Hey, Let's Be Careful Out There

Unfortunately, basic financial literacy is not taught in our schools. It should be. If I was a conspiracy theorist, I might believe that our government wants high school graduates who are ignorant, helpless, and willing to give up their freedoms to a totalitarian state. I suspect the truth is more prosaic. I doubt most public school teachers know much more about finances than their students. I also suspect that many teachers, who are either artists or are primarily motivated by compassion and altruism, consider the pursuit of filthy lucre beneath their standards. Until fairly recently, the Church has also largely failed in its responsibility to turn out fully functional members of the Body of Christ in this important area of life. Thankfully, this trend is changing. In an earlier post, I recommended three national ministries devoted to helping believers understand and use money wisely. Today, let me add a fourth, Jordan Goodman at http://www.moneyanswers.com

Around the time I turned 50, I decided I should get serious about learning the art of investment. Please, don’t wait until you are 50. If you are 16 years old, the time to start is today. Before I became serious, I purchased small amounts of two different mutual funds. The first fund I purchased lost a significant portion of its value. However, I noted that the broker received his commission and gained even as I lost money. Eventually, this fund did break even. I sold my shares, but I would have been as well served if I hid the money under my mattress. Later, my CPA, a wonderful Christian woman and friend recommended an “Investment Adviser.” I should have been suspicious. I asked my CPA why she did not involve herself in similar activities. I noted that many other CPAs also sold investment vehicles. She told me that this would create a conflict of interests between her rewards as a saleswoman and her clients’ best interests. The recommended adviser sold me a mutual fund for my ROTH IRA. I later learned that this particular fund was one of the worst in America and it came loaded with 12B-1 fees. Anyone who attempts to sell you anything with 12B-1 fees is not your friend. Needless to say this fund lost money and has never recovered, but again the saleswoman did pretty well. My CPA made a good faith effort to help me, it just didn’t work out.

Beyond the self interest of the commission salesman, we have recently seen some pretty egregious frauds. What Bernie Madoff did with his Ponzi scheme, not only wrecked the lives of individuals who trusted him, but he ruined the trust funds of a number of Jewish charitable institutions, and universities. He even stole from a charity that helps holocaust victims and their families.

I decided, “Why should I pay someone else to lose my money when I could lose it on my own?” I set out to learn how to invest. I was even willing to pay someone to teach me. No such classes or teachers exist. There is a reason for this. Almost all investment advisers are nothing more than commission salesmen. Some of them sell an active stock management service, some mutual funds, and some sell annuities and similar insurance products. Be certain that when you talk to one of these people they are not interested in teaching you anything. The Chinese have a saying, “Give a man a fish and feed him for a day. Teach a man to fish and feed him for a lifetime.” These people want to continue to sell you fish for the rest of your life. They, under no circumstances, want you to learn how to fish for yourself. Also, you can be pretty certain that these characters will look at you and see a need that can be fulfilled by one of their products, probably the one that pays the largest commission.

Most brokers and financial advisers are not considered “fiduciaries” under current law. What this means is they are under no legal obligation to act in your best interests. They can put their interests or the interests of their firm ahead of your interests. They can not legally sell an inappropriate product to a client, but they can feather their nest at your expense. Consider, after the death of my father-in-law, my mother-in-law sought a financial adviser to help order her affairs. This gentleman is a member of her church. He is an annuity salesman. Needless to say, he counseled my mother-in-law to cash out a few small annuities her husband purchased through his job and liquidate some other investments in favor of an annuity offered by his company. Unfortunately, my mother-in-law took his advice. He did not do anything illegal or even unethical. He did, however, enjoy an enormous pay day at the expense of a confused frightened old woman. In essence, he sold her something that allows her the option of putting her money in a mutual fund or in Treasury Bills. Needless to say the money is in Treasury Bills. My mother in law could have accomplished the same end for $59 or less at a discount broker.

Failing to find a professional willing to help me, I did what most of us would do. I talked with a coworker who managed, over the course of several years, to earn more on the market than he did as a GS-14. Of course that was before the dotcom bust. During that debacle he managed to lose more than he had gained. He knew I was a hopelessly old school, suspicious, and conservative soul and so steered me towards Richard C. Young’s Intelligence Report, a monthly subscription newsletter. I have subscribed on and off over the following years. When he offers subscriptions at a significant discount, I subscribe. Richard Young is pretty good but he has made some colossal mistakes. However, if you were to follow his basic advice, 50% in bonds, cash, and foreign currency, 45% in 32 different stocks, and 5% in gold, a few colossal mistakes would not trash your entire portfolio. I find his stock tips interesting, but what I have found of more value are the explanations of how he reached his conclusions. Using this information, I have applied the same techniques to free investment reports on individual stocks supplied to account holders on my broker’s web site. In a few instances, I have used these techniques to buy a stock before it was recommended by Richard Young. This makes me feel like I might be learning something. My coworker also recommended the American Association of Individual Investors. Although their magazine is very inexpensive, I did not find it to be of very much value. They do, however, do a good job of reviewing investment books by various authors. A word about reading books by various authors; much of the information in these books is time sensitive. An individual company may be one of the best managed organizations in the world one year and a train wreck the next year. Just ask IBM. However, the basic techniques of analyzing a company’s potential value are relatively timeless. Finally, I have also read exactly one book on technical analysis. While these techniques really work, they are a little too rich for my blood. Still, I try to view charts from a technical perspective, even if I am temperamentally unsuited for executing buy or sell orders on the basis of the statistical analysis of a wiggling line.

Of course, I have learned there are retail mutual funds that are well managed and not at all just a ploy to separate a fool from his money. I also know there are hedge fund managers, investment advisers, and even insurance salesmen who fear God and walk the narrow way. Separating the wheat from the chaff is a tricky business. This is complicated by the fact that many of the best advisers limit their clientele to the very wealthy. Not many of us have a spare million dollars that we will not need over the course of the next few years. The article link below will provide you with some questions to ask anyone who wants to help you manage your money. It also indicates that our latest financial crash will likely lead to reforms and tighter regulation of the retail investment business.

I feel as though I have learned enough to tell my story but not enough to be able to teach the specifics of what I am learning to others. I encourage you to do your own reading, studying, and exploring. Remember, learn to listen to everyone but to hear from God. Then, every day write down something, however short, in your little notebook and pray that the God who owns the silver, the gold, and the cattle on a thousand hills will give you wisdom, as he has promised in his Word.

During the early 1980s my wife and I really enjoyed watching Hill Street Blues. The show possessed skillfully crafted plot lines and well drawn, believable characters. It also seemed to have just the right balance of yacking and whacking necessary to entertain both of us. Near the beginning of every show, Sergeant Phil Esterhaus would hold a shift meeting with all the uniform and plain clothes officers. He would review all the recent crimes that occurred in their precinct, suspects still on the loose, and dangerous locations that needed extra patrol. As he dismissed his troops he would always add “Hey, let’s be careful out there.

I can’t think of a better way to end this essay.

Matthew 10

[16] Behold, I send you forth as sheep in the midst of wolves: be ye therefore wise as serpents, and harmless as doves.

Some the information in this blog entry comes from an excellent article written by Jennifer Levitz published by The Wall Street Journal (linked below). Most of the information comes from the school of hard knocks.

http://finance.yahoo.com/focus-retirement/article/107144/Taking-Control?mod=fidelity-managingwealth