Are you one of those investors who read investment columns, subscribe to online services, get one of the three major financial newspapers, or take advice from a full-service broker?
If so, you should now be feeling like the character in Amos and Andy who once said “you is the broker, I is the brokee.”
By one standard measure just of the stock values, If you had invested $100,000 in the Dow average 10 years ago, perhaps by buying a very low-fee exchange traded fund (ETF) so there were no significant broker fees, you would now have nearly $91,000. NOT $91,000 PROFIT, just $91,000.
If you count inflation you probably have a buying power of about $50,000 with that same money – here things are a bit more complicated because how inflation affects you it depends on what you are buying. (Just why does the government exclude food and energy when they are the two things we all must consume? Could they be hiding something?)
That 9% loss over a decade is what all those newspapers and TV gurus have done for you.
Obviously you would have been much better off just putting it in a bank – although inflation means that even holding green paper is an investment.
It is time for anyone serious about investing to take a look at all the money they have spent on brokerage fees, advisor fees, and just how well you have done listening to TV advisers.
A broad measure of the financial markets is the Dow Jones Industrial Average (the DOW.) ETFs cover large segments of some market in a single package holding each stock in the average. They make it very easy to diversify and cost very little in fees, for example, buying the DOW ETF (DIA) obviously costs 1/30 as much in broker fees as buying each of the DJIA 30 individual stocks.
The symbol for the DJIA is DIA, there is also QQQ which buys the NASDAQ average, SPY which is the S&P 500.
Remember that most investment gurus on TV say you should expect about a 10-15% profit on stocks in an average year – the reason they give for investing in stocks instead of bonds or gold or CDs.
But buying and holding the Dow 30 you would have lost about 10% of your investment over the past decade not even counting brokerage fees; just think how much worse off you would be if you also paid trading fees? Especially full-service broker fees!
In these columns I try to show how you can see for yourself when you are being taken by pointing out common sense motivation behind things so you understand their possible motivation to mislead you.
Why would business TV, magazines, and newspapers keep touting new investments? Simple, they get paid only if they can hook you into their part of the investment world. That’s great if their advice makes you money, but mostly it doesn’t.
Now you can see why they keep selling their ideas, whether they work or not, can’t you? And what better way to hook you than to have investment “stars.”
An easy way to see how bad some of their picks are is to look at the segments where they have “experts” pick stocks, then come back after a while and see how they did. One famous PBS show does this every day.
Test the quality of their advice for yourself. Just watch them interact with an advisor who made terrible picks and would have lost you a lot of money if you took their advice.
Now if I interviewed someone who had just been proven to make terrible stock picks, I would just say good day to them. I certainly wouldn’t want their new picks.
But what happens on TV is that the hosts quickly dismiss those terrible stock picks and then ask them for more recommendations.
Think about what that says regarding what they must think of their audience.
I recently watched Arianna Huffington trying to get advisor Larry Kudlow to admit how bad his advice sometimes is by citing his 1999 prediction of DOW 50,000 (just before the internet bubble burst.) The “host” quickly cut her off as if she were being totally unreasonable to ask why people should listen to someone with a poor track record. Whose side is the host on? Yours?
To be fair, I should point out that Mr. Kudlow didn’t say what millennium he expected the DOW to reach 50,000.
When you see a TV host ask for stock picks from someone who has made terrible picks in the past, remember that one definition of “insanity” is to keep doing the same thing over and over but expecting different outcomes.
By now you should have the basic tools to help you evaluate not investments, but the touts pushing EVERY investment (good or bad) – don’t take advice from big consistent losers.
For a real slam-dunk takedown of inflated egos, no one can beat John Stewart’s Daily Show. Check out his rip on CNBC based only on research.
In the next issue I want to look at just why we will always have inflation (or something worse) and what simple investment which all the TV shows ignored made money every year of the last decade.
Hint, they are closely related.
In this column I am not giving any specific investment advice, just trying to show consumers how to evaluate for themselves the quality of advice they are getting on TV and in print.
When all else fails – TRY THINKING FOR YOURSELF and first think about the motivation of the person you are listening to.