Investment Porn: Confessions of an Investment Pornographer
by Alexander Green, Chairman, Investment U, Investment Director, The Oxford Club
Wednesday, April 11, 2007: Issue #660
Daniel R. Solin, author of The Smartest Investment Book You’ll Ever Read, calls those of us in the investment media “financial astrologers.”
That doesn’t sound good. Fortunately, I’m a Gemini and Geminis don’t believe in astrology.
But Solin, an index fund advocate, adds fuel to the fire, claiming that I’m an investment porn artist.
Sort of makes me wonder why my office mates don’t put in more overtime. But why all the mudslinging?
Because, Solin says, I get my readers aroused by suggesting that they can actually beat the market. And particularly sinful, in his eyes, is that I suggest you can do it by picking individual stocks.
“What’s wrong with trying to beat the market?” Solin writes. “Just about everything.” Stock picking, he promises, will not lead to superior investment performance. Rather he calls it “a fool’s errand.”
This, of course, is the sheerest nonsense.
Beat the Stock Market by $54.5 Million
Let’s start with Exhibit A. Shares of Warren Buffett’s Berkshire Hathaway – a stock picking vehicle – are up 5,556 times since May 10, 1965, the day he took the helm. By contrast, the Dow is up 13-fold over the same period.
Since this excludes the Dow’s dividends, however, here’s a more accurate comparison. $10,000 invested in the Dow in 1965, with dividends reinvested, is worth $497,850 today. Not bad. But $10,000 invested in Berkshire at the same time is worth over $55 million today.
Any questions?
Admittedly, few investors have the stock picking skills of Warren Buffett. But plenty of other investment pros have trounced the market over long periods as well, using completely different investment approaches. Examples range from Peter Lynch, John Templeton, and Bill Miller in the mutual fund industry to George Soros, Michael Steinhardt and Paul Tudor Jones in the hedge fund industry.
The best investment letters have beaten the market, as well. Setting modesty aside for a moment (I am, after all, an investment pornographer), The Oxford Club’s Communiqué, which I edit, happens to be one of them. The independent Hulbert Financial Digest ranks us among the top handful in the nation.
Investment Porn Luck or Skill?
Solin has an answer for that, too. He calls it luck. And he compares our performance to a hoops player on a shooting streak. One that’s bound to end.
“A basketball player with a hot hand is no more likely to make his next shot than at any other time,” claims Solin. “Shooting a basketball is like flipping a coin.”
He must have learned that at Ohio State. We don’t believe that stuff in Florida.
By now you may be dismissing Solin as a misguided crank. And in many ways, he is. After all, there’s plenty of investment porn out there that do investors little good in the end. However, there is some common sense in his book that might be useful to novice investors.
For instance, he writes that market timing is an exercise in futility. It is. He writes that much of Wall Street is more interested in lining their pockets than serving your investment needs. They are. And he writes that most investors would be better served by asset allocating among low-cost, tax-efficient index funds than trading their brokerage accounts willy-nilly. That’s true, too.
But it doesn’t mean you shouldn’t strive to improve your investment returns by owning some great companies with rising sales, increasing market share, strong earnings growth and improving business prospects. (Especially if use a trailing stop to cut your losses and let your profits run.)
Make no mistake, even slightly better returns can make a big difference in retirement.
For example, if your investment portfolio is worth $100,000 and it compounds at 10% a year, it will be worth $672,749 in 20 years. But if you are able to boost your returns by even 1% a year, it will grow to $806,231. Boost your returns by 2 percentage points a year and your future value is $964,629.
If you understand this and still want to invest solely in plain vanilla index funds, feel free. You could do worse. But “The Smartest Investment Book You’ll Ever Read“?
I don’t think so.
Of course, as an Internet-based investment porn artist who am I to judge?
Good investing,
Alex Green
Today’s Investment U Crib Sheet
- While it’s true that no one can time the market – and be right – on a consistent basis, you can, in fact, beat the market if you properly manage risk. Trailing stops, as Alex mentioned, are one of the most effective risk-management strategies you can employ. He recommends using a 25% trailing stop on most stock positions. This disciplined selling approach ensures that you’ll never take an unacceptable loss, and that you’ll lock in profits after one of your stocks makes an exceptional run. Here’s more on how to build wealth.
- In fact, by combining a trailing stop discipline with quality stock selection, Alex’s recommendations have beaten the Wilshire 5000 Total Market Index by more than 3-to-1 over the past five years. For more information about The Oxford Club, and to get access to all of Alex’s growth stock recommendations, here’s how to join.
- For shorter-term gains, take a look at Alex’s Momentum Alert trading service, where he finds companies with accelerating earnings growth, heavy institutional sponsorship, new products and increasing market share and whose stocks are in pronounced uptrends. Here’s what he’s buying now.
- Another Reason to Avoid Mutual Funds
- “White Cap” Stocks: The Best Way For Investors To Beat The Market
- Using Trailing Stops: The True Art of Selling Stocks
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