Investment Strategies And Pitfalls For Sheeples

Friday’s Final Thoughts for 09-14-2012

I thought it would be fun to look at numerous pundits cautionary Do’s and Don’ts of investing for the ill-advised, uninformed and, well, stupid investor. For the most part, the cash crowd is long gone so this missive is probably going to fall on deaf ears.

When I began my research I was amazed, dumbfounded actually, how many pundits had the top 4, 5 and even 10 things for YOU to consider when considering an investment. All of them were good on various levels of importance and need to be considered to be successful. The really amazing part is that few writers agreed on anything; each taking a slice of their particular discipline and only considered that niche. The one I haven’t seen and currently subscribe to for the ‘Sheeples’ is simply, DON’T INVEST AT ALL.

Keep your monies under a mattress, pull down the window shades and don’t answer the phone. Of course I am making jest of sorts, but there is the part about reality of today’s marketplace that ‘Sheeples’, the uninformed, must consider. The reality is this market really is fixed and until volume returns you are literally wasting your time guessing. Mostly wasting your monies if you think you can beat the money mongers that ‘control’ the markets. I suppose if your bankroll is in the millions you do have another problem in that investing is a necessary evil, but I’ll cover that niche market another day.

This article is for those that DO have a job, at least have discretionary funds and are hell bent on investing in today’s marketplace. Some of these investors will guess right but most will come out on the short end of the stick simply because they don’t have enough information to secure and protect their investment.

First, before we go too far into my diatribe, you need to know a little about most investors; the cash crowd that is looking to grab the ‘gold ring’ on this Merry-Go-Round we call the stock market. The SEC, Securities Exchange Commission, says they “are clueless about stocks, bonds and the marketplace in general”. I can relate to the complexity of the marketplace it as I would not like to take a test on it myself.

This article is important if you want to learn where the ‘Sheeples’ weakness are and by reading you can have an insight where they need to improve. I dare say none of my reading audience is in this description of the ‘not-so-well-informed’ below so it should be a fun read.

SEC Says Retail Investors Are Clueless About Stocks

Bristol Voss

In 182 short pages, this SEC study shows retail investors lack basic financial literacy. [Read Now]

Investors do not understand the most elementary financial concepts, such as compound interest and inflation….[or] the differences between stocks and bonds, and are not fully aware of investment costs and the impact on investment returns.”

In another part of the report the list of information that eluded investors included “credit risk, liquidity, and inflation.”. . . the hapless retail investors didn’t even fare well on reading their own trade confirmations or portfolio account descriptions with half of them failing comprehension questions regarding an account statement exhibit for stocks.

As to where they’re currently getting their information, on a multiple choice question, 51.4% cited a financial advisory or broker as the primary source of information, 48.7% identified the Internet, 35.7% indicated friends and family, 26.6% relied on magazines and newspapers, and 24.6% said they got their information from a prospectus — which seemed odd since over 50% of the respondents in one test said they found prospectuses difficult to read.

Now that we have learned a bit of psychology and knowledge levels of the clueless, maybe we should look into what things they should be looking into before making the investment plunge.

I can see many of the reasons why potential investors have trouble with deciding what to do or even how to go about investing at all. There are really so many things one must know, consider and learn. Jesting investing is like self-directed brain surgery or being a rocket scientist is still close to the truth. The point here is for these folks finding a credible, honest and dedicated broker to guide you. I hear the laughter, but these advisers do exist and hopefully this article will help clear up some of the mystic and give some abstracts for successful investing.

The single largest reason for investor indecision is that the financial advisers and other ‘experts’ out there don’t know how to do it either. Seriously, these so-called Sooth-Sayers are mere mortals like yourself with a bit of more everyday market experience than you do and they don’t have a crystal ball. Another thing is the great majority of these pundits DO NOT INVEST on a regular basis and are not really good at it anyway. Few of them have portfolios worth talking about or claim they are long term investors so they don’t have to worry about today’s marketplace and its nuances of everyday gyrations.

