as readers with more of a day-trading mentality.

For about 18 months, I got up in the middle of the night (literally) to write the “Day Ahead” column for the site.  In addition to a roundup of market updates and earnings reports, I would also include news about the daily analyst upgrades and downgrades. The crowning glory (I use the term sarcastically) of an analyst action is the change in price target.

Even when I was teaching people how to trade growth stocks, I never understood why individual investors and traders gave the idea of a price target any credence. It’s something the analysts at brokerages do to get attention for their research and institutional sales.

It’s true that some institutions take profits at a certain target, but the effect of any pullback is generally short-lived. Sadly, this is just one more example of individuals getting caught in Wall Street’s trap.

Here’s a passage from Andy Kessler’s excellent book, “Wall Street Meat,” in which the author details his years as a Wall Street analyst.

“For some reason, Morgan Stanley was into price targets. I hated them. To me, they were pure marketing fluff. I would recommend Intel at, say, $25. The first question I would get is “what is my price target.” My answer would be $40 for no particularly good reason. It was high enough to interest investors, but I was guaranteed to be wrong. If it hit $38, it was a great call, but I was wrong. If it went to $60, it was an even better call, but I was still wrong.

What usually happened was that if the stock hit $35, I was asked to adjust my price target to $50, so that the sales force would have a call to go out with. This was how you got target creep, an ever-upward bias on numbers so calls could be made. It would come back to bite Wall Street by the end of the decade.”

What happens when a stock hits its price target?

What is an individual supposed to do when and if a stock hits one of these mythical targets? Bail out, with no attention to the trend or the market cycle? What are you supposed to do if the stock just meanders along, or – gasp! – declines while you are waiting for it to reach some magical number?

Actually, those are not even the right questions. Here is the right question: If you are obsessively watching the prices and targets of individual stocks, why?

If you are invested in a globally diversified, balanced portfolio, you won’t have to worry about fictitious price targets for individual stocks. Instead of playing along with Wall Street’s silly little game, just concentrate on building your own wealth.

After all, those analysts aren’t thinking of you when they set those targets. They are thinking of their own career.

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You Don’t Have To Be Happy, But You Really Shouldn’t Worry About Dangerous Markets

I’ve become pretty much obsessed with the media’s own obsession about the scary and dangerous markets.

As I’m writing this, the headline on MarketWatch is: “Stock market’s anxieties turn to debt-ceiling battle.” The message? You better be anxious about something!

Just for fun, I clicked through to the story. Here is the second paragraph:

“Now that the expected tapering of $85 billion a month in asset purchases fizzled out at the Federal Reserve’s September policy meeting, investor attention has shifted to the brewing showdown over the budget and the debt ceiling.”

Get it? You don’t want to just relax, appreciate that markets normally cycle through times of highs and lows. Better get busy worrying!

You don't have to be happy, but don't worry about the markets.

I’m making light of it, but the biggest effect of investor worry is to keep people out of the market. (And by “the market,” I don’t mean the S&P 500, or, Heaven forfend, the Dow. Instead, I mean global indexes that have a place in a balanced, diversified portfolio.)

Over the weekend, I began reading Paul Merriman’s “Financial Fitness Forever: 5 Steps to More Money, Less Risk, and More Peace of Mind.” In the book’s introduction, Merriman includes e-mails from investors who were scared into cash.

People have trouble with events out of their control. That applies to all of life, as well as investing. It’s actually a good metaphor for our attitudes about various endeavors.

But in one of Merriman’s examples, a couple bailed out of their index funds because of Middle East unrest and high oil prices. (Is there ever a time when those events aren’t looming?) So in addition to anxiety over losing out on market uptrends, they were now anxious about timing their re-entry correctly.

The U.S. government, foreign governments, market speculators – it’s all out of our control. But historically, despite the myriad occasions to default to doom and gloom, markets traverse higher.

I understand that a message of “Don’t worry, be happy,” is trite and even patronizing. And that’s not what I’m saying. Go ahead and worry – that’s your business, not mine. But don’t act on your worries, when it comes to panicking about the stock market. Market panic doesn’t generally end well.

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Are You Smarter Than An Active Fund Manager?

How many of you really know someone who significantly changed his or her financial position by trading? I’m talking about firsthand knowledge, no “heard it from a friend who heard it from a friend who heard it from another” stuff (with a nod to REO Speedwagon).

