SELLING: Financial Advice!

Posted on March 20, 2022 by Dr. David Edward Marcinko MBA MEd CMP™

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It is All About Sales

Rick Kahler MS CFP

By Rick Kahler MS CFP®

Steve Forbes, editor of the well-respected financial publication Forbes Magazine, once said,

“You make more selling advice than following it. It’s one of the things we count on in the magazine business, along with the short memory of our readers.”

Scores of publications sell advice on their proprietary investing secrets. In addition, hundreds of thousands of active money managers claim they can “beat the market” and give you above average returns. Usually, “the market” this advice refers to is the Standard & Poor’s 500 Index.

Investing in the S&P 500 Index simply means owning a fraction of every one of the largest 500 companies in the US. No skill is involved at all; a third grader can do this.

Accepting average market returns through an index fund is termed “passive” investing, while trying to beat the market is called “active” investing. Enticing as the latter may seem, very few active investors manage to do it.

Dimensional Fund Advisors

A recent study cited by Dimensional Fund Advisors found that only 17% of money managers beat the S&P 500 Index over 15 years. A similar study done by Dalbar, Inc. found that over 20 years, just 3% of money managers beat the S&P 500 Index. In other words, 97% of all money managers didn’t do as well as a third grader who invested in the S&P 500 Index.

In addition, active investors generally pay around 1.35% a year in fees, compared to around 0.20% a year for passive investors. According to the Dalbar study, the average active investor earns 3% to 4% less annually than the average passive investor. That’s a really big deal.

With all the research to the contrary, why does active investing flourish?

There are three reasons:

First, people are confused. Few investors understand that Wall Street has every financial incentive to keep you confused. So does much of the financial press, because passive investing doesn’t sell papers or magazines. We don’t see headlines reading, “What You Need To Do With Your Portfolio Now: NOTHING!”

Second, people tend to be extremely overconfident. Most of what people mistake for outperformance in a money manager is actually just dumb luck. According to Ken French, professor of finance at Dartmouth, it takes 64 years of data to sort through all the random probabilities to assess whether a manager’s short-term beating the market is due to skill rather than chance.

To emphasize this, try an experiment that can make you a stock-picking genius. Select 64 people, preferably not friends. Tell 32 of them the price of a share of Apple will be higher at the end of the month; tell the other 32 it will be lower. Of course, your “prediction” will be true for one group or the other. At the end of the month take the “true” group, divide it into two groups of 16, and repeat the exercise. At the end of the second month, divide the “true” group in half and repeat. Continue the pattern with the remaining 8, then 4, and the last 2. After six months you will have correctly predicted the movement of Apple stock to one person—who will think you are a financial genius.

The third reason active investing flourishes is the superior skill of the top 3%—the Bill Millers and Jim Simons. Such investment gurus provide encouragement that you, too, can beat the market. Yet actually, the fact they exist is exactly the reason why you shouldn’t try. Why?

Assessment

In order for them to do better than the market, they need lots of others to do worse. As Ken French reminds us, trying to beat the market is a zero sum game. 

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Conclusion

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OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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A New Term: The “Investor Class”

Posted on December 14, 2017 by Dr. David Edward Marcinko MBA MEd CMP™

On the Impending Tax Reform Legislation

By Anonymous Physician

In any discussion of the current tax reform bills, a new buzzword has popped up: “the investor class.” This seems especially true during the current bitcoin craze. Every time I’ve heard this term on a political talk show, it has been used derogatorily to frame the proposed tax changes as resulting in “the rich getting richer” and the “poor getting poorer.”

Definitions

In every instance, “the rich” and “the investor class” were used interchangeably. This is no more accurate than using the terms “millionaire” and “billionaire” as if they are the same, which they certainly are not. A million-dollar investment portfolio will safely produce $30,000 a year in income. A billion-dollar portfolio will produce $30,000,000. That’s a big, big difference.

Equating “the investor class” with “the rich” is just as absurd. To illustrate, here is some information from a 2008 poll of 24,000 voters by Zogby International. According to an article by CEO John Zogby, “Who Belongs To The Investor Class,” which appeared in Forbes on February 12, 2009, 38% of those surveyed identified themselves as being in the investor class.

Of this 38%, almost two-thirds had a household income under $100,000, 44% did not have college degrees, 15% were Hispanic or African American, and 15% held blue-collar jobs. This last number is especially interesting because blue-collar workers made up only 21% of the total of those surveyed.

However, the most surprising statistic from the survey was this: of the people who said they were not in the investor class (62% of those surveyed), more than half had money in a 401(k) retirement plan. This means they were investors.

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Obviously these folks saw the “investor class” as people other than themselves. My guess is that being an investor has a negative connotation with most Americans, perhaps related to the idea that “investor” equals “millionaire” equals “the rich.”

This is especially unfortunate, because if you don’t become an investor, your future isn’t all that rosy. Becoming an investor is mandatory if you want to provide for yourself in retirement. The alternatives—winning the lottery or eking out a meager existence on Social Security—are extremely unlikely or extremely unappealing.

Ironically, despite claims to the contrary, the proposed tax changes do not even favor the “investor class.” For decades Congress has taxed the profits from investments differently than ordinary income. This tax, the capital gains tax, is generally lower than the income tax rate charged on your earned income.

IRS

Neither the House or the Senate bill changes the way the IRS taxes capital gains. Instead, both versions would actually penalize investors. With lowering the ordinary income brackets, there will be cases where investors will actually pay a higher tax on their capital gains than on their ordinary income. I am guessing this may be an unintended consequence of the proposed act. However, it will be part of the new tax law unless the conference committee changes the capital gains tax brackets to match the new expanded brackets.

Regardless of the final version of the tax plan that becomes law, I suggest being skeptical about the term “investor class.” It is not the same as “wealthy.” Anyone using it probably has an agenda rooted in resentment of the rich.

Assessment

The real investor class is broad and easy to join. You belong to it already if you put even a small amount each month into an IRA or a 401(k) plan at work. OR, if you contribute to a 529 college savings plan for your kids. OR, if you have any money invested in mutual funds through an online brokerage. If you are wise enough to invest for the future, you are a part of the investor class.

Conclusion

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