CHAPTER
22

Becoming a More Advanced Investor

In This Chapter

• How to judge the integrity of financial advice
• Finding free information and education
• Benefiting from the experience of others
• Worthwhile organizations you can join
• Developing your own system

As I’ve said before, if investing were easy, everyone would do it. Actually, most people do invest, but they’re often completely uncomprehending of their choices, as in their 401(k) plan, or they’ve made a few bad choices and given up. You’ve made it through this book, but someday soon you’re going to have more complicated questions. How can you improve as an investor?

Do you want to increase your understanding of how markets might affect you? Do you want to learn to scrutinize companies in more depth? Could you benefit from a place to ask questions, get feedback, or hear other investors’ ideas and analysis? In this chapter we look at how to become a more advanced investor.

Knowing Whether the Source Is Reliable

One of the best ways to judge the reliability of financial advice is to understand how the author is getting paid, or what the financial interest of the business is. For example, if you’re getting free information from an insurance company, that education, while perhaps valuable, is going to emphasize strongly the importance of insurance. A mutual fund company’s brochures and webinars are going to highlight the company’s products and the advantage of their particular investing philosophy. That’s not to say that there’s no good information to be had—you just have to dial down the sales-y portion of the materials.

When it comes to popular media—television programs, cable channels, newsstand magazines, even venerable newspapers like The Wall Street Journal or The New York Times—you have to realize that part of their reason to be is entertainment, and the other part is finding something new to say. If they offered the same old sensible advice every day, subscribers would be bored into cancelling.

Bias

Advice and coverage of the marketplace also generally carries a strong political bias. I suppose there might be a socialist or left-wing Democrat who works for The Wall Street Journal, but in more than 20 years of reading it daily, I haven’t identified who that might be. This conservative, capitalist leaning of much of the financial press means that corporate governance and behavior may not be scrutinized as closely as the individual investor might like, and tax policy that consists of anything but lowering taxes will be roundly criticized. In the 8 years of his presidency, I don’t think The Wall Street Journal ever published a flattering picture of President Obama.

While coverage of business and government policy tends to be moderately to extremely conservative, consumer issues and advice can be a bit more evenhanded, although the advice will emphasize personal action and responsibility rather than any kind of structural or societal change. I suppose that’s no surprise. Nevertheless, you don’t have to be conservative to make money. Just know that the coverage you’re reading in every publication has its own biases.

Magazines

The stock-in-trade of every financial magazine used to be screaming cover articles such as “Our Top 10 Picks for Mutual Funds in the Next Year” or “Three Stocks to Buy Now” or “The Sky Is Falling!” or “Next Year Will Be the Best Ever!” I recently saw a hilarious presentation that selected a dozen or more covers or lead articles, and in every single case what happened was the exact opposite of what was predicted in the magazine.

The magazines have finally figured out that they haven’t done all that well with their predictions, and it’s become questionable legally how much liability they might have if anyone relied on these recommendations. So whenever you read any financial publication, tap your ruby slippers and remind yourself that there’s no one who knows the future.

Now these magazines focus on what you can do to recover from the latest disaster or poor choices you may have made. I find the articles that focus on a family’s finances particularly heartbreaking. They ask advisers to comment, but the problem is always similar—not enough money saved, no insurance, too much debt, no will or estate plan—and the answers are always the same: save more, pay off debt, protect yourself. I hope it helps readers to see themselves and take the same advice.

I do think these magazines are valuable in one respect: they cover changes in laws and tax policy that might affect you. Have the rules changed for Social Security? Is there any change to taxation of capital gains or dividends? What’s different about retirement accounts? Regularly reading a financial magazine or two will keep you updated.

Gurus and Other Personalities

Before you become enamored of any book author or broadcasting guru, please think through their background. Be especially suspicious of anyone who promises to help you get rich quick, recommends hot stock picks, tells you the sky is falling, or (maybe) has a brokerage background. You know how well all those diet gurus have worked out, right? Same with financial advice.

I think there should be a special hell reserved for financial media personalities and people who counsel people mired in debt, but then refer them to high-commissioned salespeople via their website. Often these referrals are, or should be, in direct contradiction to the advice given to be frugal, to be aware of costs, and to seek a fiduciary adviser. Sometimes the main qualification of these referred advisers is that they’ve paid a big chunk of change to be listed on the website.

