There Is No “Magic Method”

I recently had a conversation with someone in my service club about investing and it sparked a lively discussion when he learned I was a professional financial advisor. He was very excited to tell me about this new method of investing he was learning in regards to investing in stock options. He told me about how the creators of the method were making upwards of 20% a year in returns and how he had made some money recently using it. During my 19 years as an advisor, I have heard similar things several times and all of them turned out to be partially true, but mostly fake. They play on people’s emotions and make them think there is a ‘magic method’ that Wall St. doesn’t want you to know about. I wrote a previous article about how people can use their 1st Amendment rights to say virtually anything and this is a prime example. Since the creators of the ‘method’ are not advisors nor giving professional advice, they are considered teachers and/or authors. Therefore, they make money by selling a system, selling books, selling a trading platform, so they really don’t care if you make money or not.

Consider the fact that if you look at the long term performance of Berkshire Hathaway A run by the legendary investor Warren Buffet HERE, that you will see that as of 7/11/2017, the 15 year long term average is 9.15% per year. So when you hear someone claim they can ‘double your money’ or earn in excess of 15%-20% a year, then they are saying they are better than Warren Buffet. Warren Buffet’s long term rate of return is no where even close to 20% a year!!!  And yet, the person teaching this class/selling a book that no one has ever heard of and is not on the Forbes richest people in the world list is doing better than Warren Buffet. If you believe that, I got some ocean front property to sell you here in Colorado! If you earn 20% a year, then you are doubling your money roughly every 3.6 years and you would be a multi-millionaire very quickly.

I have studied many different investment methodologies during my career and have read several books and articles. My personal conclusion is that no one method works consistently. There will be periods where a certain method is doing well and everyone piles into it thinking this is the next big thing only to find it underperform the market. And then they get discouraged and move on to a newer method that is doing well only to find the same result again. Sometimes it is better to use a method or good investment manager that has great long term performance, but recent bad performance simply due to current market conditions. The stock market is very fickle and it tends to ‘latch’ onto current events that create market moves. I remember when the stock market moved with the news on the price of oil. I remember when it moved based on news from the Greek debt crisis. I remember when it moved with news about unemployment reports. It is impossible to predict and the bottom line is that no single investing method works all the time. Even Warren Buffet has had several years in a row where he has underperformed the broad market indexes only to beat them again later.

I was once a part of an investment club that met, discussed, and helped each other use a certain stock picking method through a famous company. During my time in that club, I was quite shocked at how these rational people were completely duped by the company putting out this method. They were paying for classes, paying for books, paying for software, and the company selling it even got them to believe that if you aren’t spending at least 10% of your portfolio gains per year on investing education and their system that they would fail! The company did have valuable information that I used and applied for risk management, but I never deluded myself into thinking that by using their method that I would suddenly be making 20%+ a year. However, the other people in the club truly believed that if they put enough time and effort into it that they could. They told me stories about how during the expensive classes they took to become better stock traders (some paying in excess of $10,000) that the instructors bragged about making over 20% a year consistently. When I challenged them with my above information about Warren Buffet and challenged them to tell me why these ‘instructors’ weren’t famous on Wall St. or on the Forbes richest people in the world list, they got angry with me. It was almost like a zealot in a cult and I was challenging their religion. In regards to that specific company and the creator, I know for a fact that he tried to run a mutual fund once based on his method. And he managed to run it into the ground… The performance was so bad that it got merged into another fund, he stopped managing it, and they hid the performance from the history books. Do I think the creator is a bad investor or puts out bad information? No, I do not. I believe that his method was not working due to current market conditions and his method was out of favor at that time, but still had value. My point is, once again, that no single investment method works all the time.

So the next time you get that postcard in the mail inviting you to an investment seminar that is free and they want to teach you something out of the goodness of their hearts and show you how to make money in the stock market, then I would hope you now see to recycle that postcard and just have a giggle at the absurdity of it all. The  next time you see a television commercial or internet ad promising to teach you a way to make good money in the stock market, remember they are making money by selling books and teaching classes. They are not making money if you make money. They don’t care if you make money.

The difference with me being a financial advisor is that I really do care if you make money. In fact, over 93% of my personal income is tied to how my clients investment accounts perform. If they rise in value, my income rises. If they fall in value, my income falls. Therefore, my personal success is tied to my clients investment accounts! And on top of that, I work with estate planners, CPA’s, provide life and long term care insurance, and provide financial planning services. I would advise the next time that you want to spend money on some ‘magic method’ to pick stocks, that you instead invest that money in a good financial advisor. You will get much more value for your hard earned dollar…