Search Results for “Using Investment Advice”

Classic: Using Investment Advice, Part 4 [Tread Warily on Media Stock Tips]

Posted on 11 April 2013 by David Merkel

The following was published at RealMoney on 9/26/05.? I have augmented it at the bottom, so if you’ve read it before, at the bottom, there is more.

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Often investors, both professional and amateur, will run across what seems like a great investment idea in the media and run to act on it. My advice is simple: Wait. For months, perhaps.

I’ll lay out my approach to media touts, as well as a list of current stock tips, later on. But first, let’s see how the market reacts to them.

Say that the idea is to go long on a stock. At the market open after the story appears, a rush of orders will push the stock’s price higher. Then, as the day progresses, the stock will drop and end the day lower than at the open, but usually higher than the prior close.

For the first few days, the market responds to the supply/demand imbalance, and then the merits of the investment become clear. As Benjamin Graham observed, in the short run, the market is a voting machine; in the long run, it’s a weighing machine.

My experience has been that after the initial supply/demand imbalance period, the performance of media-touted investments is market-like on average, leaving the early buyers with assets that generally underperform.

The degree of underperformance varies with the size and character of the audience that saw the story. In general, the larger the audience, the larger the reaction.

The reaction also tends to be larger the lower the experience level of the audience (as long as there is some investment experience — people with no experience won’t do anything). Novice investors are the ones that jump at ideas that seem to be hot when under the media spotlight. Experienced investors tend to have their own idea-generation processes; they either ignore the idea or throw it into their process for later review.

Naturally, the bigger the media play, the bigger the splash. A front-page article makes waves; a tidbit mentioned in passing should have no impact, even though it might be powerful information in the hands of an informed investor. The impact is also greater depending on the fame, or perceived skill, of the source.

The potential size of the investment is negatively related to the degree of underperformance. A positive article on General Electric will have less impact on the price of GE than a similarly positive article on a smaller company. Naive investors place their market buy orders without thinking through the degree of liquidity of the investment.

Know Your Enemies

A number of media sources are particularly given to sensationalism, such as newsletters, online message boards, radio and sometimes television. The risk is particularly great when the “expert” speaking has an ill-defined financial interest in the idea under discussion.

The higher the level of emotion employed, the lower the level of humility, and the less the focus on what could go wrong, the more you should be skeptical. The adviser can sometimes be an enemy of wealth creation.

There are other enemies as well: sophisticated traders who watch for unusual trading activity off of media play and take a short-term contrary position. They short into bullish news and buy bearish news when they perceive that the money acting quickly on it is naive.

What to Do

My advice is simple: Wait. Invest in a subset of the ideas that still have value and have not fully reacted to the information after a period of time.

Also, compare new ideas as a group vs. each other and against the existing assets in your portfolio. Only add a new idea if you think it will beat the median idea in your portfolio. I have detailed these ideas in a piece titled “Become a Smarter Seller.” [DM in 2013: wish I had a link, it was a great piece.] I usually wait one to three months after I get an externally generated idea before I consider acting on it. I rank new ideas against my current portfolio and choose new ideas based on a mosaic of different factors — mainly cheapness, momentum (or anti-momentum) and industry exposure. I consider selling positions more expensive than the current median idea in my portfolio, and buying ideas that are cheaper than the current median. The following decision/reaction grid helps explain my actions:

Decision/Reaction Grid	Merit of the idea still good?	Merit of the idea bad?
Results have already occurred.	Can’t kiss them all.	Glad I missed that bad boy.
Results have not occurred yet.	Invest.	Don?t invest.

There is a cost to waiting: Some ideas get away from you. This is called implementation shortfall by some. I say you can’t kiss them all.

However, waiting has the positive effect that with the passage of time, some investment proposals are proved wrong. Missing wrong ideas is a real benefit for any investment program. ?Also, waiting takes some of the emotion out of the decision-making process, which helps to avoid errors.