Their actual vociferation in life is that they have an audience and they want you to hang on every word they utter or write. Humans like to believe that someone with a desk in a large brokerage house or a stool in front of a National TV camera MUST know what he is talking about. The unflappable Jim Cramer on MSNBC(‘Main Stream Neurosis Broadcasting Company‘ ) comes to mind. (Very similar to the political talking heads mind you.) They are paid to write, talk and sound confident, not necessarily to make you a profit. If you don’t do your INDEPENDENT research outside of the MSM you will remain clueless and vote for the wrong guy or loose your money, possibly both.

Remember, The talking heads in the financial media aren’t very much concerned with your investing success. They only care about convincing you to stay in the market at all times and or fixated to their analysis for the latest market movements. (I guess the political types are similar in nature.)

To the thought of listening feverishly or reading the MSM for your inspiration for sound investing I say, bull crappy (this is rated PG of sorts) and you can shove that BS up where the sun doesn’t shine. There is a lot more to investing safely and sanely than first meets the eye and fortunately for us traders the ‘Sheeples’ continue to listen only to the MSM and, obviously, crooked brokers.

The following list of investing mistakes was taken from many financial advisers and is not complete. It clearly shows their confusion as a group, and the inability to help ‘sheeples’ to focus with just a handful of suggestions. I did not make this list up. The following is a simple compilation of some of the ones I found interesting.

You can find them as I did using Google. I am just making observations as ‘Sheeples’ should and they are not in any particular order of importance. Importance is judged by how quickly one loses their money by not doing one of the ‘Do’s and Don’ts’ listed here.

The first one is “Spreading your investments too thin”. Actually this is a good one, but not to start your ‘list of mistakes’ with as this one fellow did. You would think he should start out with some basics first. Or are we assuming that he is saying “just give me your money and I will invest it”. Either way you should probably use the 2% rule of money management until you know how to spread out your investments. None of the articles I researched covered the 2% investment rule, maybe I didn’t look hard enough.

The next mistake is “Focusing on single investments rather than the big picture” I agree, but what IS the big picture? Few financial advisers, if any, can clearly relate to the ‘sheeples’ in 100 words or less what the hell is going on in today’s market place. What comes out of their mouths instead is ‘give me your money and I’ll do something with it”. Of course their dialogue is a lot smoother and convincing than that.

“Not accounting for time horizon”, there is that Big Picture again. In all fairness, this pundit looks at your age and relates how an older investor may not be able to see profits in some long-term investments that require many years for maturity. Your own ‘time horizon’ is something you need to consider BEFORE you start pouring monies into a potential black hole. At that point you need to research the financial help available for this issue of risk profiling your ‘time horizon‘ as it applies to you and only you. The problem I find is that a clear understanding of this and other mistakes is never understandably stated.

“Concentrating on a short-term time horizon” can also be problematic. If you feel that you may have to have certain investment monies to pay bills, say next year, it would be best NOT to invest in something that can’t be converted to liquid capital without taking a potential loss. So many of the brokers out there I have had the opportunity to speak with NEVER cover this issue of short term investment issues which could easily turn into a long-term one if the market makes an about turn.

Believe it or not, there are some savvy and honest financial advisers out there who will guide you and help you. However, YOU have to do your research and that means talking to more than 5 brokers or companies. By the fifth contact you should start to have a clearer picture of who will be best for you and your individual investment issues. If you have difficulty understanding any financial candidate whether it is a tough dialect or not understanding what they are trying to describe, drop that person and find another.

“Frequent trading” is another listed mistake for the investor that does not execute his own portfolio by using a broker. His fees can and will eat into your portfolio. That is how many, many brokers make their money and will be glad to trade all you want and will probably know of a great bridge for you to buy. Watch out for that firm that allows such sales pitches to happen. Ask for exact figures on how you are going to be charged for trading with them. Sometime there are ‘House Fees’ as well as the brokers fees. Be aware there are taxes and other fees not necessarily discussed in an open manner if YOU don’t ask.

The fees associated with a trader with his own live desktop computer program are usually small and outweigh broker charges. However, that should not for the beginner and marks the first investor mistake of “Trying to go it alone”. One does need to understand the IRS’s 30 day wash rule to make any losses work in your favor regardless if using a broker or doing your own trading. Only a reputable broker or financial firm will be willing to help you in this area.