Just because you’ve heard about a program or an adviser at your church, or because the adviser purports to be an upstanding member of your religion, don’t necessarily trust. Many marginally scrupulous people and programs seek to cloak themselves in credibility by claiming kinship through religion.

Just because it’s published doesn’t mean that it’s been carefully vetted by an editor or expert in financial issues. Or that the journalist writing the article really understands the field. And the experts quoted may have some agenda of their own, or the letters after their name may be a professional designation that takes 2 weeks and a nonproctored exam to obtain.

Try to avoid overly pessimistic, world-ending scenarios. The world marketplace isn’t going to collapse, and if it does, we’ll all go with it except for those who have stashed cases of tuna and canned milk in their basements.

For beginning to intermediate investors, The Wall Street Journal and the business section of The New York Times are near-required reading. You will not understand everything you read, especially at first, but over time and with regularity you will build your store of knowledge. Concepts are repeated so often that eventually you come to understand them by exposure.

Much as I love actual newsprint, I’ve switched my subscriptions to electronic format. I find it much easier to browse, skim, shut out the noise, and get to the content I want. Look especially for news on any company you own or are contemplating, note management changes or regulatory sanctions against any of the investment or mutual fund companies you’re connected to, and do try to read through the special reports or focused reporting on taxes, investments, and so on. Both newspapers also regularly run articles on college financial planning issues, home buying, divorce, and retirement. Spend 20 or 30 minutes on one of these papers every day and you’ll build your knowledge significantly in a few months.

Even though I’m somewhat skeptical of magazines, I do recommend you pick one up from time to time—monthly if possible, quarterly if you’re pressed for time. Alternate your selection among a few publications until you find one that’s easy for you to understand and that actually runs articles that interest you.

Next, browse a few financial blogs. You have to be very careful here because most bloggers make money by running ads, and some of the commentary may push people toward the products. If there are reviews, try to figure out whether the writer has a financial interest in the product or service recommended (that doesn’t mean there isn’t worthwhile information there). Blogs can be especially valuable because they often have the latest news long before it reaches print publications.

Webinars and podcasts are available from nearly every big mutual fund company. These will generally be goal-based, giving you information about retirement, college, planning, asset allocation in their (in-house) mutual funds, and so on. Many of these are recorded and on-demand, but you might seek out the few that are live-cast, because you may be allowed to ask questions.

In addition, most of these companies put out consumer-oriented brochures, and additional material that any adviser can get for you. The companies do everything they can to make these user-friendly (lots of white space and lovely photographs). While they’re often a good free introduction or reinforcement of the basics, they can come to seem pretty simple, pretty quickly.

Advisers also usually have access to white papers oriented to professionals, giving more in-depth background research. Ask your adviser to give you research on any topic you want to study in depth. Once you feel ready, and feel the need, you can ask questions like whether intermediate-term TIPS or short-term TIPS are better, and in what market environments? Can the benefit of using an adviser be quantified? Questions about making strategic portfolio decisions, ETFs as tax strategies … you get the idea. Maybe it sounds deadly dull now, but eventually you’ll want to know more.

I’ve dissed bestsellers, but there are some classic works that continue to offer sensible advice. After a time, the prices quoted and the companies mentioned may become out of date, but the principles endure. Plus, it’s fun to see how right they were, if some time has passed since the book was published. I’ve included a list from my own bookshelf in Appendix B.

It’s hard to discuss financial gurus without mentioning Warren Buffett. No matter how much you read, you’re never going to invest like he does. He has every possible resource at his fingertips, a support staff available 24/7, and more than 60 years of experience. You don’t and I don’t. But what you can access, for free, is his annual letter to shareholders of Berkshire Hathaway. The letters are all available on Berkshire Hathaway’s website going as far back as the 1990s. Reading through a few recent ones will give you a pretty succinct education in the Great One’s thinking. Reading through all of them, particularly when he analyzes his mistakes, is worth at least one college course in investing. And they’re witty. The new one comes out in May of each year, so put it on your calendar.

Speaking of college courses, junior colleges and adult education centers (as well as senior centers and libraries) frequently offer seminars, talks, and courses in investing, retirement planning, and other areas. These offerings have a veneer of respectability, but don’t necessarily believe everything you hear. All it takes is a proposal and convincing the venue that you have a good topic (or, in the case of community colleges, that you can scare up enough paying students). Some speakers are very good, some are shills for the brokerage industry.

