Karen Damato has written a nice profile, "A "Dilbert" Guide to Funds", on Scott Adams, the creator of the Dilbert comic strip.
Scott Adams has an MBA and is a financial analyst. Thus, when he has Dogbert make fun of the mutual fund business, people take notice; and those in the investment community relate. The article also reveals a distaste for active management: "But Mr. Adams has sworn off using professional advisers to oversee his money." For several years, Wells Fargo & Co. managed half of his portfolio, and he says he ended up with a "shockingly" large sum "in companies that weren't even real companies, like Enron and WorldCom."(My bolding.) In fact, Scott Adams did better as a do-it-yourselfer.
Ms. Damato emphasizes that Scott Adams expresses his approval of exchange traded funds by avoiding them in the strip. He says, "...from his perspective as a cartoonist, "there has to be something broken in order to get a joke out of it."
This is an excellent piece to copy and give to friends who are skeptical of the do-it-yourself approach and exchange traded funds.
If you have an advisor who picks individual stocks for you, the question you have to ask yourself is how well does your advisor understand the companies he is investing in. Like Scott Adams, many investors ended up holding Enron (and employees lost their life savings) despite the fact that they were clueless about what the company, and especially Mr. Fastow, were up to. Many self-proclaimed stock pickers got caught up in the hype. This isn't what people need for their retirement funds.
It always amazes me how little people know about the stocks they buy. Information like, "It has paid a dividend for 35 years and has a great track record" isn't research, in my book.
ReplyDeleteI read like crazy before investing in individual stocks--reading at least the past 5 year's worth of annual reports, and trying to find the financial shenanigans they're trying to pull on the public (almost all companies play silly games, and it's fun to find them). Howard Schilit's book, on Financial Shenanigans, is a good place to start as an accompaniment with an annual report.
I'd check out competitors as well, and then see who's buying the products, and then ask them directly about them. Then, with hands-a-shaking, I'd consider pressing the buy button after a silly silly amount of research time. I never trust online EPS numbers either. I like to try calculating what Buffett refers to as "owner earnings": net income + depreciation, amortization and any other non cash charges, minus capital expenditures. It tends to be a more modest figure than EPS, and I think it's far more "real". What amazes me is how many people invest their hard-earned money on "gut" decisions, or because they read somewhere that a company is a good investment.
I was born a financial patsy, I guess. But, as Fisher said in the title of his superb second book, Conservative Investors Sleep Well.
Buying individual stocks still scares me a lot, so I can't claim to sleep as well as Fisher did. Hey, from what his son suggested, old Phil worried about everything. So maybe there's no such thing as a sound sleeping stock picker.
You can't look in the rear view mirror and buy stocks; you have to look through the windshield and anticipate what is ahead, both good and bad.
ReplyDeleteIt is amazing how many usually excellent funds owned Worldcom and Enron as their descent into oblivion was starting. The worst excuse for buying a stock is because it has had a big run up. I think the pros get caught up in the mentality of having to own what is hot way too much.
Re: Andrew I believe you make a really good point when you bring up the quality of research. A sort of new trap investors are falling into, I believe, is the use of screens. Because of computing power individuals can run all kinds of screens on hundreds of data items and even easily back test their screens. They view this as research when in fact they don't really understand the business and the numbers they are looking at. As you point out, high quality research is time intensive.
ReplyDeletere: The Grouch...Hey Grouch welcome back...where have you been? I hope everything is alright. You're exactly right that investors need to look ahead. There were many others in the Enron era and then it was followed by the financials in the more recent period and even General Electric and the autos. Stock picking is very difficult.
Thanks for the comments guys.
DIY
Hi Robert,
ReplyDeleteBeen having a streak of bad luck recently that has kept me from blogging...... broke my leg, then got RIF'ed by my employer the day after surgery..... I've got the cast off now, walking around without crutches and going to physical therapy.... so things are starting to look better and my spirits are picking up.
Jim
Hey Grouch/Jim-
ReplyDeleteGood to hear your spirits are picking up and you are back to blogging.
Robert
Great post Robert!
ReplyDeleteLove the part about Adams saying "there has to be something broken in order to get a joke out of it." How true.
What an excellent reinforcer to those who feel they can't invest on their own with ETFs; they most certainly can!
I love Dilbert---- He's on the money with his advice-- And I agree with his view on ETF's too!
ReplyDeletere: Financial Cents and Barb
ReplyDeleteThanks for stopping by. It is always interesting when smart people who can hire the top advisors see the value of using ETFs. Adam's experience with advisors buying Enron etc. is also valuable because people don't like to admit, much less publicize their investment mistakes. Imagine the shame of those involved with Madoff.
Dilbert is one of the comics you can't help but laugh at loud, especially when they are about mutual funds :).
It is quite interesting that his way of supporting ETFs is by just not mentioning them. I get it though and am a huge fan of ETFs too. It's like having your cake and eating it too: liquidity, diversified exposure, cheap prices.
ReplyDeleteGood point Shawn. Those not aware of the subtlety will miss Scott Adam's indirect support of ETFs.
ReplyDeleteDIY