Beat the Market: Invest by Knowing What Stocks to Buy and What Stocks to Sell
- Investment Management
- Investment Management Incentive
- What Do You Do?
Investment management today has slowly migrated away from the old trust and prudent man concept when an experienced investment manager or trust officer looked after you, your family’s investments, and your financial future. As an investor, you have to make decisions affecting your retirement and economic well-being for many reasons. Fear of litigation for poor past performance and the sheer size and complexity of investments have caused the investment industry to consolidate into specialists rather than generalists. As an example, pension funds have changed from “defined benefit” plans, where the pension fund made the investment decisions and guaranteed you a specific income after retirement, to “defined contribution” plans, where you must make your own investment decisions and hope for the best. This change takes the investment responsibility away from the pension fund and places it on you, even while you continue to pay for the “expertise” the fund allegedly offers. Now you must decide how many bonds and stocks to include in your investment program. You must decide whether to own big caps, foreign stocks, midsized, emerging market stocks, and so forth. Not being a professional, you face a daunting task. Even funds that balance investments between cash, bonds, and stocks are rare today because they are not “sexy” and have almost never outperformed the stock market.
This is unfortunate because the money management business has little incentive to watch out for you and take responsibility for your assets. In many ways, it has become a flim-flam, principally designed to take your money through fees and commissions while appearing to be on your side.
Let’s face it, professional money management, on average, is not that great. In fact, it is a disgrace. History shows that the performance of most mutual funds is below that of the market averages. In a study by Motley Fool, from 1963 through 1998 (good years in the stock market), the average mutual fund earned for the investor approximately 2 percent less than the average market return. The study equates this to an investor earning 8 percent per year from professional management versus 10 percent per year from just buying a market average such as the Dow Jones Industrial Index (unadjusted for inflation). Using these figures, over 50 years, $10,000 invested would amount to a total market worth of $1,170,000. However, at 8 percent, the investor would have gained only $470,000. Motley Fool quotes John Bogle, founder of the Vanguard funds:
- “Our hypothetical fund investor has earned $1,170,000, donated $700,000 to the mutual fund industry, and kept the remaining $470,000. The financial system has consumed 60 percent of the return, the fund investor has achieved but 40 percent of his earnings potential. Yet, it was the investor who provided 100 percent of the initial capital; the industry provided none. Confronted by the issue in this way, would an intelligent investor consider this split to represent a fair shake?”
With these profits, you can see why the mutual fund industry wants your money.
In the investment industry, there is almost no consideration for getting out of stocks during bear markets, and the popular policy of “diversification” (also called “asset allocation”) shows meager results over long periods. In other words, it is mere gimmick with no real substance. The one thing professional management is good at is scaring many people into not investing for themselves and placing their financial assets with management. This is done primarily through investment jargon that makes the subject appear much more complicated than it is. Amazingly, this use of special words and concepts of finance theory intimidates even the higher-ups in corporations, foundations, and the wealthy who are looking for people to invest their funds. I show you that so-called finance theory has enormous logical holes in it, and in fact, it is unable to be used profitably in investing. It is a theory that has not worked well in practice but is useful in bamboozling prospective clients.