Do not make “Fear based decisions” is actually one investor mistake that I wish would come back into fashion as it adds volume and volatility to the marketplace. Seriously, when Ma and Pa, aka ‘the cash crowd’ got washed out in 2009 we started to see the daily volume diminish and that trend has continued to this day. Without active trading, or little to no volume, market trends can be manipulated when volume is anemic as we have clearly witnessed this past year. Currently the ‘bad guy’ is the HFT or High Frequency Trading crowd who can see the market before you can and make their commitment on what you are going to do. They can melt the markets up using mindless algo computers that don’t give a rip about charts, technical or human psychology.

Yes, lately it appears the marketplace is rigged and the HFT crowd is behind most of the recent problems. You don’t have a chance in trying to outguess them either. ‘Fearing to get into the market‘ really should be the advise of the day. The decision to stay out should have already been made – a long time ago. Well I say that tongue and cheek, but seeking SOLID financial advise is job one. More on that later.

“Relying on past performance” to make sound decisions can lead one to make poor decisions. Look at possible investment candidates like Netflix. (NFLX) is a good one that had a great past and recently came up short and so did Research In Motion (RIMM). Had you previously owned either of these equities it would have been easy to remain in and not sell these stocks because they ‘might’ recover while another rule of “Confusing “might” with “probably will not”. On the other hand they “might look like a great buy in the making”. Either way you would have made a BIG mistake of not selling or buying in.

“Trying to time the market” is another important mistake most make, including myself. But this is also specialized to the type of trading you are doing. A day trader usually has developed specific rules for jumping in and out that he has formulated over a period of time. Unlike you, he is “Looking for instant results” which is not what the beginning investor should be looking for like many did in purchasing Facebook. Swing trading is for a longer period of time usually not exceeding several months. Neither of these types of investing schemes apply here.

An example of “timing the marketplace” is the old saying “Sell in May and go away”. It didn’t work out too well in 2012 and you would still be waiting for the market to descend in the August/September so you could pick up some bargains. Yeah, I missed out too by waiting too long in reacting. It happens to all of us at one time or another.

A longer trading window can be 6 months to years where dividends become the yields many investors look for. I include “6 months” as the old “Buy and Hold” isn’t as safe as it used to be and it is best to speak to an adviser for help as your investment situation may change without you being aware of it. Which brings us to “Not paying attention to your investments” as being another investment mistake. It is O.K. to sit on your hands when the cash is in your pocket but when you have an active ‘paper’ investment, you need to watch it like a hawk. Cash allows you more time to think, the marketplace doesn’t allow such luxury.

“Putting all your eggs in one basket” or “lack of diversification” is probably the one error all investors have contemplated or tried to do at some point in our investment schedule. Early on in my career of financial investments I got burned badly and it took several years to recoup the losses. Be very careful of the one stop shop, or single investment, as it doesn’t offer good protection from losses. Even a good stock can fall out of favor and turn sour like many during the dot-com bubble while many others continue to rally.

Which brings us to the next one of significant importance. The “inability to take a loss and move on” has probably been faced by most investors, myself included. Do not tell yourself, just in a few more days (or months) that this investment or market will turn around and I’ll at least be able to break even. Pull the trigger Mr. Investor, take your loss and move on. This becomes much easier if you have a “price targets in place” as part of your exit plan.

You always need an exit plan as ‘things’ will happen when you least expect them to. You should never “Expect a smooth ride”, no matter what. There will be hiccups along the way and you need to “Be prepared by having a plan”. Having a plan is also difficult to possess and formulate because few know what to do now much less having any idea of what to do next. That is where wisdom comes in, usually learned at the School of Hard Knocks and many of the good financial advisers out there have gone to this school. I think I am still enrolled some of the time.

One type of a plan is the failure of “not setting price targets” mentioned above. Thinking an equity is going to continue rising forever is foolishness and so is believing it can’t go down a whole lot further down than you think it could. You need to decide when you want to get out and at what price you are willing to bail ship. Tough decisions, but research and asking questions will make it a lot less painful.

Having diligently studied your equity list of potentials you need to ‘ratchet down your ego‘ prior to making a choice and “Failing To Differentiate Between Information And Wisdom” is the key to failure or success. “Over Confidence” in your ability to make correct calls is something else you have to get a hold of and it is very difficult to explain.

