Who Defines Success?
Many major firms like Morgan Stanley (MS) or Fidelity offer dozens, if not hundreds of funds to choose from. Let’s suppose a company puts a new manager in charge of a fund, and he doubles its size. Imagine this happened in a good year where the S&P went up 12%, but the fund only made 10% net. Oh, darn!
Now, do you think they’ll fire the fund’s manager or give him a bonus? Just think about the fund prospectus, where they’ll want to boast about double-digit returns. The prospectus won’t contain an apology to investors; it will say that the fund’s performance was terrific.
The problem will then compound when brokers like the hotshot I mentioned earlier tell folks like you and me about the amazing fund that made double-digit returns last year. He’ll tell prospective clients they really need to send him their money now, before they miss out on a great opportunity.
Personally, I like my stockbroker. However, I always keep in mind that at the end of the day, the number that means most to brokers is the number of shares they trade in a day, and not whether the market moves up or down.
So, the bottom line is: brokers and fund managers want our investment capital. We take all the risk, they earn high fees, and we get whatever is left over. See, they are pretty smart after all… using our money to make a lot of money for themselves.
It Doesn’t Take a Rocket Scientist (or a Fund Manager)
So, do we stand a chance? In a word, absolutely! Individual investors have many of the same trading tools as mutual funds, but not all of the disadvantages. We just need to know how to access our toolkit. We are each managing our own personal “mutual fund,” and we have a real say in how well it performs. Plus, we get to keep all of the profits.
What about the often-repeated sentiment that the little guy needs the superior skills or intellect of brokers or money managers? Hah! I totally disagree. If you are smart and hardworking enough to build a nest egg, you can certainly manage it. There is a major difference between being dumb and being an uneducated investor. While the professionals may have more financial education and experience, they are neither smarter nor more capable than you or I. Frankly, I resent that sort of condescending attitude.
Does that mean we all need to hit the books, pass the Series 7 test, and get our broker’s licenses? Of course not. It just means we need to do our homework and fill in any knowledge gaps.
I shudder when I think back on my early days as an investor. I was still a working man, and when my broker would call he’d have to leave a message on my answering machine – surely you remember those relics. We didn’t have cellphones in those days, so I would race to a pay phone during a coffee break, use my telephone calling card, and call her back. My broker would tell me about this or that wonderful opportunity, and I would decide whether or not to invest in less than five minutes. While my broker would only give a few quick bullet points, I assumed this was just a summary based on a lot of in-depth research. It turns out I was way off base.
A few years later, many of the big brokerage firms got in trouble with the Securities and Exchange Commission. Apparently, they would buy large blocks of stock in a big-name company. Each morning some guru in their New York office would get on the squawk box and tell all their brokers about the hot pick of the day. Brokers nationwide would then tell retail investors that this pick was a “strong buy.” Their office would receive a fax with bullet points to read to people like me over the phone.
The fact that a major brokerage firm recommended a stock was the reason the stock jump would 3-5 points. Brokers would point to the sudden uptick in price as confirmation of their wisdom. Most folks never understood that the stock they were buying came out of their brokerage’s inventory. In short, the brokerage houses were making money on that 3-5 point jump, not us.