After the waiting period, I ask whether the underlying investment thesis is still valid and whether that is reflected in the current stock price. The media piece that generated the initial interest is long since forgotten, so the emotion and excess stock price moves are gone. But the value might still be there, and with enough new investment ideas, some of them will present real opportunities for above-average investment returns.

Back to 2013

In 2005, I closed the piece with a list of stocks that were interesting, but that I did not own at present.? Look for my next ?Industry Ranks? piece in late April or early May.? You will get some ideas there.

One more thing to confess, I wrote this series with Cramer in mind, but not only Cramer.? I cringe when I hear people speaking or writing about specific investments with a high degree of certainty.

Investing is not certain, even for those of us who try to invest with a margin of safety.? The proper sense of investing engenders sobriety and caution.? That is the opposite of what sells newsletters, gets listeners on the radio, and viewers on television.

I?ve been invited onto TV three times more than I have been on TV.? In talking with a producer, I will explain the issues involved, and I will tell him they are complex.? This doesn?t make for good soundbites.? The producer either concludes there is no easy story here, or seeks out someone who will make the show snappy.

I leave you with this simple concept: if it is entertaining, it is probably not useful for investing.? (And as an aside, that is why you will not see a word related to entertain in my disclaimer.? I am offering opinions, not advice.)? Truly that?s all anyone in the markets can do, but because so many people dupe the credulous, of which there is one born every minute, that?s why we have extensive regulations for disclosure and advertising.

Be skeptical. Research, and be a buyer.? Do not let yourself be sold to.

Finally, avoid emotive media regarding investing.? Listen to those who write dispassionately or better, learn, and do your own research.

Classic: Using Investment Advice, Part 3

Posted on 11 April 2013 by David Merkel

The following was published on 3/29/2004:

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Investment Advice

Time horizon usually correlates with return size.

It’s good to have signposts as the investment plays out.

Free advice is seldom cheap.

In analyzing any advice, investors have to consider the adviser, personal character issues and the nature of the investment proposed.

In Part 1 of this three-part column, I focused on the adviser. In Part 2, I looked at issues centering on your personal character.

In Part 3 today, the emphasis shifts to the investment itself.

Many Things to Consider

Good investment recommendations give some idea of how much to play for and the likelihood of getting there, even if the appraisal of likelihood is subjective and squishy. Are we looking to scalp a dime, a buck, 10%, 100%, or are we looking to score the elusive ten-bagger?

Most often, the time horizon of an investment corresponds to the amount targeted to be earned. Under normal circumstances, gains are made a little at a time. Bigger gains ordinarily take more time. How long will it take to earn what is expected from the proposed investment?

What risks exist in realizing the value inherent in the investment? What could go wrong? Nothing is certain in investing, so beware of advice that tries to sell hard on the idea of safety. Appeals to safety, particularly with investments that are touted to earn an above-average return, are often dangerous. The price adjustments with supposedly safe investments that disappoint are sometimes severe. I experienced this firsthand with corporate bonds: The most dangerous bond was the one everyone knew was secure, and then accounting irregularities popped up. The price would drop 10% to 20%, and liquidity would drop to nil.

If the investment is going properly, what signposts will you see to validate that the investment idea is on track? Aside from price action, what will yield clues that the investment thesis is wrong or right? What should earnings look like? When is that new product going to be introduced?

What factors in the macroeconomic environment does the investment rely on? If inflation rises, what will happen? Does this investment resist recessions well? If the market falls, will this investment fall harder?

Finally, how well does this investment fit into your portfolio? Does it reduce risk for you, or increase it?? Too much of a good thing can be wonderful, but the more concentrated your bets become, the closer you must watch your positions. The higher the degree of concentration in a portfolio, the higher the amount of expertise relative to the market the portfolio manager must possess.

No one will give you all of this in advice, but these are things to keep in mind to aid in the evaluation of advice that comes your way. In general, a conservative and skeptical posture will serve you best. Keep a tight hand on your wallet, and remember that those who stay in the game the longest often do the best.

Finally, you can remember Ferengi Rule of Acquisition No. 59: “Free advice is seldom cheap.”

