What Your Investment Guru Isn’t Telling You
by Alexander Green, Chief Investment Strategist
Monday, February 28, 2011: Issue #1458
Two weeks ago, I spoke at The World Money Show in Orlando – one of the largest investment conferences in the country. More than 11,000 investors registered to attend.
(Unfortunately, the conference room was far too small. It filled up half an hour before I spoke and we ended up turning away a couple of hundred people. Not good.)
In my talk, I argued that the only certainty in the world is uncertainty. Then I demonstrated how investors can effectively capitalize on this uncertainty, starting with the seven factors that determine the future value of your portfolio…
Seven Factors That Shape the Value of Your Portfolio
Those seven factors are:
- The amount you save.
- The length of time it compounds.
- Your asset allocation.
- Your security selection.
- Your annual compounded return (as a result of 3 and 4).
- The expenses you absorb.
- The taxes you pay.
As I walked around the event, however, I listened to other speakers talking instead about the outlook for the stock market. And I kept hearing the same thing.
No, not persistent bullishness or bearishness. There’s always plenty of both at a conference of this size. The universal part was analysts confirming just how right their previous market forecasts had been.
Count me as skeptical.
“I Wasn’t Wrong… Just Early”
If I flipped a coin and said “heads” and it came up heads, would you be impressed? If not, why not?
What if I flipped it again and said “tails” and it came up tails this time. Would that impress you?
Maybe on the next coin flip, I get it wrong. Then I remind you that no system is perfect and that no one bats a thousand. Does that add to my stature and make my next prediction more credible?
The idea is laughable.
Yet listen to some market gurus and you’d think they’re all a bunch of smart guys who never get blindsided by events. Even those who missed the boat generally claim that they weren’t wrong… “just early.”
I suspect that more than a little revisionist history is going on here. The truth is that even the market forecasters who are right are generally dead wrong.
Let me give you an example…
The Bear Philosophy: Every Silver Lining Has a Cloud
I know a famously bearish investment analyst – one who has been bearish not just for years but for decades. He sincerely believes that every silver lining has its cloud.
Just before the financial crisis of 2007-2009, he let his readers know that we were on the edge of catastrophe. He predicted that inflation would soar, the dollar would crash, foreigners would repatriate their assets and the stock market would keel over.
And it did.
Today, he insists he “called the recent market crash.” It’s true he was bearish before the market tanked – and I hate to quibble – but…
- Inflation is 1.2%.
- The dollar is up against the euro and the yen.
- Foreigners have clearly not repatriated their assets.
Yet he crows about how much money you would have made if you’d listened to his analysis before the recent meltdown. Of course, you’d also have made a ton if you’d bet large on my first call of “heads” a few minutes ago.
What? You say my forecast had nothing to do with the result, that my success was meaningless?
That brings me to analysts who are busy claiming that they called the recent spike in oil and gold prices…
The Core Principles for Investment Success
Think about it: Who foresaw that a frustrated market vendor in Tunisia would set himself ablaze in the street – a move that would ultimately bring down the Tunisian government? In turn, who knew that would lead to a successful uprising in Egypt and then anarchy in Libya – developments that would cause oil (and thus gold) to soar?
Who? Precisely no one.
There’s a lot of money to be made in the prophecy racket… I mean, the market forecasting business. But here’s the industry’s dirty little secret:
Real investment success doesn’t come from following the right predictions. It comes from following the right principles:
- Allocate your assets properly.
- Diversify your portfolio broadly.
- Buy quality investments.
- Reduce your investment costs.
- Tax-manage your portfolio.
Yes, you can make it a lot more complicated than this. But you really don’t need to.
Good investing,
Alexander Green
Any investment contains risk. Please see our disclaimer.
10 Responses to “What Your Investment Guru Isn’t Telling You”
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Thank you again for your wise, honest, and true analysis and advice. It is great to deal with a man of integrity and openness. Thank you also for you Spiritual e-mails as well. I have read and heard these so called gurus who crow about past predictions till I am angry. So God bless you real good. Hugh.
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This is an excellent reminder for all investors, small and large, novice and experienced. Once these factors are in play, patience and trust is what is needed during those periods that cause anxiety and fear; fear of loss and fear of not getting the most gain. Trust that your strategy will take care of the bigger and longer term picture versus the short term – “now” moment. It’s well documented in your Gone Fishin’ book.
Thanks for all your great advice Alex. You have a steady head and cool temperament.
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Excellent points Alex, well put thanks for the reminder about principles.
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I would agree with every one of your points and would add: don’t get greedy and don’t swing for the fences. I’m 72 and it took the first 40 years of investing to learn how easy it is to become your own worst enemy. The real risk comes in a bull market when you begin to believe your smarter that you are.
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Alex, i read your recent gold article, and you have the same problems here-where are you getting your inflation data from? I subscribe to several newsletters, and they all make interesting and valid arguments, but you seem to be the only one that seems to be using questionable data in your thesis. Please explain!
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I agree with Alex’s general hypothesis and it is hard to argue with his advice for investment success. Allocation is perhaps the most important aspect of portfolio management. Finding quality investments is not too hard if you stick to the proven policy that blue chip, dividend paying investments outperform those blue chips that ignore dividends.
Tax managing one’s portfolio may be effective if your portfolio is taxable. But for most retired investors much, if not all, of their portfolio is tax deferred in an IRA. If your portfolio is taxable, managing it for tax purposes should be the least important thing you do. Getting the best return is the most important thing.
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I enjoyed immensely your “Gone Fishin” book. I do respectfully disagree with your stating that inflation is 1.2%. This is in my opinion, a bogus government number and an attempt to mislead the public. However the public recognizes what is really going on and how inflation is raging. When the gov’t takes out energy and food from their inflation number, who are they trying to kid?
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So Alex, how long have you known Martin Weiss? And how many decades now has he been a mega-perma bear?
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Dear Mr. Alexander Green,
I enjoyed reading your “Gone Fishin’ Portfolio” book very much. In fact, it is one of the most clearly written investment books I have read.
In the book, you stated that one needs $30,000 to start the Vanguard portfolio. Is there any harm in starting with say $6000 and just buying Large & small cap stocks, and then buy the other stocks year by year after that when one has the money?
Hope to hear from you.
Thank you.
Alison
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BYRON KING. He foresaw the War In Middle East, he’s been proclaiming it for about 13 months at Agora Financial.
Maybe he just got lucky.
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