I’m guessing the answer is, for the most part, no. There are war stories of successful trades. There’s a widespread idea – promulgated by the media and purveyors of stock-picking methodologies — that a do-it-yourselfer can be successful by working hard, choosing the right stocks, and timing buys and sells correctly. Of course, more than two-thirds of active fund managers can’t beat their benchmark index, but the stock-picking cheerleaders are oh-so-certain that you, armed with the right software or checklists of “rules,” can do what the pros can’t.

Let’s look at this from another angle: You load up your desktop computer with four different charting programs, each equipped with 53-and-a-half technical indicators and oscillators.  If these signals were so foolproof, doesn’t it stand to reason that every investor and trader on the planet would be using them?

Home trading set-up


Look, I’m not saying it isn’t possible to score some “wins” on speculative trades. But the long-term record is clear: A market-based approach to asset allocation and diversification, with regular rebalancing, is a proven method of achieving investment results superior to stock-picking.

It’s kind of sexy and glamorous to think you can achieve better results than active fund managers. Who knows? Maybe you can. But a better way to think about your investing/trading decisions is to focus on the performances of key indexes over time.  And notice I said “indexes,” not the S&P 500. Trading in an effort to beat the S&P may have some short-lived moments of exhilaration, but that activity ultimately contains the seeds of its own destruction.


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Don’t Ask A Marathoner How Fast He Sprints

One opinion I occasionally see about finding a financial advisor: Ask if his or her net worth is greater than yours.

This reminds me of an old episode of “Murphy Brown,” a TV show I loved back in the late ’80s and early ’90s. Two male colleagues were arguing in over some kind of “mine is better” issue that really didn’t matter. Candace Bergen’s character stepped into the fray – and I’m paraphrasing from memory here – but she said something along the lines of, “Let’s just measure and finally be done with this.” I’m omitting some comedic detail to keep this PG-rated, but you get my drift.

Measuring your financial advisor the wrong way.


Similarly, the idea of comparing net worth with your advisor is misguided and irrelevant. What are you trying to find out? Whether he or she is a good steward of money? That’s a relevant question, but personal assets won’t answer that for you. That’s because no two situations are alike, and your advisor may have amassed a retirement nest egg quite differently from the way you did.

Maybe he inherited $1 million. Does that make him a good saver? Not necessarily – though it says something if he hasn’t squandered it on a Porsche, a 12,000-square-foot home and cases of Krug Brut.

Maybe he sold a company. Maybe his or her spouse brought a big chunk of dough into the marriage. Maybe the advisor or his or her spouse had a high-paying corporate or banking job, so the savings plan didn’t have to be aggressive as yours.

Let’s look at another problem with the “let’s measure” philosophy to finding an advisor. His or her retirement and lifestyle goals are almost certainly different than yours! For some lifestyles, it’s necessary to have north of $1 million invested, in order to create the necessary retirement income.

Other lifestyles, though, require less cash to support. If your retirement goal is to support two houses, stop working early, and travel extensively, then you likely need to stash away more than an advisor who is interested in a more low-key retirement, staying close to home and living simply.

No two people have the same financial and retirement goals. That goes for advisors, as well as clients.

To compare net worth is irrelevant, because you are using the wrong factors to see if an advisor right for you. It’s like asking a marathoner how fast he sprints. Or, for that matter, asking a sprinter about his long-distance performance. They are running completely different races. Comparison is irrelevant and meaningless.

So what are the metrics you should use to gauge an advisor’s effectiveness, or even if he or she is a good fit?

One way is by checking the advisor’s form ADV. Registered Investment Advisors are required to file this form with the SEC or their state.  It contains information about the firm, its assets under management, and whether it is fee-only or is paid commissions to recommend investments. There is also information about the RIA’s background and education, as well as any regulatory events.

You can look up the advisor’s form ADV here, or ask the advisor. He or she is required to provide the form upon request.

In addition, use the “gut check” methods of choosing an advisor. Do you click with the person and the team? Are they people you look forward to working with? Do you understand and agree with the investment philosophy? Did they do an unbiased financial plan before recommending investments? Did their portfolio recommendations match the financial plan? Are their recommendations truly independent, or are they products created by the advisor’s brokerage firm?