Classic: Using Investment Advice, Part 2

Posted on 9 April 2013 by David Merkel

The following was published on 3/26/2004:

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Investment Advice

You have to understand the advice to use it.

Can you implement or monitor the idea?

Analyze your own personal motives.

In analyzing any advice, investors have to consider the adviser, personal character issues and the nature of the investment proposed.

Yesterday, in Part 1 of this three-part column, I focused on the adviser. Today, in Part 2, the emphasis shifts.

It’s About You

Do you understand the advice? There is no shame in not understanding every investment concept under the sun. Only rare individuals can do that. If you can’t understand what is being proposed, walk away from the idea until you can understand it. People who don’t understand an investment concept, but invest anyway, can’t react rationally to the volatility in the market, and they fall prey to fear and greed. They become the noise traders that professionals profit from.

Some strategies suffer from what I call “too smart for your own good risk.” In Britain, the phrase is “too clever by half.” This problem affects both individual and institutional investors. Some strategies are very complex, and some people are intrigued by complexity. I think most investing is simple, and complexity signifies a lack of understanding. The more complex a strategy is, the more likely it is to break down in one of its many steps. Be careful with complex strategies.

Can you implement and monitor the investment idea? Does it fit your character? I did risk arbitrage on an amateur basis for several years, but even though I did well at it, I found that the amount of time it took detracted from my family and work, so I stopped.

Some people don’t have the time, talent or personality for strategies that require rapid trading or rapid shifts in strategy. Other people don’t have the stomach for high-risk strategies, even if they understand how they work. You have to pick strategies you can sleep with.

Does the investment support your ethical standards? This applies to both the management and the business.? In general, your ability to make rational decisions in investing will be hindered if you are long a company that you think harms society. The same is true of management that you believe acts dishonestly, particularly toward shareholders. It doesn’t matter how cheap a company is: If you can’t trust the management, it will be almost impossible to unlock the value trapped there.

Also, from my personal experience, if management is dishonest to some other stakeholder group, such as customers, eventually shareholders will get bad returns. Dishonest management often has underlying business models that are unfavorable, and which they are trying to enhance unethically.

Analyze any personal motives you might have for making or not making an investment. I had a large number of usually intelligent friends who gave up their investment disciplines in late 1999 in order to buy into the bubble. Many seemed driven by envy of less capable friends who were racking up impressive profits on paper. Motives for investing that rest in uncritical admiration or dislike for another person and their prosperity usually lead to bad results.

How much of an unrealized loss could you take in the short run? Do you have the capability to carry the position through a rough period, even if the eventual result will be good? The answer depends on your liability structure. Do you need the value of the assets in question to throw off cash for you in the short run? Are you investing on margin, or have significant external debts to service? Safe is better than sorry here. At minimum, set stop orders if you can’t bear losses beyond a given threshold. It is better to avoid strategies that force you to take any action, so if you can’t take short-term losses, reduce the risk level.

Next time, in Part 3 of this three-part column, I’ll take a closer look at the nature of the investment itself.

Classic: Using Investment Advice, Part 1

Posted on 8 April 2013 by David Merkel

Dear Friends,

I am republishing some old pieces from my days at RealMoney during this busy time that I am in.? If there are significant changes in my opinion since it was first published, I will spell out the changes.? As for this series, there are none.

Originally published 3/24/2004

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Investment Advice

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You have to trust your investment adviser.

Look closely at the track record, too.

You want realistic advice you can use.

Advice bombards all investors. Some is good, some is bad, and much of it is indifferent. In this three-part column, I’ll show how to use the advice you receive so you can be a more effective investor. In analyzing any advice, investors have to consider the adviser, personal character issues, and the nature of the investment proposed. In Part 1 today, I’ll focus on the adviser.

Sought-After Qualities

The first issue is always one of trust: Do you trust the competence and business ethics of the adviser? No one is perfect, but has the adviser made sound decisions in the past in areas similar to where the adviser is proposing advice now? What’s the adviser’s track record? If he’s a professional, does he have a clean record with the regulators and his current and past clients?

