Relying on Your Investment Advisor
One hires an Investment Advisor in the hope that such a person has devoted most of their waking efforts to analyzing the markets and determining how their clients should invest. In order to assist them in making these determinations, the firms that they work for, supposedly provide these individuals with insight and understanding as to what is happening in the markets, and what to invest in.
To some extent this is how the system works, but at the same time, each firm relies on internally hired ‘analysts’ in order to ‘analyze’ various stocks, bonds and sectors.
There are two basic problems here. Firstly, most of the firm’s income comes from selling offerings of one sort or another, whereby they convince some company or entity to allow that firm to act as a agent for that company and sell either securities (stocks) or debt securities of that company. In order to convince that company to allow the brokerage to act for them, a key component is usually that an analyst of that brokerage will ‘cover’ that company.
Inherent Conflicts of Interest
If you are unable to immediately comprehend the inherent conflicts of interest in this relationship, within 5 seconds of understanding this relationship, you should read no further. Just accept your Investment Advisor’s advice.
If you immediately comprehend just how incestuous this relationship can be, next take a moment and understand the motives of each of the parties that are involved in this relationship. There is not an innocent party in the entire lot. Each and every one of the analysts, the sales people, the firms, the Investment Advisors, the CFO’s of the companies, and the rest of them, have only one interest at heart – SELL YOU THE SECURITY.
The only way that any of them make money, is if you buy the security offered.
So now that you understand how and why certain securities are offered to you by your Investment Advisor, what you have to do, is determine in your own mind, what is good and what is bad. Failing to take the time to understand this and to gain a basic understanding of how the market works, is akin to giving your money to strangers on the street and hope that they will search you out in the telephone book in order to return the money and some profit to you.
Do You Want Your Money Returned With a Profit?
Is it likely to happen that you will get your money back? I doubt it.
However if you independently take the time to understand what is being offered to you – having in mind the inherent conflicts and motivations of the Investment Advisor – , and if you accept the offer from your Investment Advisor as being a good bet, next you have to understand that the market is not stable in any way.
Market Volatility is Normal
The market moves up and down in waves that are far more extreme than underlying causes would seem to matter. The first lesson to successful investing, is ‘Expect The Unexpected’.
One would think that given the long history of dramatic moves both up and down in the market, that these moves would be expected. However, they never are. Each time there is a major up or down move, it is great surprise in investor’s minds.
In recent years, this phenomenon has given rise to some new books and identifications, such as “The Black Swan”, and similar books of analysis.
I suppose, that in our age, everything must be pigeonholed and named in order for people to comprehend the obvious.
Whether you find ‘The Black Swan” enlightening or not, depends on whether you have taken any time to understand the market. The Black Swan is a name given to something happening in the market that is totally unexpected, and which dramatically causes the market to fall.
Except if you look at any period of time in the last hundred years or more, you will note that “Black Swan Events” happen on such a regular basis, that they are the norm rather than the exception.
Expect The Unexpected
For example, in 2011 there has been natural disasters in Japan, escalating unrest across the Middle East and North Africa, surging oil prices, Standard & Poor’s downgrade of the U.S. long-term credit rating, and volatility in the global stock markets, together with so many other events.
None of these events was expected, and before the year ends, there will be many more unexpected events.
Having the Unexpected occur is the norm, not the unusual.
In light of this, investors should not react to immediate and frequent changes in the stock market indexes. Instead, look for value that you might reasonably expect will remain in demand for the foreseeable future, such as energy, or producers of essential goods or services, or providers of essential materials.
If a stock is a company that has good management, has an excellent product, is something that you can reasonable expect, as a normal person, will remain in demand, then that company’s stock is a buy. If it has dramatically fallen for no reason other than a momentary stock market panic, that stock is a buy.
Don’t buy stocks based on tips, or based on hysteria, or based on rumors, or based on tips. Buy value.
Remember what Warren Buffet, Baron Rothschild and others have said – Buy when there is blood in the streets, and always hold value.
The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.
