Experts & Monkeys: Who’s Throwing What?
If you watch TV and have seen commercials about investments then you’ve heard the disclaimer that “past performance is no indication of future results.” Why do they say that, aren’t technical experts supposed to know what the stock market will do based on the past? Isn’t that why individuals hire stock brokers – for their investment acumen? Or worse yet, Kevin Spacey tells us that if we open an account with E-Trade we can see trends in the market all on our own.
One of my all-time favorite movies is Tommy Boy, starring Chris Farley and David Spade. It happened to be on TV yesterday, and I had to watch it. In the movie where Dan Aykroyd tells Tommy that “what the American public doesn't know is what makes them the American public.” He also says that the “truth is, I make car parts for the American working man because I'm a hell of a salesman and he doesn't know any better.” I think of these quotes when I think of the hoodwink stock brokers make on the public every day. So-called ‘experts,’ like that loud mouth Jim Cramer on CNBC or the Edward Jones stock broker, are allowed to call themselves such because they have more data and more experience than the average person, but does that really count for anything? My belief is that people are given a false sense of security about their wealth and investments because they simply do not know any better and they have been deceived by Wall Street.
A well-known book called A Random Walk Down Wall Street, written by Burton Malkiel explains my belief. His main premise is that the stock market acts like a random process, much like flipping a coin or gambling in Las Vegas. To combat this randomness one needs to invest in a well-diversified portfolio and continue investing at regular intervals over a long time period. It’s that simple, and anything other than this is harming the investor and enriching their stock broker. Further evidence for this can be found in publications from Nick Murray, the Wall Street Journal, and numerous other research articles. So ask yourself if having a stock broker at Edward Jones, Merrill Lynch, Morgan Stanley, or your local “independent” advisor help you to reach your financial goals? Does the service they provide enrich you or them, and do they offer any substantial value for their service?
On occasion, the Wall Street Journal matches monkeys against leading stock analysts. The monkeys are tasked with throwing darts at the stock pages of the Wall Street Journal. This selection of stocks is put up against the advice of the experts. Time and again the monkeys’ random selection outperforms the experts’ picks. While there are several reasons that can be debated as to why the monkeys win, one big reason is that experts have no more predictive power over the markets than do the monkeys. So, again I must ask, do you believe your broker is bringing value to your finances by making suggestions on when and what to buy?
I am sure you are asking yourself right now, Brent, are you not a financial advisor? And are you not making the case against yourself? First, I am a financial advisor, not a stock broker. I advise individuals on much more than just investments. I don’t advise clients to buy and sell stocks in order to make a commission like many brokers do, and I don’t advise clients to buy and sell in order to make money from arbitrage like many Wirehouses do – think Merrill Lynch in the High Frequency Trading Scandal a few years back. What I, and other Certified Financial PlannerTM Practitioners like me, do is to create a financial plan for clients so that they know how much it is going to take to reach their financial goals. Then, I recommend investing in low-cost, high-quality mutual funds, exchange traded funds, or other investments in a buy-and-hold strategy that minimizes many of the risks associated with short-term, frequent, stock trading brokerage strategies. The value I give to clients with their investments comes from minimizing, not eliminating risk, mitigating destructive investor behavior, and monitoring the long term horizon. Do not forget that what a financial planner does is much more than investing. We help to bring client’s entire financial life into view so that an overall picture can be painted.
The next time you are watching TV and Kevin Spacey starts pitching E-Trade’s ability to help investors to see trends and improve their retirement plan, just remember that a monkey, a dart, and a newspaper can come out further ahead than an expert, a computer, and an historical chart.
Don’t waste your time with enriching a stock broker’s bank account. Find a financial planner and start enriching your own bank account.