Investing: Part I

"Twenty years in this business convinces me that any normal person using the customary three percent of the brain can pick stocks just as well, if not better, than the average Wall Street expert."                                                  …Peter Lynch

Every investor has three issues to contemplate when it comes to putting ones savings to work in the stock market. The first is finding someone whose ideas and guidance you can trust and who has a proven track record; the second is knowing when to buy; and third, when to sell a security.

The first problem is much harder than you think.  The main reason it is so difficult is because the majority of professionals in the industry are employed by companies whose self-interest in generating commissions trumps that of the clients.  One of the main principals of investment advisors is the “know your client” rule (KYC).  This rule basically stipulates that as an advisor you must collect the important facts and financial objectives about a client.  The second specifies that any recommendations the advisor makes must be suitable to the client's objectives. The KYC rule is humorous and the most two-faced principal of any profession because profit of the broker and the institution they work for comes first.  The majority in the investment business are told what to buy, and occasionally, what to sell for their customers.  In many cases, a brokerage house will issue shares for a company and it is then responsible for the release of the shares into the open market in order for the issuing company to raise as much capital as possible.  More often than not, the brokerage house is paid in shares of the issuing company at a discount to the issue price. Once the shares are ready to be released into the market, the brokerage house will issue a buy recommendation and its brokers will disperse the shares onto their clients.  The brokerage house will profit by its own shares realizing an instant capital gain and by the commission it charges for purchasing the shares for its clients even if the stock is not suitable for client.  This is contrary to the KYC rule. Another common practice that goes against the KYC rule is a firm will load up on a security at a lower price and then get their sales force to recommend those shares to their clients.  The sales force would then receive bonus commissions for placing clients’ money into those shares regardless of whether it suited the needs of the client.  Most of the sales people, sorry, “Investment Professionals”, could only see a bonus commission.  This was common at the firm that my father once worked at.  He left after a few weeks because he was, and still is, against this type of business.  Fortunately, as my dad put it, “luckily, in about a year’s time, the firm disappeared”.  Breaking the KYC rule runs rampant in this industry.  Obviously a mutual fund salesperson will only sell the products created by the company they work for.  The same can be said about most ETFs and life insurance professionals.  As a result, it is rare for a client to receive a product that fully suits their investment needs. An investor, if they have the time, can spend unlimited hours searching for an advisor they can trust.  With a bit of luck, they will cross paths with an individual that makes sense and gives honest opinions and suggestions on their financial wellbeing.  However, finding that individual is rare and we hope our readers and our clients find Sacola fills this need. We have found about a dozen of these people (David Rosenberg, Jim Rogers, Patricia Croft and Warren Buffett, to name a few) whose opinion we truly respect.  While we may disagree with them at times, it is obvious they have done their own research and given serious thought to their conclusions.  Unfortunately, the truth is that the majority of people in the investment business do little research and understand very little about investing.  Yet, it is these people who most investors end up with. ...to be continued