Even if the adviser has a great track record, did he get it accidentally? In a past job, I had the fun of interviewing a large number of money managers. We had a need for a large-cap growth manager, and our manager adviser brought in a manager who had a stellar, though short, track record.

The principal of the growth manager was a former pro athlete who had developed an entirely quantitative, momentum-driven management method. The presentation was short, and I asked a few questions about earnings quality and how the process might do in nongrowth-driven markets. I received a very terse set of “we can do no wrong” answers.

After the presentation ended, I pointed out three companies in their portfolio that I knew had weak earnings quality. They politely blew me off. I wasn’t impressed with their processes, and my colleagues were not impressed with their demeanor. Then I had my accident; the next week, two of the companies I pointed out blew up. Their accident followed soon after, which was a significant loss of assets under management. The accident of their prior performance evaporated. Persistent good performance happens for the reasons that the adviser specifies in advance, not by accident.

Even if the advice giver is competent and ethical, what incentives does he have in the situation? Full disclosure allows you to decide whether the adviser’s judgment might be shaded by other concerns. Then you can take that into account in making your decision.

Is the adviser cocky? In my experience, pride goes before a fall. One way to measure this is to see whether the adviser admits to errors. The best advisers admit fallibility, and even try to reduce your expectations. You want realistic advice from someone you can trust. Big claims may draw some clients in the short run, but in the long run, clients are kept through dependability.

Next time, in Part 2, I’ll examine how your character affects how you evaluate the investment advice you get.

Using Investment Advice, Part IV

Posted on 18 August 2012 by David Merkel

My last point on investment advice is to think long-term and treat it as a business.? You are trying to buy underpriced cash flow streams.

Because it is a business, you must focus on the long term, and downplay short cycle information.? Don’t let the media scare you or make you greedy.? There are bumps and jolts in all investing.? Keep your eyes on the long term.? Always ask yourself when reading news, “What is the long-term effect on profitability?”? Often good companies have bad quarters or years.? The same is true of bad companies having good years.? Look at the long-term profitability, and downplay the short-term noise.

By short-term noise, I largely mean the media.? That includes the web, and those that tout stocks on a short-run basis. There are several problems here:

1) Media investment advice (and that from Wall Street as well) is biased toward buying.? Articles will give you a list of stocks to buy either generally, or in a given industry.? The biggest problem is that they won’t generally follow up on their recommendations, nor will they tell you what the time horizon is for the recommendation, or what catalyst should lead you to sell.

2) You will not see many articles offering a list of stocks to sell.? There are several reasons for this: a) most readers have some cash, which they could use to buy stock.? Most readers do not own the stocks that one might suggest to sell, so unless readers are enterprising enough to sell short, which even fewer are willing to do, your article is of little value to the average person. b) Do you want the possibility of a lawsuit?? Unlikely, but could happen. c) If you rely on advertising, do you want the reputation of shooting companies down?

There is an even bigger reason behind this: the world is designed to be 100% long.? That is the norm.? Shorting is a side-bet.? Even holding cash is a side bet, trusting in the veracity of a central bank that mostly has claims on the taxation power of the government.

3) Most people in the media are not investors.? As journalists, they have to be neutral.? At least there has to be significant disclosure of interests.? Readers should ask themselves, “What does this writer know that I don’t?? Who disagrees with him?”? In good investment shops, they have a process where they challenge opinions.? Rarely do you see that in the media, where two parties present opposite opinions.

4) Even when professionals go on the air or on the web, be skeptical.? (This includes me.)? They may have an interest to mention stocks that are close to their “Sell” level, but they will not mention companies that they are currently acquiring.? Hey, I went through that when writing for RealMoney.? I could write about things only once we had our full position on.? It is normal for firms to not allow their employees to write, ever.? It is second most normal to allow them to write only when the firm’s interests are not affected.

5) There’s no measurement process, no feedback when people give investment advice in the media.? They seem more credible when they are on the Web, TV, Radio, but does that really make them more competent?? It does make them more marketable.

