Wall Street Bullies Need You!

Every week I look for a subject to discuss what I have heard from clients/prospects. Some are questions, some are comments. This week I am going to discuss ‘The Efficient Market Hypothesis’ written by Dr. Eugene Fama in his Phd. Dissertation. Partly because Dr. Fama won the Nobel Prize in Economics for 2013 and partly because I continue to hear questions on market timing, when to get into and out of the market. I actually had someone ask for the current hot stock(s). YIKES!!

I have mentioned ‘The Efficient Market Hypothesis’ , now Nobel prize winning, many times before. It has also been referred to as Free Markets Work. Dr Fama’s definition of the efficient market is as follows:

“In [a free] market at any point in time the actual price of a security will be a good estimate of its intrinsic value”.

This is just a brief definition because I do not wish to bore you with the entire dissertation. What he is saying is that price of a stock today represents its true value today. It does not represent a forecast of the future, because we all know no one can predict the future. Therefore, all the knowable information is already in the price of the stock (security).

Any future movement of that stock is random and unpredictable.

Given this information we know that if you are trying to use

  • Stock picking
  • Market timing
  • Track record investing

You are gambling and speculating with your money. Anyone who recommends you use these tactics with your investment money should be considered a Wall Street bully.

When my financial services career began in 1992 I found it very curious why not one firm that I worked for recommended using ‘The Efficient Market Hypothesis’ or any other academic study I learned in finance classes in both college and graduate school. The research I learned proved these concepts work and making predictions does not.

What I concluded was the Wall Street bullies need you to continue to gamble and speculate with your money because this generates the most fees for these firms.

It has been proven numerous times that there is zero correlation between a stock pickers/market timers ability to pick the right stocks or correctly time the market in the past and their ability to do so in the future. This means that just because any adviser/agent has a good track record in ‘beating’ the market there is no evidence that they will repeat. It is not impossible but highly unlikely.

If this is true, then why do investors continually seek out the ‘best’ investments for right now?

Why do these same investors look for someone to beat the market?

The markets offer great returns long term why not concentrate your investment money on capturing market returns?

Most of these questions can be answered by the fact that the Wall Street bullies continue to market gambling and speculating.

There will always be someone making predictions about where investments are going. Stop being a victim of the Wall Street bullies. Learn about the most recent Nobel Prize winning concept along with other academic concepts to engineer a portfolio for you.

Are You An Investor or a Speculator?

There continues to be more and more media attention that the ‘buy and hold’ strategy is dead. That Modern Portfolio Theory no longer works. This is another attempt by the Wall Street bullies to keep your money on the move.

There are an increasingly amount of ‘experts’ extolling the underperformance of equities for the near future. Any are predicting an imminent recessionary period. These ‘experts’ have an obvious conflict of interest as they recommend their own solution.

I even heard of a late-night show comedian saying that there is a recession coming. Unbelievable, Now, there may be a recession coming but no one can predict when and how long, not even a celebrity.

True investors are much better served using a passive management strategy and utilizing Modern Portfolio Theory and ‘buy and hold’. This strategy, over the long term will lead to success. It should be emphasized that ‘buy and hold’ should really be ‘buy and rebalance’.  ‘Buy and hold’ might signify set and forget and we must rebalance back to our target allocation periodically. This entails buying low and selling high, automatically.

When we rebalance we sell asset classes that have done well and buy asset classes that have done poorly, short term. Buy low, sell high. This is done periodically and eliminates the need to forecast the future.

There is some confusion as to what is an investor? Many believe that a successful investor makes more than their peers all the time. This they believe is measured on a short-term basis.

A true investor will make comparisons of 10-year performance and perhaps longer. It might be ok to compare 5-year performance. But investing is a long-term disciplined process. When you compare performance on a short-term basis. Like monthly or worse daily, you are really a speculator not an investor.

Now its ok to be a speculator, but if you have a long-term goals like retirement planning. Being a speculator will lead to disappointing long-term results.

To e successful, investors, no matter how large, would be far better off using a passive strategy with Modern Portfolio Theory as part of the process. Modern Portfolio Theory is actually part of a larger strategy called Free Market Portfolio Theory. 

Remember no strategy always looks like the right thing to do. We must continue to believe the free markets do work.  Most importantly we must believe in our strategy and remain disciplined.

We must own equities….. globally diversify ……. rebalance.

Celebrate Uncertainty!!!

Right now, we are experiencing an equity market that seems to, for the most part, go up. Eventually we will experience a longer period of down market.

Many investors lament the downs of the market.  They feel that the randomness is cause for complaint and pain. 