I speak frequently at libraries. In the Chicago area, one week in April is designated Money Smart Week, and the Federal Reserve Bank sponsors and promotes activities about consumer financial issues. While some excellent events are offered all around the area, the program is sponsored by banks and brokerage houses as well as others with less of a financial interest in the advice. Most speakers (myself included) offer the programs as a way to let people know they exist and what services they can offer. Check with a librarian to find out what programs might be offered for consumers. You can get information on specific topics, and a chance to ask questions when you have a live presenter.

Find a Group

You can’t get all the experience you might wish for in a few months, or even a few years of investing on your own. But you can benefit by the experience of other individual investors by joining an investment club or finding a group that offers programs on investing. I recommend you check out at least two: BetterInvesting and the American Association of Individual Investors (AAII).

BetterInvesting

BetterInvesting used to be known as the National Association of Investors Corp. (NAIC). It’s weathered a few storms since its founding in 1951.

In the 1990s the organization was made famous, then infamous, when one investment club (the Beardstown Ladies) published a number of books claiming outsized returns. Eventually, an independent audit showed that they had miscalculated by including their own contributions in returns. Their popularity, and the fad for investment clubs, took a downturn. However, the Ladies are still investing.

There were also some gyrations in management during the 2000s, which appear to have settled down since the hiring of the new CEO.

As I mentioned in Chapter 11, BetterInvesting promotes a method of analyzing individual stocks using their Stock Selection Guide, which analyzes many factors derived from a company’s data to consider whether the company has good growth potential and currently appears to be a good value. The basic form of this software is available online to members, and a more extensive software package, including portfolio management tools, trend analysis, and a whole raft of other tools that can take you a significant amount of time to learn, are available as purchased software.

BetterInvesting’s magazine (published 10 times per year) focuses on analyzing a Stock to Study, an Undervalued Stock, revisiting previous stock picks (even some that did not do well), and various articles on financial topics. There’s a specific section for beginners. Although BetterInvesting and its members are primarily focused on stocks, beginning in the 1990s, BI began coverage of mutual fund investing as well, because so many members expressed a need for help in selecting investments for their 401(k)s.

Local investment clubs under the BI umbrella focus almost exclusively on individual stock analysis and purchase—you won’t hear much about mutual fund investing at the meetings.

What you will hear in a good club, however, is a lively give-and-take about how other members view current trends, analyze a company, and have different takes on the same data analysis. Some members may have worked in a specific industry and have insight into what makes a good company in that industry. If the club has been around a while, you’ll hear about previous portfolio successes and disasters. Even if you join or form a fairly new club, the process of working through the Stock Selection Guide will teach you a lot about the workings of a company.

Most clubs meet once a month and require a monthly contribution to the stock purchase fund—usually $20 or $30. I view this as the price of tuition—you probably won’t get rich or retire on your share of a club’s portfolio, but you will probably make some money. What you learn, however, along with the opportunity to interact with other members, will be priceless for your own long-term investing success. Generally a club will require members to prepare and present a stock analysis on a regular basis, and monitor some part of the club’s current portfolio. Members will vote on what to buy and sell.

The one difficulty you may have is actually finding a club to join. It does require an investment of time to participate in a club, and because good clubs want dedicated members who will stick to analysis and not be enamored of wild bets on crazy investment schemes, most clubs do not publicize.

The best way to find a club is to seek out and attend local or regional events. Most regions will put on an annual investor’s fair (with many educational sessions) as well as workshops and training events. You’ll be able to network to find a club or two to visit.

Make every effort to participate live in a good club. But if you’re rarin’ to get started, or can’t find or attend a club in your area, you can still enjoy many of the benefits of an investment club by joining BI as an individual, at-large member. Membership will give you access to many website tools and articles, a subscription to the magazine, and the opportunity to participate in webinars. The webinars offered might include information on basic stock selection, when to sell, a magnifying-glass examination of a specific data point and what it means, or a panel of experienced investors discussing their favorite current stock picks, and why. Many webinars are free or low-cost, and most are archived on the website.

You can sign up for a myriad of free email newsletters. Several people involved in BetterInvesting also offer paid subscription newsletters using Stock Selection Guide principles. These can give you some good stock ideas, and walk you through how the recommendations were selected and analyzed. I’ve found their SmallCap Informer to be a worthwhile subscription for a type of stock that’s harder for me to identify. Before you plunge in to any of the specialized products, give yourself some time to learn the analysis methods, watch some webinars, and (hopefully) join a live club.