6) Investing is best when it is businesslike.? Good opinions take a lot of time to form within investment firms.? If anyone can do the “lightning round,” Cramer can.? But good investing isn’t typically snap decisions, so we should not give a lot of credence to anyone’s off-the-cuff remarks.

7) Remember, few people writing/speaking on investments are doing you favors.? They have their agenda.? Some make it clearer, like me, and others don’t.? Be aware, you are your own best defender.

8 ) Few writers will urge caution on asset allocation because it is a boring topic, and besides articles on bonds don’t sell.? People read advice that excites, not that which preserves safety, at least not to the same degree.

9) One last note, good value investing is usually boring.? There may be some interesting tales, but who will be good/talented enough to do all of the research and spill it for free?? There are uses for such a person that pay more.

This probably ends my series on Investment Advice, but feel free to send questions, ideas, etc.? Thanks for reading this.

Using Investment Advice, Part III

Posted on 16 August 201216 August 2012 by David Merkel

The next aspect of using investment advice is understanding your own capabilities.? It comes down to what you understand, and what you have time for.

Some investment advice requires constant attention, even assuming that it is right.? Does your job afford you that flexibility?? If it doesn’t, you need to look to longer-term strategies.

There was a period in my life when I did small company deal arbitrage.? More profitable, more volatility, more blowups.? It took a lot of time to do the daily research.? I really felt I was cheating my family in that era.? Value investing does not take nearly that amount of time.

Do you know enough about the investment advice that you can be an intelligent amateur critic?? You don’t have to be an expert but to follow the strategies of others, you have to be intelligent to the point where you can differentiate between strategies that work and those that don’t.

What, that’s a tall order?? Really, it depends on your time horizon.? Value investing will deliver over a decade-long horizon.? Momentum investing will deliver most of the time, so long as too many people aren’t following it.? Value has the advantage that adjustments are infrequent, that’s not true with momentum.

Beyond those two primal strategies, I’m not sure what else works, aside from indexing.? Indexing has its own issue: as long as money is flowing into indexing, indexing tends to outperform.? This is less obvious with stocks, but if you have ever been a bond manager, index bonds trade special (expensive).? They have lower yields because there is a class of investors that has to own them.? If the money flow ever reverses, indexing will not do well.

You are your own best defender.? No one can protect yourself more than you can.? That is why it pays to be skeptical of unusual claims of investing expertise.? If they were really that good, they would invest for themselves, and not solicit outside investors.

After all, in this modern era, if anyone has an infallible investment method and limited capital, they will do best by setting up a hedge fund.? Those who proclaim to you that they have methods that border on miraculous should be questioned closely, because in investing, there are no miracles — only cash flows, and the market’s anticipation of future cash flows.

Now, there are some things with investment advisors that can give you some comfort.? Smaller managers tend to do better, because they haven’t reached the boundary of how much money their ideas can accommodate.? Beyond that, in my opinion, managers that don’t beg for business do better as well, they aren’t spending time on the marketing; they are managing.? Also, managers with a clean revenue model “fee only” aid investors.? The costs are clear from day one, and there are no conflicts of interest.

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Taking it back a step, can you critique yourself?? Where have your biggest successes and losses come from?? It might be good to keep a journal, so you can see if your successes stemmed from things you foresaw, or were accidental, and if your losses stemmed from neglect of discipline in following your ideas, or whether the idea itself was wrong.

My personal conviction is that most investors lack patience.? That’s why we sell at the bottom, and buy at the top.? But to be a patient investor requires strong balance sheets, because bad things do occur, and we want to avoid a permanent impairment of capital.

Do you know your weaknesses?? It took me 10 years to wash fear out of my system.? Greed wasn’t a problem.

Understand yourself, and learn self-control.? Don’t compare a stock to where it was, compare it to where you estimate it should be, once you are realistic.

More in Part IV

Using Investment Advice, Part II

Posted on 15 August 201215 August 2012 by David Merkel

Part two is understanding the advice.? A large part of the problem is that many aspects of the advice are unsaid.? For example, with a “buy” recommendation:

What time horizon does this recommendation require?
How likely is it that this investment will succeed?
What risk factors could cause the investment to fail?
How will this advice get updated?
Have prior investors benefited from this advice?
What is the benchmark for the advice?

