The Greater Fool Theory and Investing

Stock pickers success has nothing to do with skill and all to do with luck. To succeed in reaching your long term financial goals own the market, globally diversify and rebalance. The final piece is to remain disciplined to your strategy. The formal phrase is the investment policy statement. You will not know if you succeed unless you have a goal and a strategy. Remember predicting the future is for fools.

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You are Picking StocksPicking stocks refers to both the practice of buying individual stocks because you believe they are mispriced, or purchasing actively managed stock mutual funds, where the fund manager attempts to beat a designated benchmark. If you are engaging in either of these activities, you are a participant in the GFT.

Individual and institutional stock pickers assume they can find mispriced (typically underpriced) stocks, hold them and sell them at a profit. If anyone could do this, you would think it would be Bruce Berkowitz, the much lauded manager of the Fairholme Fund. With much fanfare, on Jan. 12, 2010, Morningstar issued a press release naming him the “Domestic-Stock Fund Manager of the Decade.” It noted this was a new award recognizing fund managers who have achieved superior risk-adjusted results over the past 10 years and have an established record of serving shareholders well.”

How did the “Domestic Fund Manager of the Decade” perform in 2011? According to data provided by Morningstar Direct, his fund suffered a staggering loss of 32.4 percent!

Greater fools thought that Berkowitz had the Midas touch that would continue indefinitely. They assumed there would always be buyers at a higher price for stocks picked by him. They were wrong.

If you purchase any actively managed mutual fund, you are engaging in the GFT. One study (reported here) showed the Vanguard Index fund beat 75 percent of designated mutual funds before taxes for the period 1982-1991. The same study found that its after tax return beat 65 out of 71 mutual funds. When you buy these actively managed funds, you are the greater fool.

Stock picking and over weight in gold are two big mistakes investors make. Many are driven by fear and media hype. The best strategy is a risk adjusted globally diversified portfolio. This takes out the guess work as well as the anxiety.

Please comment or call to discuss how this affects you.

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A Day Late and a Dollar Short

For investors and their advisers trying to beat the market or find ‘alpha’ this provides additional proof that it is really mission impossible. Many advisors believe that they bring value to clients by making prediction, picking under priced stocks. This is totally false and will cause investors to lose money unnecessarily. They would be better served by utulizing a prudent process and remain disciplined to that process. Advisers providing this type of guidance brings value to the client relationship. Selling return only increases client turnover and decreases public trust.

English: "Our aim is to serve investors,“...
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The market for stocks and bonds takes into consideration all publicly available information and instantly incorporates that information into the price. This irrefutable fact has profound ramifications. Think about how most individual investors make investment decisions. They trade on their own using research tools provided by discount brokers (or worse, relying on technical charts with purported predictive value). They rely on analyst reports and the recommendations of their brokers or advisers. These “financial experts” are all too willing to pick the next “fund manager of the year,” identify “mispriced” stocks, select high yielding bonds and predict the direction of the markets.

Relying on this advice, instead of looking at the market and recognizing the current price is a fair price, which reflects current and forecasted news, is the most fundamental error made by investors. The likelihood of identifying mispricings and profiting from them is 50 percent, before costs and taxes.

This is not an intelligent way to invest.

Another example and good advice on predicting the future. No one can consistently predict the future. The best alternative for all investors is to own equities, globally diversify and rebalance. This prudent process will lead to a successful investment experience.

Please comment or call to discuss how this affects you.

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Younger Investors Not Shy About Stocks in 401(k)s

English: Risk and Return for Investors
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This is a great indicator of the importance equities have in the overall health of any economy and young Americans recognize it. Most baby boom and earlier investors have an all in mentality when dealing with equities. Their thought process must become controlling risk and know what their expected return and expected volatility are. This will reduce their anxiety with stocks.

About 21 percent of savers in their sixties had more than 80 percent of their accounts invested in stocks last year compared with about 40 percent of investors in 2000, Holden said. “We see a tempering of the allocation to stock The process must include our older participants,” she said.

No Equities

Separate studies by ICI have shown that U.S. households are less willing to take on financial risk in the wake of the financial crisis in 2008, said Holden. Concern that younger individuals may be timid about buying stocks hasn’t been borne out by the data on 401(k) participants, she said.

The Standard & Poor’s 500 Index (SPX) gained about 826 percent over the 30-year-period from Dec. 31, 1980, to the end of 2010.

The number of younger workers without equities in their 401(k) accounts also decreased at year-end 2010 to 9.4 percent from 14.6 percent in 2000, said Jack VanDerhei, research director at EBRI.

“A lot of that may not necessarily be due to employees themselves actively making that choice as much as it’s them being automatically enrolled, being put in target-date funds,” VanDerhei said.

The ‘Great Recession‘ may have changed the younger generation into investors rather than speculators like the baby boomers. By following three simple rules, own equities, globally diversify and rebalance investors will succeed in reaching their long term financial goals.

Please comment or call to discuss how this will affect your company retirement plan.

  • Why Gen Y Still Invests In Stocks (
  • Younger investors save more for retirement (
  • Study: Boomers Making More 401(k) Investing Mistakes Than Younger Folks (
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Should I Wait Until Everything Calms Down?

Warren Buffett speaking to a group of students...
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Ideally, we should all just time the market cycles and only buy when the market is low and sell when the market is high. Unfortunately, few, if any investors are able to do this with any consistency.

We tend to make our investment decisions based on recent past events and how we feel about those events.

If the market has done well lately, we wish, we are comfortable buying stocks. If the market has done poorly, however, we avoid them. Unfortunately, this is the exact opposite of what we should do if our goal is to maximize our long term return. Once we feel “comfortable” with the market, we have usually already passed up large potential gains. The stock market is forward looking and usually starts trending upwards between 6 to 9 months ahead of the economy actually recovering from a down cycle.

Remember, Warren Buffet is a buyer and NOT a seller.

There is an unholy alliance between the media and the large financial institutions to convince the investing public to continue trading by spreading fear and panic. The large financial institutions make money when you trade in and out, making money on every trade. The media encourages sensationalism because it sells advertising. You should own equities…globally diversify…rebalance and believe that America and the capital markets will recover. We as a country have been thru much worse and we recovered and became stronger.

Not all sectors of the economy will recover or come back to where they were prior to 2008.  Other sectors will recover quickly and new sectors will emerge and thrive.  The problem is no one can consistently predict what will happen and when.

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