It has been said that people want to avoid down markets or risk much more than any potential reward. That said there continues to be many people avoiding the equity markets because of this fear

Emotions drive many investors to make the wrong choices. Emotions cause them to buy high and sell low. Which of course, is opposite the number one investor rule. Buy low and sell high.

Conversely many investors observe an asset class that has done very well during a relatively short period of time. They then want to concentrate their investment portfolio in that asset class. This is usually another case of buy high and sell low.  

Investors should remember that the equity markets are random and unpredictable. The unpredictability makes stock picking and market timing unprofitable over the long term.

In reality the unpredictable ups and downs of the market are part and parcel of its superior long-term rate of return.  Volatility is the only reason the market offers a risk premium. 

Celebrate the uncertainty.  It contains the seeds of growth and wealth creation.

To reach your long term goals you must own equities….globally diversify….rebalance.

Just A Reminder That The Free Markets Do Work!

This is one question most investors never think about. Primarily because the Wall Street bullies want you to believe that free markets  DO NOT work. The bullies will continue to supply you with forecasts on what will happen to your finances.

First let’s look at the assumptions if Free Markets Fail:

  • The market fails to price goods and services appropriately.
  • It is possible for some individuals to identify in advance which prices are inaccurate.
  • Underpriced or overvalued markets can be forecasted or predicted.
  • By taking advantage of these miss-pricings, either in stocks or market sectors, it is possible to both increase returns and avoid losses in investments.
  • People with this view would utilize traditional investment myths and speculate with their assets.

However if Free Markets Work.

  • Based on supply and demand the free market is the best determinant of market prices.
  • All available information is factored into the current price.
  • Only new and unknowable information and events change pricing.
  • The randomness of the market makes it impossible for any individual or entity to consistently predict market movements and capture additional returns unrelated to risk.
  • People with this view would utilize free market investment strategies.

It is vitally important that you decide whether free markets work or free markets fail. This will determine how you will invest for your future.

If you believe free markets fail you should continue to invest in the traditional investment strategies of stock picking, market timing and track record investing. This would require that you stay connected to ALL sources of financial information. By following this strategy, you will, in my opinion, be gambling and speculating with your investment money.

Ask yourself one question, do you really want to constantly stay connected to the equity markets?

If on the other hand, you believe that free markets work. You would concentrate on capturing market returns. Build a globally diversified portfolio. Identify YOUR risk tolerance. Eliminate the traditional investment strategies.

And finally, work with an investor coach who shares this belief.

The Wall Street bullies want you to believe that there is someone on Wall Street that can predict the future. This message is constantly bombarding the investing public thru the media and marketing campaigns. They need you to believe that someone can earn you above market returns AND avoid all large losses.

After many years of watching Wall Street I can tell you no one can consistently ‘beat’ the market.

You will never have peace of mind with your investment dollars if you continue to seek the ‘hot fund manager’ or the next ‘hot stock’.

Any investment that requires an accurate forecast of the future is destined for failure because the equity markets are random and unpredictable.

Keep in mind there will always be examples of those who beat the market however it is extremely unlikely that they can repeat.

To succeed in investing for a lifetime you need to follow three simple rules:

  • Own equities
  • Globally diversify
  • Rebalance

Your investor coach can help you stay disciplined throughout your life. As you age your coach will help you adjust your risk to assure you reach your financial goals.

Your Brain Wants The Big Fix!!!

The Wall Street bullies are continuously promoting stock picking, market timing and trading. We have all seen the commercials about the baby, using the brokers’ tools, picking stocks and making great returns. These commercials make us believe that it is an easy task to predict market movement.

There has been a huge push by the big banks and brokerage firms to recommend private equity to their high net worth clients.

The bullies know we are looking for a get rich scheme to make our lives easy.

Hit it right, they contend, and you will be on easy street.

When you bet on a long shot in gambling or assume excessive risk by trying to pick the “big winner”, your brain releases Dopamine. This chemical produces an euphoric feeling and is closely related to the high that cocaine and morphine produce.

For stock pickers, even thinking about placing an order for a stock they hope will bring them huge returns can produce this chemical.

All the while stock pickers ignore the real risks and likely losses in the speculative venture.

There will always be investors who get lucky and make unbelievable returns. We must realize that this is a matter of ‘luck’ and not ‘skill. These lucky investors will very seldom repeat in the future.

Successful investors have a long-term plan when allocating their assets. They know there is an academic and scientific method available when building a prudent portfolio. Their strategy includes understanding the expected return and expected volatility of their portfolio.

Many investors believe that looking at past performance is a good indicator of future results.

This is exactly what the Wall Street bullies want you to believe.