Time horizon is important, even if it were handled approximately, e.g, “six months to two years.”? Should you buy for the earnings release and sell thereafter, or is this a company going through a multi-year shift?

The likelihood of success is subjective, but still important.? It helps if analysts/touts would clarify how certain they are of success, st least in vague terms.

Listing the risk factors is important.? Analysts do less of this than do companies in their prospectuses/10Ks.? These are important, and it would be valuable for analysts to see if there are any risk factors not listed, or emphasize the importance of key risk factors.

Knowing how frequently the advice will be updated aids the investors — it helps them understand how much help they will get, or whether after the recommendation, they are on their own.

It helps to know whether the adviser has any real talent or not.? Does he just opine, or is his own money on the line?? Has he succeeded in the past?

Finally, the benchmark is of utmost importance.? Buy! Why, what will it do better than?? Is it a relatively good stock?? Is it a relatively good stock in its industry?? Is it a relatively good bond?? Is it just going to do better than cash?? You need to understand the comparison that the analyst is making in order to say the stock is a buy.

More in Part III

Using Investment Advice, Part I

Posted on 13 August 2012 by David Merkel

If you have a subscription at RealMoney, you should read these articles:

Using Investment Advice, Part 1
Using Investment Advice, Part 2
Using Investment Advice, Part 3
Tread Warily on Media Stock Tips

I didn’t say it at the time, but I wrote those with Cramer in mind.? This was not that I did not like Cramer, hey, he gave me my start in investment writing, my blog would not exist without that start, but that what he said in the mass media often did not include enough data to allow an investor to manage his/her portfolio.? I will explain why here.? (Note, this is true of many investment gurus, not just Cramer.? Cramer takes more abuse because he is so visible.)

Part one is understanding yourself.? What are you good at? What do you understand?? What do you have time to do?

If your work is demanding, ignore services that require quick responses in order to work.? If you don’t understand bonds or commodities, you probably should avoid advice on those, unless they update you regularly on prior recommendations, and provide a track record on recommendations. When younger people ask me about investing, the first question I ask is how much time they have to put into it.? If they don’t have time for it, I push them toward Vanguard and indexing.? Save time, get a slightly better-than average result.

It is also not wise to follow any sort of instructions on investing that you do not understand.? If you want the wisdom of the investor, ask to have a portfolio that mirrors his — I mean, if you have implicit trust in someone, make sure that your interests are aligned.? After all, that is how it is from my clients, they have copies of my portfolios and get the same results, less fees.

If you follow instructions that you do not understand, it is as if you believe in magic.? You are flying blind, but won’t admit it.

Let’s take a different tack: when you read or hear investment advice, how often do they tell you when to take the opposite action?? I.e., buy here, sell there.? Sell here, buy there.? That is rare.

And this is a reason why I rarely write about individual stocks.? I’m not going to update you, and that is true of most investment writers.? Also, when you get one right, you get one praise.? If you get one wrong, you get fifteen kicks.

Using investment advice boils down to understanding what one is intelligently capable of acting on.? You are responsible for educating yourself so that you are capable of evaluating investment advice.? If you don’t do it, no one else will, and you will only have yourself to blame.

More in part II

Abusing Buffett’s Reputation for Profit

Posted on 16 August 201616 August 2016 by David Merkel

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Yesterday, Berkshire Hathaway issued a press release:

WARNING ? On-Line Article Regarding Warren Buffett, BREXIT and Anderson Cooper is a Fraud

August 15, 2016 06:08 PM Eastern Daylight Time

OMAHA, Neb.–(BUSINESS WIRE)–Berkshire Hathaway Inc. (NYSE: BRK.A; BRK.B) ?

