Thursday, June 22, 2017

The Secret to Investing is.... No Secret.

Succeeding as a small investor means only that you should avoid swimming with the sharks.

Lots of people want to believe in the tooth fairy.  They desperately want to believe in something-for-nothing or easy riches and wealth.   After all, they read about "rich people" in the paper all the time, and surely they didn't work to get wealthy, right?  Movies reinforce this mentality - that in order to succeed in life, you have to cheat or do something underhanded.   And sadly, this mentality takes hold in American's minds.

And hucksters galore will sell you "the money system" or a seminar or something, because the rubes think there is a "secret" to wealth and that you can buy this secret.   But they never bother to figure out that if there was such a secret, no one would tell it to you or sell it to you, because, well, then it ain't a secret.

But there is no secret.   Yea, some people get lucky and make millions or billions.  Some work hard and get lucky and make millions or billions.  Most people who are "wealthy" worked hard, saved money, invested it in rational things, and did well over time.   Little people who get crushed by our financial system are the ones that gamble - literally in casinos, or figuratively in sketchy "investments."

The "secret" to getting ahead is not really a secret.  Spend less, save more.  Invest in rational, normal things.  Stay away from futures trading, commodities trading, stocks, IPOs, or any other huckster-type deal that is promoted on the Tee-Vee or worse yet, the Internet.   Diversify your portfolio so if one investment goes bad (and more than one will!) you are not wiped out financially. 

This is simple, basic advice that all the rational actors in the marketplace give free of charge.  Most folks take it - those folks you think of as "rich" follow this advice.   Others don't and get fleeced.

In this special report from Reuters, they mention offhand, the experience of this one farmer:
In three years of managing investments for North Dakota farmer Richard Haus, Long Island stock broker Mike McMahon and his colleagues charged their client $267,567 in fees and interest - while losing him $261,441 on the trades, Haus said.
McMahon and others at National Securities Corporation, for instance, bought or sold between 200 and 900 shares of Apple stock for Haus nine times in about a year - racking up $27,000 in fees, according to a 2015 complaint Haus filed with the Financial Industry Regulatory Authority (FINRA). 
Haus alerted the regulator to what he called improper “churning” of his account to harvest excessive fees. But the allegation could hardly have come as a surprise to FINRA, the industry’s self-regulating body, which is charged by Congress with protecting investors from unscrupulous brokers.
The story was about unscrupulous brokers.   But they don't bother to go into too much detail as to why a farmer from the mid-west is losing a half-million dollars in trading fees and churning.   That's more money that most Americans hope to save up for their entire lives.   The answer is, of course, that the "brokerage" likely cold-called this guy and told him they could make him tons of money.   And he didn't bother to investigate this too much or think to himself, "Gee, if these guys can make lots of money investing, why don't they invest their own money?  Why are they calling me?"

And they were calling him because they likely can't make a lot of money investing, but rather they make a lot of money churning other people's accounts.   And shitty deals like this abound in our free-market economy.   People tout gold bars on Fox News (I saw it in a bar last night - sound off, thank God).   People push and IPO stocks on the financial channels.   The shouting guy is still on the air even though he has been repeatedly exposed as a charlatan.

And yet, every day, another small-time "investor" jumps into the deep end of the shark tank and ends up as chum.   Why?  Because they don't know where to invest their money, so they look around and think about what could be the next big thing.   They want to "win" at all costs - in a game where they don't even know the rules.

And I say this from experience, as when I was younger, I thought, "Yea, I want to make big money in the stock market!" and proceeded to lose my shirt.   It was only a few thousand dollars, but it was an expensive tuition for a lesson well-learned.   I stopped looking for "the next big thing!" or the "big stock tip!" and started thinking about more prosaic, steady investments that earned profits and paid dividends, and over time went up in value almost uniformly.

You see, as small investors, we'd like to "win" of course, but we can't afford to lose.   Maybe a Billionaire venture capitalists can afford to throw a few million or hundred million at some "start up" company and hope to hit it big.   They don't have to worry about retiring on catfood.   We do.   We cannot afford to "lose it all" and start over.

Have I taken some big risks that paid off?   Yes, but in small amounts.   $750 invested in Avis on a whim went up several thousand percent.   If I had invested my entire portfolio, I would be a multi-millionaire.   I could not afford to invest my entire portfolio in a company that could have just as likely gone bankrupt.   I invested in a bank started by some friends.   That more than quintupled in value.  I did not invest much - not more than I could afford to lose.

I also did dumb things like buy GM stock before it went bankrupt, or Martha Stewart, thinking a cookbook and television show was a "media empire".   It was not.

I also learned that trying to time the market was nearly impossible.   Unless you have your hand on the pulse of something, it is very damn hard, using the same data everyone else is getting to understand whether a stock is going to go up or down.   Taking someone else's advice in this, is even worse.  I got out of Real Estate in time, only because I was immersed in that market and saw that it was going crazy.   People who didn't understand real estate kept buying, right up to the very end. 

Never invest in things you don't understand.  And when someone tries to sell you an investment and you are skeptical and don't "get it" maybe you should back away.  When the person trying to sell you such a turd condescendingly tells you that you just don't appreciate how it works, run away.

You are going to make money on some investments and lose money on others.   Overall, after 30-40 years, you will do OK.   If you try to "hit the jackpot" you likely will lose everything you've worked for.   You might as well just go to the casino and gamble - at least they give you free drinks there. 

Stay in the shallow end.  The water is just fine.