There are great questions to ask when you are in the market for a financial advisor, but avoid the temptation to use the same standard of measurement for every situation.

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Why Making Money is Just Like Home Improvement

A couple weekends ago I was catching up on some podcasts, and I found an interview that Jonathan Fields did with behavioral economist Dan Ariely.

I hired Jonathan as a coach a few years ago, and benefited greatly from the experience. I ultimately scrapped the project I asked him to advise me about. I had planned to launch my own stock-trading newsletter, but the timing wasn’t right. I launched a different newsletter a couple years after that, with some partners. But the coaching experience with Jonathan was valuable on many levels, and I look back on that time fondly. It provided me with a springboard for further career moves both online and offline.

(If you haven’t read Jonathan’s books Career Renegade and Uncertainty, go read them now! Well, after you finish reading this.)

I am a fan of his interview series, Good Life Project, which features artists, entrepreneurs, business people and thinkers who share wisdom gained from living their stories.

The interview with Dan Ariely piqued my curiosity. Dan is a behavioral economist, and he has some fascinating points about the predictability of irrational behavior.

My ears perked up, however, when he began talking about financial advisors. I’m paraphrasing here, but Ariely maintained that individuals could move in and out of stocks and bonds on their own, and not hire an advisor to develop a customized financial plan for retirement.

Ariely is completely off-base on this point.

I understand the idea that an “advisor” (quotes used deliberately) who is paid a commission to trade in and out of stocks is not adhering to any kind of plan that is in a client’s best interest. That’s completely different from the fiduciary model, in which there is a legal and ethical obligation to be the best steward of another party’s resources.

Ariely’s view, and the view of much of the public, is that it’s preferable to do away with the broker. That part I have no problem with. But here’s where Ariely and I part ways: Rather than replacing the broker with a true planner with a fiduciary duty, many people assume they can trade, trade, trade all on their own, and achieve the same results.

Of course, those “results” are up for grabs, because a person who is inclined to trade stocks usually has no objective, other than to make money, which really isn’t a financial objective at all.

Home improvement is like financial planning.

Does your financial planning look like this?


Think of it this way: You say you want to make some “improvements” to your home. But what does that mean? Do you want to remodel the kitchen, because you love to cook and the current set-up is inefficient? Do you want to build out a basement playroom for the grandkids? Or do you have a growing family, and you need another bathroom?

See how the phrase “home improvement” is meaningless? Same with the phrase “to make money.” Investing is done to offset future liabilities, and to stay ahead of inflation. While there is plenty of financial education available for free, everywhere, the overwhelming majority of do-it-yourselfers simply don’t have the training necessary to a) design a comprehensive financial plan that incorporates retirement income needs, estate-planning and taxation concerns, risk tolerance, and all the other factors that go into a solid plan, and b) to design an investment portfolio matched to the stated objective of that plan.

So I take issue with the idea that a financial advisor is useless. If you want to aimlessly trade stocks and rack up trading fees, then sure, you may as well pay an online brokerage vs. a guy in your local wirehouse office.

But if you want a plan tailored to your circumstances, and to anchor your investment strategy to the plan, then working with an advisor makes all the sense in the world.

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Are You A Victim Of Your Financial Fears?

It’s ridiculously easy to find “success literature” stories of people who are stuck living out old scripts – so-called limiting beliefs that no longer serve them (or never served them), but they are still living according to those beliefs or rules.

And usually, those beliefs center around fear of some kind, though people are not conscious of that.

Sadly, these fear-based beliefs can have huge effects on the financial decisions people make.

Here’s an example: A couple years ago, as I was sitting on a plane, two guys behind me struck up a conversation. The obviously hadn’t known each other previously, but somehow their conversation drifted to the stock market, and how they didn’t trust it.

“I got out a couple years ago and I’m not going back in yet,” said Guy No. 1. By a quick account, I figured that he exited near the bottom of the market in late 2008 or early 2009, and then missed the subsequent rally that began in March of 2009.

“Oh yeah, me, too,” said Guy No. 2.

They were clearly impressing each other with what they believed to be extraordinary market savvy, but they were stuck in a place of financial fear and distrust. In the short run, they missed out on some big stock-market gains, but the long-run implications are far worse.

We live in an era of media-stoked fear. Competing political TV networks exhort viewers to completely distrust and dismiss anything the “other side” says, resulting in a nation of paranoids who express the conspiracy theory du jour on Facebook.