It has come to Berkshire?s attention that there is an article on-line concerning Warren Buffett and BREXIT with respect to a conversation that Mr. Buffett allegedly had with Anderson Cooper. The article is headlined as follows ? ?Warren Buffett Warns ?BREXIT? Chaos is going to cost Millions of Americans Jobs.? For the record, Mr. Buffett has not spoken with Anderson Cooper for about five years and never about BREXIT.

The article among other fraudulent claims states that Mr. Buffett spoke with Mr. Cooper and indicated that Mr. Buffett was recommending something called ?The Global Cash Code.? Allegedly, per the on-line article, Mr. Buffett indicated that Sandra Barnes, the party who allegedly created ?The Global Cash Code,? has been teaching people how to successfully use ?The Global Cash Code.? Prior to learning of this fraudulent article, Mr. Buffett has never spoken with or even heard of Sandra Barnes.

Contacts

Berkshire Hathaway Inc.
Marc D. Hamburg, 402-346-1400

There is no end of those that want to cash in on Warren Buffett. ?But those that know Buffett know that he doesn’t give investment advice aside from what he has written publicly himself. ?But to the uninformed, the pitch mentioned looks real enough.

I was curious, so I went looking for it, and I found a version of it here. ?It came up number one on my Google search. ?It looks like a fake CNN site, which fits the shtick of using Anderson Cooper interviewing Buffett. ?I decided to do a WHOIS search on the domain name “com-politics.us” to see if there was anything interesting. ?There was.

The domain was registered on June 28th, 2016. ?Here’s the data I found at the WHOIS site:

Name:?Devin Karapoulos
Organization:?Devin Karapoulos
Address:?1348 high bluff cir
City:?Park City
State / Province:?UT
Postal Code:?84060
Country:?United States
Phone:?1-435-214-1857
Email:?dkarapoulos@gmail.com

Now, that might not be the main site — the Global Cash Code site has hidden its owner, so you can’t tell, but who knows? ?That said, I can’t find another one. ?Maybe Mr. Karapoulos knows something about this misuse of Mr. Buffett’s name, likeness, and reputation.

Full disclosure: my clients and I own shares of BRK/B

On Investment Charlatans

Posted on 12 February 201613 February 2016 by David Merkel

Photo Credit: Alex Proimos || A bunch of con men attempt to bilk an unsuspecting lady

There are many ways to try to cheat people in the investment world. ?You can promise them:

No risk (an appeal to fear)
High returns (greed)
Secret knowledge (can appeal to either or both fear and greed)
An easy life, free from the worries common to man.
And more…

For virtually every human weakness or sin, there is a road to cheating men. ?This is why it is difficult to cheat a truly honest man, because an honest man is:

Industrious — he knows most ways to improve his lot in life involve considerable work, whether physical or mental.
Skeptical — he knows not everyone is honest, and there are many that pursue ways that harm themselves or others.
Self-controlled — he doesn’t need to become wealthy, but if it comes bit-by-bit, he can handle it.
Unafraid — he doesn’t scare easily, and there are many purported scares out there. ?There are always people trying to make money off of apocalyptic scenarios. ?(Believe me, in a truly apocalyptic scenario, where the government breaks down, or you lose a war on your home soil — no one wins. ?And, there is no way to prepare.)
Studious, and has wise?friends — he doesn’t quickly buy novel reasoning, or unfamiliar concepts without testing them, and running them past his personal “brain trust.”
Patient — he can’t be rushed into something, and he can walk away.
Virtuous — when he does commit, he holds to it, and makes good on what he promised. ?He expects the same of others, and does not deal with those of bad reputation.

There’s more, and I don’t hold myself out to be perfect here, but that is a part of what I aim for. ?If you are like this, you will be very difficult to cheat.

With that wind-up, here is the pitch: I ran across a video while doing my usual work, when I saw a picture of Buffett. ?Now, everyone wants to invoke Buffett because he is a genuinely bright guy on all affairs affecting money and wealth. ?Many who do so twist what Buffett has done for their own ends. ?You can see the graphic used to the left.