Because I think behavioral and psychological considerations profoundly influence investment decisions, I think one of the most valuable benefits from participating in an investment club is the stabilizing influence it can have on our attitudes. In a roiling market, it really helps to hear the concerns and accumulated wisdom of other investors, and it can prevent panic selling, over-optimistic buying, and tunnel vision on one hot industry or company. It’s crowdsourcing at its best.

I’ve been a member of BetterInvesting for about 20 years now, and have belonged to two investment clubs over time. The more I’ve used the methods, the better understanding I have of analyzing investments. The instruction and analysis far exceeds anything taught to CFP^®s, and I’m betting the broker on the street doesn’t know the half of it.

American Association of Individual Investors (AAII)

AAII has been around since 1978. Its offerings and orientation are different enough from BI that you should consider joining both.

AAII doesn’t offer investment clubs, or promote one specific methodology for analyzing stocks. There are, however, a number of local chapters that meet to hear presentations and offer seminars and discussions. In addition, the organization invests and tracks two model portfolios, the Shadow Stock Small-Cap portfolio, and a portfolio of the choice of mutual funds.

The AAII website offers the ability to select and monitor portfolios using a number of stock screens. So if you’re curious just how well the Dogs of the Dow, or the Motley Fool, or dozens of other investment schemes are doing, you can monitor your choices on the website. It’s a great way to follow a potential scheme over time, before you put real money into it.

Take some time to explore the website. AAII offers some model asset allocation strategies (which I can’t, due to regulatory constraints on registered investment advisers offering specific investment advice to nonclients). There are plenty of basic courses, often with a little test to see if you really got it, and advice on investing in specific areas: stocks, bonds, and mutual funds.

Some of the material will be familiar to readers of this book, but it’s always an excellent idea to see content presented in several different ways in order to reinforce your learning.

AAII’s 10-times-a-year AAII Journal has a very different tone than BetterInvesting. AAII doesn’t focus very much on specific investments, but rather runs articles discussing various strategies for buying and selling, but also on consumer topics such as Social Security updates, retirement, and withdrawal strategies.

I find that sometimes the articles are quite technical and can present more math equations than the average investor will be comfortable with. It’s not a newsstand magazine; on the other hand, AAII Journal often presents research that is otherwise only available in magazines and journals aimed at financial professionals. If you find the material challenging as a beginner, save a few of your issues and take a few of their online courses. When you return to the Journal, the articles will really sing with relevance.

Just like BI, AAII offers a bunch of supplementary materials you can purchase in addition to your membership. Both organizations also offer software (at extra cost) that allows you to search on specific criteria for stocks that match. I’ve had very little problem finding more investment ideas than I had money for, but for some people, or clubs, these might be useful. Try using Morningstar’s stock-screening tools (free through your library, remember?) to see if they will generate enough ideas for you, first.

Exploit Online Resources of Media and Websites

There are tons of websites and online magazine content, and because I can’t possibly vet every one (and they change frequently), I’ve included a few I like in Appendix B. Two, however, deserve special mention.

Morningstar

Morningstar will drive you crazy with pop-up promos each and every time you visit the home page, until you sign up for basic membership, then a free trial membership, then their rather pricey full 1-year membership (currently $189). If you have the patience to click through, there’s lots of free information on the site. We’ve already examined Morningstar’s usefulness for giving you extensive data. But they’re also a professional source for other information.

The tab for personal finance will give you plenty of articles, discussion, and interviews with prominent financial commentators (some of whom are pretty out there in my opinion, but you may judge differently). You have to be on your guard, as is usual with media, against gloom-sayers and overly optimistic prognosticators, but it’s worth a listen from time to time.

While I discourage you from daily worrying about the market and even your individual investments, if you suddenly find yourself asking some variation of the question What the heck is going on with ______? you can probably find some information about the issue on Morningstar. They provide a daily market watch on a number of indices, and usually commentary on the issues and events du jour. You can set up a portfolio (or several, if you wish) and track performance and news alerts.

I’ll confess that I check the site just about every day, and while it’s probably worth the bucks they charge, I’m even happier to go through my library and get it all for free. See how much you actually use the site—in fact, you may have to limit your time on it in order not to disappear down the rabbit hole.