Are financial fears making you scream?

The financial media aren’t much better, breathlessly encouraging viewers to trade every day’s events. I can only imagine the mental condition of the poor soul who takes all this contradictory advice literally, and trades China’s PMI one day and pending home sales the next. This is a perfect example of stoking financial fears.

And it’s not just the financial media, which is aimed mostly at men. The financial media tends to cloak the fear-mongering in as left-brained “analysis,” but it’s fear, all the same. (“How to play today’s jobs report?” The implication being that if you are not “playing” it, you are missing out on big, big, life-changing portfolio gains. Nonsense.)

But the women’s media is perhaps even more expert at this, unabashedly using the embarrassment of social stigma (“My closet doesn’t look awesome enough!”), health concerns, and worries about the children to stoke fear, which, in turn, eventually stokes ad dollars. If you want first-hand documentation of how the women’s media makes money by scaring its audience, read Myrna Blyth’s excellent book on this topic.

Remember benzene in your bottled water? Alar on your kids’ apples? Not so scared about those anymore, are you? That’s because the media have moved on. They have to. They have products to sell.

You can’t follow all the fear-based advice, because it will only send your account into fresh havoc on a regular basis. I know traders who make panicked buys and sells. Sure, they have some big wins now and then, but over the long term, they generally operate in the red.

Try to keep in mind: Much of your world view, including that of the stock market, is likely manipulated by the media. Everybody says they are immune to it, but almost nobody is.

Fear-mongering is often disguised as being smart or sophisticated. Fiscal cliff, anyone? Remember all the terror spread by the chattering classes on that one? Sequestration? Don’t worry (pun intended), there’s another scare tactic coming soon, and it will be packaged as something only the most sophisticated among you need to worry about.

Of course, that’s you, right? What you just read about government spending and your portfolio. Better start worrying about that!

The two guys on the plane who sold out at the bottom of the market and hadn’t gotten back in? They were acting sophisticated, but they were making rookie mistakes.

So if you have the belief that your financial survival depends on reacting to news, price movements in individual stocks, or whatever economic development the TV anchors say you are supposed to “play” today, you are operating from a fear-based belief system, and it is not serving you well. It is serving them well. Their interests are not aligned with yours, and it’s important to remember that.

Image by  University of Salford





Does an Equity Overlay Portfolio Fit Into Your Investment Strategy?

Today Rigged Money features a guest post from my colleague at Portfolio, Jared Hopkins, CFP. Jared manages our Equity Overlay portfolio of individual stocks. He explains some background about the portfolio, and tells us how it performed in the first quarter. 

When asking clients to state their investment goals, the most common response is “to make money.”  The real question then becomes how.  At Portfolio, LLC, we employ a risk budgeting process using exchange-traded funds to create our pension models.

The Portfolio Pension Model is an extremely efficient investing strategy by itself.  However, some clients like having individual stocks in their portfolio to track and watch.  For these clients, Portfolio, LLC developed the Equity Overlay strategy where individual stocks are combined with the pension model.

The overall goal for the equity overlay portfolio is to have a combination of stocks that give us market exposure with less overall correlation to the S&P 500 and a better dividend yield.

To accomplish this investment objective, the Equity Overlay Portfolio is segmented into three investment criteria:  core, income, and growth.

Core investments provide exposure to areas of the U.S. economy that will be vital to long-term growth.  Income stocks deliver consistent dividends, which offer cash flow and help to increase the overall return of the portfolio.  Growth stocks are those companies with higher growth targets than the overall market.

With all stocks in the Equity Overlay portfolio, we maintain a quality bias seeking companies with strong balance sheets, attractive valuations, and a proven management team.  The strategy will keep some cash on the sideline for opportunities that may arise in the market.  Likewise, if market conditions become too volatile, cash will be raised as a tool to control risk.

 Q1 2013 Equity Overlay Portfolio Update

The first quarter of 2013 saw the S&P 500 zoom up 10.61%.  The S&P 500 returned in one quarter what most investors hope to achieve in one year.

But this market run-up was different than the past.  Most of the growth names in the S&P 500 did not participate in the first quarter rally.  Defensive areas, such as consumer staples, health care and utility sectors, lead the way.

This was no different in the equity overlay, as ten of our 19 stocks reached 52-week highs.