So this guy posits that Buffett got rich off of “Guaranteed Income Certificates.” ?You can listen to the whole 39-minute video, and never learn what a?Guaranteed Income Certificate is. ?This is a tactic to make you think that the video-maker has hidden knowledge. ?He does not lie, per se, but dances around what it is and how Buffett has used them. ?I figured out what he was talking about in a about two?minutes, but only because the language was so discursive, with many rabbit-trails.

So what is the vaunted?Guaranteed Income Certificate?

Preferred stock.

Preferred stock?

Yes, preferred stock, that hoary creation that gets wiped out when most firms go into bankruptcy. ?There are few cases where the preferred stock is worth anything in a crisis. ?It is far from guaranteed. ?It has all of the disadvantages of a bond, with none of the countervailing advantages of common stock, which can provide strong returns.

Geek note: why is preferred stock called preferred? ?Three, maybe four reasons:

Its dividend payment can only be unpaid if the common dividend is unpaid first. ?It has a dividend payment priority.

If the dividend is eliminated, preferred stockholders as a group typically gain representation on the Board of Directors.

In bankruptcy, they receive preference over the common shareholders when the company is recapitalized or liquidated. ?That said, in bad scenarios, their claim is the second lowest of all claims — behind the secured creditors, the government, lawyers, general creditors, bank debt, and unsecured bonds. ?Believe me, that preference on common shareholders is not a big protection.

The preferred dividend is usually, but not always higher than the common dividend.

All preferred stock is is a promise to pay dividends if the company can do so without going broke, and ahead of the common shareholders. ?Like all risky investments, you can lose it all. ?Average recovery in bankruptcy for?preferred?stock is?around 5 cents on the dollar, versus 40 cents for most bonds,and 80 cents on bank debt.

Now, Buffett has done some clever things with preferred stock that is convertible into common stock, or alongside common stock or warrants. ?Occasionally he has bought some regular preferred stock as an income vehicle for his insurance companies. ?But Buffett almost never plays merely for income, he wants the gains that come from stocks.

Now, I didn’t listen to the whole video — after five minutes of the beautiful voice dancing around the issue, I stopped it, right clicked, downloaded it, and went?to the end. ?As is common with these sorts of videos, it makes it sound easy, as if infinite income could be yours if you just buy this service. ?They sell you on what your dream life will be like: you will have more than enough money for vacations, you’ll never have to work again, you can spend as much time visiting the faraway grandchildren…

The guy who put the video together, and sells his service, was big on hiding things behind new names that he concocted:

Preferred stock becomes Guaranteed Income Certificates
Venture Capital / Private Equity becomes Doriot Trusts
Master Limited Partnerships?become Secret Oil income Streams
Royalty Trusts are treated as a novel investment, rather than the backwater that it is.

The presentation is also expert in lying with true statistics, making the ordinary sound extraordinary. ?It also has the “but wait, there’s more!” pitch, where they throw in a bunch of old reports to make the deal seem sweeter. ?The cost of the newsletter if saved for the very end — beware of those that won’t tell you the cost up front. ?Good deals will always show you the price early. ?Charlatans hide the price.

There are no secrets. ?There is no easy road to an easy, wealthy life. ?I want to end this post ?the way I ended a similar post called “On the 770 Account,” which was a code name for permanent life insurance. [Sigh. ?Oddly, that post still gets a lot of hits, probably because no one has stepped forward to call that one out.]

Final Note

THERE ARE NO SECRETS IN MONEY MANAGEMENT! ?THERE ARE NO SECRETS IN MONEY MANAGEMENT! ?THERE ARE NO SECRETS IN MONEY MANAGEMENT!

There is no secret club. ?There are no secret formulas. There are a lot of clever lawyers, accountants, and actuaries that the wealthy employ, but for average people, the high fixed costs won?t make it work.

If you want to be wealthy, you have to run your own firm, run it well, providing value to many. ?Don?t listen to those who say they have an easy way to wealth. ?They are lying, and are looking to make money off of you. ?Those who give you free advice are using you in some way. ?(Wait, what does that make me to be? Sigh.)

Signing off, your servant David, who does this for his own reasons?