Looking Ahead

GJretire has three major sections. Part I: Don’t Believe Your Professor, challenges several core investing principles. Interestingly, neither the Fourth Estate (the press) nor the hallowed halls of academia have been very useful in pointing investors in a new direction. Maybe it’s because these bedrock institutions are so completely overrun with sloppy thinking socialists who just don’t begin to understand how money works. It would be like having me write about the symphony. The result would be, I’m quite certain, disastrous. You really can’t reasonably dissect something about which your fundamental beliefs are so thoroughly misguided. I know virtually nothing about music theory or the history of music.

I took piano lessons for many years, and was even pretty good in pedestrian terms, but I never really “got it.” I love musicals. I adore ballads. I even have traces of rhythm. But I’m not really a student of music and I don’t begin to understand it, just as very few university professors or professional journalists really understand business and finance. They treat investors like an alien species. They either deify or vilify especially the most successful investors, but they rarely understand the beauty of the service capital allocators perform.

To start at the beginning of the Investment Heresies eMag, click here

As a result, there is a lot of rubbish taught in business and finance programs that needs to be unlearned. These are not the self-interested myths fostered by Wall Street, but rather economic theory gone haywire and preached as dogma from the front of the lecture hall with the confidence and self righteousness that only an academic can produce. That these theories are illogical and don’t work, that they sound like chopsticks in the real world of finance, doesn’t matter to them. The theories are accepted. They are beyond refute. And they sometimes are as foolish as the day is long.

Part II: Don’t Believe the Salesman gives lay investors some new insights into just how rotten the industry is at its core. It’s not a matter of “is it rotten?” Everyone knows that it is. A local radio announcer mentioned a survey that was talking about just how low and slimy are the lawyers in this country. While, naturally, not disputing that fact, I was nonetheless disappointed to hear the radio announcer note at the end of the segment that of course the only form of life even lower than lawyers was financial advisors. It was said in such a matter of fact way. I wanted to scream.

Granted, it’s a little like politicians, which all the world knows are dishonest bums yet somehow the electorate remains under the impression that their bum is actually the exception who proves the rule. Similarly, retail investors seem to all accept the badness of the lot yet refuse to fire their own slimy rogue because they are, after all, such a nice guy or gal. Investors refuse to hold their advisors accountable for the misdeeds of the industry, yet maddeningly they have the audacity to hope for better treatment in the future!

They see their advisor’s big house and expensive car and believe, against the laws of logic and experience that the advisor’s wealth came from smart moves in the market. True, their own accounts have not experienced or benefited from this wisdom, but somehow investors are able to convince themselves that their advisors’ high net worth is a function of the advisor’s own investment wisdom rather than a sure sign that high fees are soaking up returns that really ought to belong to clients, but are being diverted to financial advisors instead!

Fred Schweb asked, “Where Are The Customer’s Yachts” in his 1940 classic. Yet 65 years and scores of scandals later, the “customers man” is still getting away with indulgences of the worst sort while investors sing the blues.

Part III: Structure Your Investments For Success provides step by step instructions that take these heretical theories and translate them into simple steps that investors can use to manage an investment program. It’s not an exhortation that you, too, can discover your inner Warren Buffett. That would be stupid. Far too many books go that route, and investors usually end up in investment purgatory as a result of trying this approach.

What “GJretire” will do, however, is put investors back in charge of hiring competent professionals to manage their investment program. The only thing that stands between the commoditization of the financial services industry (which is a great thing for consumers) and the financial dark ages is a little bit of consumer education. In between the stupid stories and self righteous pronouncements, I hope to be able to give readers that tiny spark of recognition that enables them to break away from the financial service monoliths that seem to hold your financial destiny hostage. They haven’t been on your side in a long time. Admit it. It’s time you took back responsibility for your own future.

• Why You Should Care:

An article several years ago by Jonathan Clements in the Wall Street Journal points out that in retirement savings, a modest boost in annual returns can make a big difference when it's time for you to retire. Using the example of a 40 year-old investor with $80,000 in savings who saved an additional $6,000 a year until he reached the age of 65, our hypothetical investor's retirement income (figured in today's dollars) would be $27,665 if he earned 7% on his savings. By boosting earnings by just a half a percent (to 7.5%), his projected retirement income increased 15% to $31,719 a year. At an 8% return, he boosted his retirement income by 31%, and at an 8.5% return, our hypothetical investor's retirement income grew to $41,626, more than 50% higher than what it would have been had he only earned 7% on his money.

How do you implement an investment program which will increase your investment returns? You recognize that the world has changed, rendering most investment advisors obsolete (Heresy #1). You realize that risk and return are not always correlated (Heresy #2).  Successful investing can be simple (Heresy #3) as you realize that standard deviation is not the same thing as risk (Heresy #4). You accept that market timing is not a foolish endeavor (Heresy #5), use clever advertising as a sign of what mutual funds not to buy (Heresy #6), and acknowledge that the style consistency consultants don’t know what they are talking about (Heresy #7).

Then you start holding advisors accountable. You realize that most advisors lie about their track records (Heresy #8). You conclude that mutual funds and exchange traded funds are still the best vehicle for the majority of investors (Heresy #9) and take heart in knowing that many hedge fund advantages are available to traditional mutual fund investors (Heresy #10) with much lower fees. You do the research to know that in spite of what you’ve heard, small cap value stocks are less risky than their large cap or “growth stock” bretheren (Heresy #11) and you open your mind to the notion that fixed income investments are not only for generating income (Heresy #12).

Finally, you structure your investment program for success. Knowing that two brokerage accounts are simpler than one (Heresy #13), you take advantage of the "free lunch" which is available to smart investors (Heresy #14) and come to grips with the fact that if you can divide by 10, you can invest your own portfolio (Heresy #15). And by all means, know enough to admit that you should delegate investment research to an experienced professional and find a fund newsletter that saves you thousands of dollars (Heresy #16) while boosting your portfolio returns. Lastly, in the event that you still find a need for a financial advisor (and many people will) you are as impersonal as possible when searching for your personal advisor (Heresy #17).

The world has changed; competition has rendered most investment advisors obsolete. Take advantage of it!

Next post: Give Back the Nobel Prize, Professors

To start at the beginning of the Investment Heresies eMag, click here

Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.

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