Some standouts include Allstate (ALL). This has a strong chart, and is up almost 50% since we purchased it. Costco’s (COST) chart also shows solid gains; we’ve seen a 33% gain since initiating this position.

Another notable holding is Health Care REIT (HCN), which has advanced nearly 30% since we purchased it. We also like the 4.30% dividend rate at the current price.  For EO investors, the yield is a healthy 5.61%.

Finally, I want to point out MasterCard (MA), one of the best performers in the EO. Since opening our position in October, 2011, the transaction processor is up  has gained 82%.

MasterCard (MA) gains since October 2011

MasterCard (MA) gains since October 2011


Even when looking at these impressive gains, it’s important to remember that not losing money is really making money.  Investors who consistently invest in only the “growthy” areas of the market will be very disappointed when they open their March statement.  Not the case for clients at Portfolio, LLC.

Click here to contact a Portfolio advisor for a review of your investment strategy and retirement plan.


Your Financial Plan Is Not Written In Stone

The topic of perfectionism is one that I’m fascinated by, because I see plenty of people using it as a reason to avoid financial planning.

I’m waiting for my inheritance.” (I hear this a lot, though it always has the ring of a pipe dream.)

“I need to wait until I make some more money.” (When will they think they have enough?)

“I’m going out of town. And my ferret is sick.” (I love the double excuse. When one avoidance justification is not enough, use two, or even three! And they never have any connection to each other.)

People commonly make excuses as a buffer. Their excuses protect them from having to take action with the situation is less than ideal.

Christine Kane, a blogger who regularly gets my attention with her to-the-point posts about personal development and business success, offered a colorful example of making a bad decision because of perfectionism.

Think about how many people you know (maybe you’re one of them!) who started on a path. Maybe it was a new business.  Maybe it was a long-held dream. Maybe it was a project, or a production or a plan.

Then, they got a “flat.”

the financial equivalent of a flat tire

Maybe it was a bad performance.  Or a negative review.  Or overwhelm from too many clients.

Rather than fix the flat or put on a spare for a while, they sabotaged the entire dream. They slashed the other three tires.

Are you doing the financial equivalent of slashing the tires because things aren’t perfect right now? Maybe you aren’t making as much money as you hope to be someday – but why in the world would that stop you from planning?

A financial plan is not chiseled in stone, never to be changed. It’s kind of like the U.S Constitution, at least in the sense of its “living, breathing document” interpretation. You don’t have much money now, but three years from now, once your income is up significantly, work with your advisor to fundamentally revamp your financial plan. It’s not a tough concept, but I’m getting a little tired of the all-or-nothing excuses, which I’m not buying anymore.







It’s Not About Being Perfect. It’s About Getting Started.

My first post on this site touched on the topic of perfection: It’s often hard to get started because we expect perfection from ourselves. If we can’t do it perfectly – whatever it is – then we don’t do it at all.

I was reminded of that a couple of times in the past week.

In particular, I was thinking of how the quest for perfection prevents many people from taking baby steps that would be financially beneficial over the long term.

PerfectionA few days ago, I tweeted a New York Times article about a woman whose 43-year-old husband suddenly died.

She realized she did not have basic financial measures in place, and she started a Web site (with a very colorful title) to aggregate useful forms.

However, what really grabbed me was an observation from the Times Writer:

“[T] world of personal finance suffers from an odd sort of organizational failure. We tend to organize our thinking around products: retirement accounts, mortgages, long-term care insurance.”

That paragraph touched a nerve with me. The financial services world is often intimidating and bureaucratic. The various products are confusing, and the terminology can make people feel stupid.

They’re not stupid, of course. But people believe they should know this stuff cold, and have their accounts perfectly organized and up-to-date.  Anything less would not be perfect.

The other article that brought to mind this perfection pursuit came from Kevin Mercadante’s blog, Out of Your Rut. His topic: Start and grow your nest egg, even if you’re broke.

In other words, just get started. Begin paying off your debt. Sell some stuff to raise cash. If you receive some unexpected cash, such as a gift or a bonus, stash it away or put it toward debt payments. Cut your spending. Take on extra jobs.

In other words, it’s not about understanding all the nuances of financial products or services.

It’s about just getting started. You don’t have to be doing it perfectly, but you have to be moving.

Image by pheezy