May-8-2009
FACT: Since 1992 the average daily trading volume has increased by 1,900%.
FACT: Over the same time period the S&P 500 ONLY gained 150%.
Who's making all the money? The following are five reasons why most investors never beat the market, never get rich, and never have enough for retirement. Let's start with...
(1) Short Term Focused:
Anytime you want to "get rich quick" it's bond to bite you in the rear end. There are no short cuts in life. Yes, you may get lucky, but for most of us, hard work makes luck. At my online investment service - PigsGetRich.com - we've seen how being short term focused caused major pain for our clients. For instance, in 2002, when we started publishing our first reports, the very first stocks we highlighted went lower by 40% and 60% respectively. YET, they were our biggest winners to date. The same thing happened in 2008. In August we were ahead for the year by 40% and then it all came tumbling down... But, we didn't panic because a lot of the companies we owned were still very good businesses. So far in 2009 we’re up 25% total where as the S&P 500 is only up marginally. This isn’t a hype article for my publications, but it’s important to know that things are never as good or as bad as they seem.
So next time your stock is down 30% or 50% or even more, think of its long term prospects and if you have the cash, buy more! Dollar cost averaging works on the downside a lot more effectively than it does on the upside, in my opinion.
(2) Not Enough Liquidity
Think about all those real estate investors that are just sitting on their property right now! Imagine if they had been stock investors instead... They'd be out of their holdings and in cash immediately. This would serve the entire economy because they would be spending or investing their money eventually. However, now that we have millions just stuck in a home they either don't want anymore or cannot afford, the need for liquidity is great.
This is why I love investing in stocks. For one, I know how to evaluate a business much easier than I know what a piece of land or home is worth over and above its building materials. Of course, if we judged homes the same way we value stocks, they would only be worth the time, labor, and materials used to build them. They would actually have a pretty easy intrinsic value. Then again, would you value a home that is 20 years old less based on the depreciation of the materials? You see why I stick to what I know best?
Secondly, if I buy a stock Tuesday and by Friday my world falls apart, I can sell it immediately and collect my cash and go. Of course, the goal for investing is to make money long term. The market has been the best place to create wealth for over 100 years. We would not have the vast amounts of wealth in this country were it not for the publicly traded companies in it!
(3) Poor Investment Strategy
An investment strategy can be defined as a plan of asset allocation into an investment vehicle or multiple vehicles for the purpose of making money. Then why do so many people fail to make money? Well, they have a poor strategy. For one, many people look for the "get rich quick" schemes. These could be in the form of penny stocks or tips from the next broker that calls them today. These get rich quick schemes, though they may appear to be "risk free," are actually the riskiest of all. Also, for the majority of investors, advisors and money managers are the captains of their ship. Anytime, you hire someone else to manage your money for you, it's generally a bad idea. Let me explain.
Fool.com states that over 80% of mutual funds never even match the performance given by the overall market. Hedge funds fair better, but still over 50% of them fail. The reason is because of turnover and fees.
An average investor believes, or dare I say, has been brainwashed into believing that mutual funds and wide diversification is a way counter risk. This is complete garbage. Studies show that an investor with 20 stocks is just slightly less diverse than an investor with 200. The only difference is, you can track 20 on your own. This is why it's so important that investors take control of their own portfolios. Something I've preached for 7 years now.
Ok, back on track. Mutual funds and especially hedge funds create substantial volume in the market buying and selling stocks on a regular basis. Again, you think you're mutual fund or annuity is safe? NOT! The manager is probably buying and selling stocks in it right now! According to Morningstar, the average turnover for most funds is close to 100%, which means each year the manager has bought, sold, and replaced every single stock in the fund. (HMMM.... Something to think about before your next mutual fund purchase.)
And, what happens when a fund manager is buying and selling? FEES! Lots of fees are being generated. Fees are great, if you're the broker. But, since you're the investor, fees are your enemy. The more you rack up, the worse off you are.
All of these factors are apart of your investment strategy. Many people stay away from mutual funds because they know the "real deal" and yet they do the same thing the fund was doing for them... trade aggressively. Again, FEES ARE YOUR ENEMY, THE MORE YOU RACK UP THE WORSE OFF YOU ARE IN THE END.
(4) Poor Investment Choices
Poor investment strategy leads to guess what... Poor Investment Choices! Poor investment choices are less the effect of timing and more the effect of selection. Let me explain. Take for instance, the retail brokerage industry. I know this business very well, since I started my career selling stocks over the phone to business executives, wealthy retirees and the like. In retail stocks, the broker makes a commission based on the size of the transaction and like a lawyer will get paid whether you win or lose. At 21 I thought this was a fantastic idea. By 22, I was having a hard time sleeping at night. So, what does this have to do with poor choices? For one, hiring a retail broker is a poor choice. PERIOD. Hiring a money manager is a coin toss from being a poor choice. PERIOD. However, when you do it on your own, you might still make poor choices.
1. You could trade (or speculate) too often. Day trading is wonderful, for the 0.0001% of the investors that are good. I don't like those odds and neither should you.
2. You could pay too much for your advice. Generally speaking, this happens when you let someone else manage your money for you, regardless of performance, since so few actually do well. However, this could mean following the advice of a newsletter service, financial website, or television commentator. In the end, you should make your own judgments and take responsibility for them.
3. You could choose the wrong opportunities to invest in. There are over 10,000 stocks in the market and each has a story to tell and sell. Choosing the right ones out of the madness is your job. This is where investment coaching and certain financial publications can come in handy.
Bottom line – if you make better investment choices and you’ll make more money.
(5) The Wrong Psychology
Even the Oracle of Omaha himself, Warren Buffett states that you either take to his style of investing like a fish to water or you don't at all. This is why having the proper mindset is the most important thing to any investor.
It's the following the herd... or get rich quick mentality that keeps the majority of people poor. Sacrifice, hard work, and savings create wealth. Henry Ford said, and I'll paraphrase, that if a man cannot save, he cannot become wealthy.
When it comes to investing, it's not your fault that you feel the way you do... it's the brainwashing of the media, Wall Street, and your family and friends. For instance, looking at Beta and Alpha you might think that stocks were RISKY when the market was at 6,500 and FAIR VALUE when it was at 13,000. Is this really the truth in practice? NO, yet this is still taught in colleges around the country. How slow we are to change.
Many investors only get in after a stock has seen 100% in a short period of time and wonder why they lost money. Others get in as the stock is going down and wish they had waited a little longer. This has in fact, happened to everyone. So, what's the right psychology?
The answer is, it’s personal! LOL! I wish there were a secret answer for the question, but there’s not. I could tell you that in my opinion, if you could model Warren Buffett, you’d be successful, but that might not work for you. The truth is, education starts with knowing yourself.
What are your tendencies? Can you sleep at night knowing you might be down 50% in one stock over the short term? Can you look at your statements and see losses with a positive frame of mind? Can you sit in at a desk in front of your computer for 7 hours and trade? Do you want to analyze charts or business statements? Or both? These are all serious questions to ask, but keep one thing in mind:
We all have the same physiology, so what has worked for one person, can work for all people!
Jonathan D. Poland
Managing Editor
Wealth|FN – www.wealthfn.com
