The Bizarro World of Investment Advice
Sadly, it seems like many investors are living in Bizarro World when they make investment decisions. Here are some examples you may be familiar with:
You Ignore Ethical Transgressions
In other aspects of your personal and business life, you are known as a careful person. You check the references and backgrounds of new employees. You fact-check resumes. You are prudent when hiring an accountant or selecting a doctor. Any indication of a lack of honesty or integrity is unacceptable to you.
Brokerage firms have a long history of acting against the best interests of their clients. They have been involved in the junk bond scandal, the analysts' fraud scandal (which caused one journalist to refer to them as "the whores of Wall Street"), excessive trading charges, the subprime mortgage crisis, chicanery relating to collateralized debt obligations and other indefensible conduct in connection with events leading up to the 2008 recession. That, of course, led to a major restructuring of the industry.
Recently, five major banks were fined $3.4 billion to settle a currency exchange investigation. Traders at these firms allegedly manipulated currency markets for years, "profiting at the expense of clients – and then congratulating themselves for their brilliance." The banks involved were all big players, including Citigroup (C), JPMorgan Chase (JPM), Royal Bank of Scotland (RBS) HSBC Bank (HSBC) and UBS (UBS).
In a separate development, the U.S. Treasury Department announced fines totaling $950 million against JPMorgan Chase, Bank of America (BAC) and Citibank for failing to prevent misconduct in their foreign exchange trading operations.
The conclusion is inescapable. This is an industry infected by systemic greed and the absence of basic ethics. They would thrive in Bizarro World. It's curious they are able to thrive on earth as well.
Why are you entrusting your life savings to them?
You Ignore Evidence of a Cruel Charade
Many brokers and advisors will tell you they have the skill to time the markets, determine when to buy or sell stocks and how to pick mutual funds that will "beat the market." There is overwhelming evidence that this skill doesn't exist. The well-credentialed authors of one exhaustive study found the number of mutual fund managers who demonstrated skill (as opposed to luck) was statistically indistinguishable from zero.
The results of this study surprised one of its authors, who previously had indicated he would not have tried to discourage a sophisticated investor from efforts to find a mutual fund that would outperform the market. After doing this study, he concluded that "it seems almost hopeless."
Another study, co-authored by Nobel laureate Eugene Fama, reached a similar conclusion.
Why do you ignore peer-reviewed research and fall prey to slick talk from glib brokers?
You Are Spooked by Financial Pundits
I don't mean to pick on Dennis Gartman, editor and publisher of The Gartman Letter. But he is the quintessential "investment pro," and is featured prominently on both CNBC and Bloomberg TV. I'm sure he has made some accurate predictions, but his losers have been doozies. On Oct. 16, he told CNBC Europe's "Squawk Box" that the selloff in the global markets was "the start of a bear market" that was likely to take hold for "a long period of time." The Dow Jones Industrial average (^DJI) rose about 8 percent between Oct.16 and Oct. 31. Confronted with this data, Gartman later conceded, "Whether I like to say it or not, it's still a bull market. ... I was wrong."
Several websites keep track of the accuracy (or inaccuracy) of predictions made by financial pundits. My personal favorite is the one run by CXO Advisory Group, which gives depressing grades to the financial media's best-known pundits. The majority are ranked under 50 percent, which is about what you would expect from random chance.
Would you base an investment decision on a coin flip?
You Ignore Warren Buffett
Everyone holds the sage of Omaha in the highest regard. Here's what he said in his 2013 annual letter to shareholders of Berkshire Hathaway: "My advice to the trustee could not be more simple: Put 10 percent of the cash in short-term government bonds and 90 percent in a very low-cost S&P 500 (^GPSC) index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers."
Buffett doesn't live in Bizarro World. Neither should you.
Daniel Solin is the director of investor advocacy for the BAM Alliance and a wealth adviser with Buckingham. He is a New York Times best-selling author of the Smartest series of books. His latest book is "The Smartest Sales Book You'll Ever Read."