As investors we must realize that if something happened in the past does not mean it will repeat in the future. The variables must be exactly the same for these situations to repeat.

During a meeting in Chicago I met with an active trader and his quote has stuck with me.

“Trading strategies work until they don’t.”

The problem for us investors we will never know when these strategies will stop work. Develop a prudent strategy and remain disciplined.

To succeed in reaching your long term goals you must own equities….globally diversify……rebalance.

What Kind of Risk Are You Taking?

Investors are always looking for answers. How do I earn stock market returns with Treasury bill risk?

There is a saying the greater the risk the greater the return. There is of course a point of diminishing returns. In that, at some point adding risk will not increase return. This has been proven by Nobel prize winning research.  

The Wall Street bullies have continually come up with exotic strategies to avoid risk and increase return. NOT!!

In fact, Modern Portfolio Theory tells us at a specific level of risk there is an appropriate mix of assets. That is proper diversification will lead, long-term, to your desired return.

One of today’s leading financial thinkers, Bruce I. Jacobs, examined recent financial crises ….including the 1987 stock market crash, the 1998 collapse of the hedge fund Long-Term Capital Management, the 2007-2008 credit crisis, and the European debt crisis….and reveals the common threads that explain these market disruptions. In each case, investors in search of safety were drawn to novel strategies that were intended to reduce risk but actually magnified it…. And blew it up.  Until we manage risk in responsible ways, major crises will always be just around the bend.

So, believing you can earn a great return with little or no risk will lead to disaster, in the long-term.

There is a way to responsibly manage risk and therefore return.

Modern Portfolio Theory and Efficiency hypothesis have both won the Nobel prize in economics. While the three-factor model was written by a Nobel Prize winner.

When we combine all three, we develop a portfolio that will earn market rates of return, while responsibly managing risk…over the long-term.

The implementation is the easy part. Remaining disciplined during market extremes is the hard part. This will require the guidance of an investor coach/fiduciary advisor.

Comparison Envy??

Many investors are continually searching for better returns. They hear their friends talking about their great adviser. I have even heard one investor say they had the best adviser in the country. Not sure how that is determined. Of course, the best adviser in the country must be able to predict the future.

This comparison of one adviser to another is a dangerous strategy. Because one adviser may be hot today or even for a year or even longer. But that streak will invariably end. Followed by the next hot adviser.

Psychologists Kahneman and Tversky showed that more people would prefer to make $70,000 per year when others were making $60,000 than to make $80,000, when others were making $90,000. There will always be “others” with more assets, money, or larger portfolios.

We are doomed to disappointment because comparison destroys the joy of having and using what we already have. Most people would agree to make or have less as long as others were even poorer. Resist the impulse to compare yourself to your “neighbors”.

This includes comparing your portfolio or 401(k) account balance to your colleagues. In some instances you may be better in others worse. The goal of your investments is to attain your long term goal. This would include a strategy and savings discipline.

Developing a prudent strategy and remaining disciplined to it are very difficult, however in the long term will lead to success. No one can predict what asset class or sector will outperform in the future.

Warren Buffet has one strategy which he remains disciplined to. Mr. Buffet will often lag the market, sometimes for significant periods of time. As an example he lagged significantly behind the market during the mid to late 1990s. Only to become the star during the tech bubble crash. He was quoted as saying “I don’t understand the dot.com craze. Why invest in something that doesn’t exist?”

He remained disciplined and this is the primary reason for his success.

You are speculating if you stock pick, market time or base your investing decisions on track record performance.  Keep in mind speculating is ok, but not with your retirement funds.

To succeed in investing you should own equities…globally diversify….rebalance.

Markets are Random …..Get Over It!!

During many conversations with investors. I have come to realize that they continue to be afraid of the equity markets. They are afraid they will lose all their money.

Many expect to earn stock market returns with treasury bill risk. Many believe there is someone out there who can and does know when to get in and out of the market to maximize return and avoid all losses. 

After nearly three decades of research I can tell you this person does not exist.  You will find someone who makes a correct prediction. The problem is there is no evidence that their predictions will be correct going forward.

Have you ever noticed that the same ‘predictors’ are on the financial talk shows more than once?

Of course, with the exception of Jim Cramer, who I believe is on for entertainment value. If you ever went back and looked at his picks from the past. You would realize he does not beat the market. In fact, he lags significantly behind the market.

If you invest in stock markets no one can predict “save” you from the down periods—NO ONE.  If markets were not random and unpredictable, they wouldn’t offer higher expected returns.  Markets randomly and unpredictably go up and down.

The down markets are short term volatility that we must live with to earn market returns.