One suggestion from Ruters I like is “Not Having an Investment Policy Statement”.

“If you are constantly watching the headlines and business TV shows, you’re not paying attention to your real bottom line. An investment policy statement puts in writing your goals, risk tolerance and portfolio allocation.

Do you want to retire at 60? Are you saving for college? Are you living on a fixed income? Each kind of objective requires a different allocation. And I’m not just talking about just stocks and bonds.

There’s a whole range of alternative investments from public real estate investment trusts to commodity funds that can enhance your returns. So if you haven’t crafted a personalized investment policy statement, now’s the time to do it.” Here’s some guidance: link.reuters.com/dah55s.

Another misstep is the failure of “not selling winners” and “trying to time the market” discussed before. Pierpont Morgan that said he was “unconcerned with picking the top and bottom of a market”, that he “was content with taking his profit in the middle”. He also said and I love it, “I made a fortune of getting out too soon”.

You may discover that there are cyclical rises and falls of your stock that look tempting to either buy or sell so you can reinvest. Remember that hindsight is 20-20 and you want to “Avoid jumping in and out” while leaving that game to the swing traders. Seeking qualified advise can not be emphasized enough.

Another way to stave off problems is to avoid “Taking more risks when comfortable and less risks when not”. If there is any doubt that this purchase isn’t right, it probably isn’t. Remember cash in the pocket gives you time to think out the issues.

“Blindly following the advice of a broker”. Bernie Madoff is a good example of how you can get sucked into something that seems to good to be true. I was approached and turned it down because I learned a long time ago that there is no such thing as a free lunch, plus it didn’t pass the smell test. I also turned down FaceBook for similar reasons. Some are screaming that NOW is the time to buy GOLD! The probably own gold and they want you do so and make their investment go up. There are a lot of crooks out there and some not so well-meaning advice to help you part with your money. Ask questions; ask a lot of questions and maybe now is the time to buy precious metals.

There are so many investing mistakes you should avoid or in some cases pay attention to and not covered here because I don’t want to write a book. Mostly the mistakes new investors make come from not having enough time from their busy schedule to ask a lot of questions. Reading is another problem most investors have in that they don’t do enough of it and from several sources. Plus an unbelievable number of investors have a belief that all financial advisers are created equal. Many ‘Sheeples’ believe all brokers have to be honest and not biased in some way that is not to your benefit.

Here is a partial list of mistakes I found and not one of them was duplicated by another well meaning pundit. All of these mistakes listed below (and above) are important to know, understand and follow if you are going to be a winner. Failing any one of these can actually make you a loser.

Taking actions in hopes of gaining control.
Don’t flee with the crowd.
Skip the flavor of the month.
Don’t be so quick to erase the mortgage.
Take tips with a (large) grain of salt.

“Ignoring Costs”
Worrying too much about taxes.
Staying Out of the Market.
Ignoring Inflation.

“Recency” – Buying what has recently been up, selling what has fallen down.

Believing That Great Companies Make Great Stocks.

Listening to Experts Who Give Forecasts.

Excessive costs.
Misallocation of resources.Misplaced trust.

Chasing results.

Not thinking of allocation first.

Not assessing your level of risk.

Deviating from your investment objectives.

Not following your investments.

In conclusion, the list of “Top 4 to 10 Mistake” articles that investors make was at 35 when I gave up counting. What this should tell you is that, one, the investment professional is trying to keep things simple and two, investing is a whole lot more complicated than you are led to believe. Three, like going to the family doctor, you sure hope he knows what he is telling you. Doctors, unlike financial advisers, are easier to sue if they are wrong.

One way of helping yourself is to ask questions, lots of questions. When you run out of questions, tell your broker that you will call him back. This will allow you to arm yourself with more questions (some brokers hate this approach) and when you run out again, tell him that you will call again. Keep this up until he doesn’t want to talk with you anymore and tells you to find someone else (and that is a good thing) or you feel that you actually know more than he does and can make a decision. Be careful of being “over confident” as I bet you haven’t asked enough questions or read enough to have reached that lofty goal.

That is why we traders love them. They won’t take the time to secure and protect their investments and we will eventually take their money.

To contact me with suggestions or deserved praise:

[email protected]

Written by Gary