Seeking Alpha

I have some reservations about bringing this website to your attention because some of the content can be dubious. It’s a crowdsourced information site about any specific investment you want to track and read about. Much of the content is written by financial professionals, but there’s no guarantee that it’s free of self-interest or sellers flogging their own products or investments.

My other caution is to be careful what you sign up for. When I first became aware of the site I input about half a dozen stocks in which I was interested, and in very short order had 892 emails. You may want to limit the onslaught by restricting yourself to searching the site online for any investment you’re interested in, and prevent your email from overload.

That said, if you’re thinking about buying or selling a particular investment, it’s quite interesting to read the commentary of several authors, which may come to very different conclusions. Part of the task of any individual investor is sifting through different interpretations in order to arrive at what works in your particular situation, with your particular investment orientation and needs.

Codify Your Own Path to Investment Selection

As you advance or seek to improve your investment knowledge, you’ll begin to find a path that you feel works for you. For mutual funds, I pretty much set my asset allocation, choose low-cost funds that meet or exceed their index, and rebalance regularly.

Investing in individual stocks requires much more attention and participation than investing in mutual funds. I urge you to keep good records of your thinking by doing the following:

Keep a list of stocks that interest you. Even if you don’t have the money at a specific time, you should keep a “watch” list and monitor the performance of stocks that interest you.

Have a target buy price and a target sell price, from the moment you purchase the stock. When these triggers are hit, you should reevaluate. You might not necessarily buy or sell, but you should use these indicators to jumpstart your reevaluation.

Write down your reasons for buying the stock, so that you will know whether or not the stock has really met your expectations.

Use several different sources to gather analysis. Before I buy a stock I read the analyst report on Morningstar and check out a few commentaries on Seeking Alpha. If I’m still interested, I do a Stock Selection Guide (SSG) on my BI Toolkit software, and look on the BI website to see if anyone else has done an SSG and how close their judgment is to mine. I also look at BI to see whether there have been any feature articles covering the proposed investment. While many of my ideas actually come from the BI magazine, I love to find old articles to give perspective on what the company and the stock looked like 2 or 5 years ago. If I like what I see on the SSG, I’ll trek to the library to check the stock (and the industry, if I’m not familiar with it) on Value Line reports.

Set regular dates to review your current investments. I recommend you check out your stock investments quarterly, when earnings are announced, in order to see if the stock is performing as you predicted. While I look quarterly, I’ll rarely sell an investment unless I’ve held it at least 18 months. BI reevaluates investments at 18 months and 5 years, and pretty much that’s a schedule I follow. Unless the stock has dropped like a stone (and by that time it’s probably too late anyway), I’m generally willing to give it at least an 18-month chance.

Quarterly, I also monitor whether any of my investments have done well enough to overwhelm the others (at which point I’ll consider selling some to bring back a little balance and diversification), and whether I should chuck the worst performers for my next better idea (or more investment in stocks currently in the portfolio).

Develop and write down your sell policy. Both BI and AAII have numerous ideas and checklists suggesting criteria for deciding to sell. These are going to have to be adapted (and changed, when appropriate) for your own personal risk tolerance and belief in what’s important in a stock. For example, some people will sell if a stock drops 5 percent; personally, I’ll tolerate a 20 to 30 percent drop if I can figure out the reason and believe it’s temporary. Because we all have a natural bias against selling and losing money, you should exercise the discipline to write down some questions to review when evaluating your current investments.

I double-check my diversification. Some picks will inevitably lose money, but I can limit the damage by not concentrating on one company, one cap size, one geographic location, or one industry. Even if the industry is currently in favor and doing well, I don’t want all my stocks to be concentrated in it.

You need to think for yourself in making investing decisions, but you don’t need to reinvent the wheel. Hook in to the experience and knowledge of others to improve your own thinking and develop your judgments. Many sources of information and organizations can keep you current and expand your investing education.

The Least You Need to Know

• Protect yourself from the crazies and promoters by using multiple sources of information to form your own opinions and enhance your education.
• Keep abreast of current news, changes in investments, and changes in tax and government policy by regularly reading several press sources such as newspapers, magazines, websites, and blogs.
• Benefit from others’ experience by participating in an investor group.
• Morningstar.com and Seeking Alpha are sources for information about specific investments. Morningstar also offers personal finance articles, news, and extensive data.
• Use your improving knowledge to write and revise your investment policy and criteria for buy and sell decisions.
• Keep track of what and how you’re doing, and revise your methods based on experience.