In a moment, I will tell you a true story. It’s about a group of lovely grandmas who are infamous for making a classic investment mistake and lying to the public about their investment track record.
An expert’s image is created by packaging, and it counts for everything at seminars and workshops and on radio and television. Yes, show business trumps the facts, and the track record that many experts present to the public is not always what it seems.
You have heard it a thousand times: Things are not always what they seem. You will have a better chance of not shooting yourself in the foot if you stop wanting something badly enough (fear and greed) to rush into giving yourself reasons to make a bad decision. At the moment you make a decision, you will not know that you may have made a bad decision–that is why it is called a mistake.
The Beardstown Ladies investment club was packaged and they were naturals on stage. These Grandmas were so charming that no one questioned the lies they told us about how they crushed the experts on Wall Street with their stock picking skills.
Now, lying on TV and radio is not anything new. Many experts leave out material facts about their track record for the purpose of making themselves look like something they are not. But the bottom line is this. If you leave out material facts about your track record, you are deceiving the public.
Prior to this, did you know that leaving out material facts is a form of lying? It is lying, and that is why you need to ask the right questions before you invest your hard-earned money. The first question you should always ask an expert is this. Do you have at least a ten-year track record of beating the market? If so, show it to me, but do not try to fool me by cherry picking investments that you did not own back then. And don’t try to fool me by cherry picking time frames, either.
My point is this. The media and the public fell in love with the Beardstown Ladies, but it was the kind of hoax that not even these grandmas knew was a lie. They were happy with the growth of their investments, because they did not realize that most of the growth in their portfolio came from their own money that they invested each month, not from capital gains. And even their investment adviser, who became famous along with them, did not know how awful their real Return on Investment (ROI) was. The bottom line is this. The adviser did not know that he and the lovely grandmas were lying to the public about their track record.
Do not make the same mistake that these grandmas and their investment adviser made regarding their ROI, because if you make it with your own investments it may cost you a fortune–long term. How? You will be satisfied with your awful investments that underperform the market, and it will never occur to you to switch to investments that are designed to match the market.
Here is what I am talking about.
The Beardstown Ladies had to apologize for lying to the public after a reporter named Shane Tritschm looked at the facts. The facts showed that the growth in their portfolio came from their own money, which was the deposits that they made into their investment account, each month, and not from the huge capital gains they claimed they earned on their stocks.
The ladies and their investment adviser claimed that their highest annual return was 23.4 percent, which was amazing for that time-frame, but facts are stubborn things. A Price Waterhouse audit uncovered a yearly return of 9.1 percent. In other words, their stock picks underperformed the market for that same time-frame.
These lovely grandmas could have invested in no load, low cost, index funds and not paid their trusted investment adviser a bunch of money in commissions. Had they done that they would have matched the market less the cost of their funds, and they would have enjoyed the following benefits:
1. They would have had more money, because they would have at least matched the market’s performance–long term. Instead, they underperformed the market.
2. They would have had more time, because it requires less time to research index funds than it takes to research stocks and managed mutual funds.
3. They would have had less stress, because it is comforting to know that your investments will match the market’s performance less your cost and that your ROI will be good enough to beat the pants off most experts.
If you want more money; more time; and less stress, you can do it the easy way: invest in a mix of investments that will match the market’s performance. And, too, the easy way is to read my blog—every day. How you invest your time, every day, really does matter most. That way it does not require more than a few minutes of your time to invest, because you can pick up the telephone and tell the brokerage firm’s representative what you want him or her to do for you. Easy! Never ask an investment adviser what you should do about your investments because he or she has inherent conflicts of interest. Instead, give him or her instructions on what you want to invest in. See?
Summary: Your IRA account, 401(k) plan, or 403(b) plan may be growing because of your own money that you contribute each month, and not because of capital gains from your investments. A time-weighted return will show you the truth about your investment picks because it accounts for deposits, withdrawals, and gains or losses during a certain time frame. Or you can you can just match the market’s performance. That way you will not have to worry about if you are doing the right thing for yourself and your loved ones.
The bottom line is this. The worst thing you can do is to be happy and/or satisfied with your investments that underperform index funds; especially, if you do not see what is happening with your hard-earned money until you retire.
Best wishes,
Your teacher, Frank Cirullo