The most successful investors have a philosophy they believe in and stick to it regardless of the3 market conditions.

As we age our situation gradually changes from growing our money to taking an income stream that keeps up with inflation. To succeed in this, we must reduce the level of risk in our portfolio as we grow older.

We will succeed in our investing when we own equities, globally diversify and rebalance.

It is also vital to hire a fiduciary adviser/investor coach. Your coach will keep you focused on the long term returns of the equity markets. And ignore the inevitable short-term volatility that we experience in the equity markets.

Should You Get Out of the Equity Markets? Continued..

I essentially wrote this exact article twice over the last 7 years. The message bears repeating now.

During conversations with investors I continue to hear apprehension when the subject of stocks is discussed. This apprehension or fear is completely understandable.

We hear nothing but bad news from the media, the continuing battle in Washington, the International crisis, terrorism at our front door, the socialist tone of some current members of Congress like it or not, our own budget deficit and ballooning debt, finally the trade war with China.

Will there be down markets in the future? Absolutely, there is no doubt. We are experiencing a bad market right now.  However, no one can tell you when and which countries and/or sectors will be involved. And no one can tell you when the markets will recover.

The equity markets around the world are random and unpredictable.

This is undeniable. However, the equity markets remain the greatest wealth creator in the world, if properly used. This does NOT mean picking the right stocks or market timing, getting in and out of the market at the right time. Neither of these activities promoted by the Wall Street bullies are in your best interest. These activities benefit the Wall Street bullies and will not improve your returns.

The market returns are there for the taking, they are waiting for you to take advantage.

Listening and taking the advice of the Wall Street bullies is not in your best interest. 

Even worse taking stock picking advice from the likes of Jim Cramer.

Your time can be much better spent than worrying about the direction of the equity markets. If you have developed a prudent portfolio and remain disciplined you will succeed long term. This will require the help of an investor coach who will keep you from letting your emotions take control.

Remember the Equity Markets are forward looking:

  • Expectations about the future are in today’s price.
  • Market returns are not strongly correlated with macroeconomic variables such as GDP
  • Markets can provide positive returns even during periods of poor economic performance.
  • Timing markets is difficult.

A study was done looking a past recessions and stock returns. The conclusion there is no correlation between recessions and stock returns.

To succeed in reaching your long term financial goals you need to own equities, as scary as this may seem, globally diversify, no one can tell you which countries and/or sectors will outperform and rebalance, buy low sell high.

If you these simple rules you will stop gambling and speculating with your investments and improve your results with less anxiety about the future. If you are younger growth must be your goal, a retiree your goal is to keep pace with inflation. Owning equities in your portfolio is a great solution to accomplish both.

Long Term Strategy and Discipline Wins!

There continues to be more and more media attention that the ‘buy and hold’ strategy is dead. That Modern Portfolio Theory no longer works. This is another attempt by the Wall Street bullies to keep your money on the move.

There are an increasingly amount of ‘experts’ extolling the underperformance of equities for the near future. These ‘experts’ have an obvious conflict of interest as they recommend their own solution.

I even heard of a late-night show comedian saying that there is a recession coming. Unbelievable, Now, there may be a recession coming but no one can predict when and how long, not even a celebrity.

True investors are much better served using a passive management strategy and utilizing Modern Portfolio Theory and ‘buy and hold’. This strategy, over the long term will lead to success. It should be emphasized that ‘buy and hold’ should really be ‘buy and rebalance’.  ‘Buy and hold’ might signify set and forget and we must rebalance back to our target allocation periodically. This entails buying low and selling high, automatically.

When we rebalance we sell asset classes that have done well and buy asset classes that have done poorly, short term. Buy low, sell high. This is done periodically and eliminates the need to forecast the future.

There is some confusion as to, what is an investor? Many believe that a successful investor makes more than their peers all the time. This they believe is measured on a short-term basis.

A true investor will make comparisons of 10-year performance and perhaps longer. It might be ok to compare 5-year performance. But investing is a long-term disciplined process. When you compare performance on a short-term basis. Like monthly or worse daily, you are really a speculator not an investor.

Now its ok to be a speculator, but if you have a long-term goals like retirement planning. Being a speculator will lead to disappointing long-term results.

To be successful, investors, no matter how large, would be far better off using a passive strategy with Modern Portfolio Theory as part of the process. Modern Portfolio Theory is actually part of a larger strategy called Free Market Portfolio Theory. 

Remember no strategy always looks like the right thing to do. We must continue to believe the free markets do work.  Most importantly we must believe in our strategy and remain disciplined.

We must own equities….. globally diversify ……. rebalance.