When it Comes to Investing, You Get What You Pay For

September 17, 2006 –

100.gifSometimes, I’ll scan financial news on Reuters, Bloomberg, MSNBC and so on, not for information to make investment decisions, but just for ideas to write another blog entry. Occasionally I’ll find something to comment on. By now, most of you know that I find most financial news in major media to be junk. Case in point. A couple of weeks ago, Chevron, Devon and Statoil announced the discovery of massive oil reserves, perhaps as much as 15 billion barrels, in the Gulf of Mexico. Major news media commented that day that oil prices plunged in response to this discovery.

The early estimates are that it could contain as much as 15 billion barrels of oil. However, because the oil is located in deep waters, 1.3 to 5 miles underwater, the impact of this discovery may not alter oil supply significantly for another decade or perhaps not even until two decades or more. So are people really stupid enough to let a discovery that won’t significantly impact oil prices for perhaps 20 years out in the future significantly affect the price of oil price futures today? I believe the answer is yes. So many people today do not want to put any effort into their investing. They make ludicrous decisions about where to invest hundreds of thousands of dollars based upon ten-word headlines and 15-second soundbites.

Though you know by now that I am relentlessly critical of the financial media for leading investors astray, today I will actually give them credit. I read an article online that I feel actually contained some good advice. This article was interesting because I discovered this article on a website that I feel contributes heavily to global investment firm’s “dog and pony show”. This article quoted another advisor that stated, “You get what you pay for, and if you’re relying on ‘free’ research and online chat rooms and your next-door neighbor that’s a big mistake.” Then the author stated, “Leave impulse buying for the supermarket and out of the stock market. Have patience. Time gives individuals a rare edge over short-term minded institutions and hedge funds, which tend to trade frequently.”

However, just when I thought that I had finally found an article with solid advice, I click to the next page and read this statement: “The most successful investors I’ve known buy stocks at attractive valuations and hold them for long periods,” said Hugh Johnson, chief investment officer at Johnson Illington Advisors. “It’s time, not timing, that is the secret to success.” To discover what I think about this statement, merely read my previous blog entry titled “The Days of Buy and Hold” on August 14th. The journalist just can’t turn the corner and provide an article that is solid all the way through and succumbs to old-school advisors that have not kept up-to-date with technology in their investment strategies. And don’t skip out on Kaeho’s Corner, because this time around, he actually has much better things than I to say on this subject.


In martial arts, you also “get what you pay for”, but in this case the payment has to come from the martial artist in the form of time, commitment, and the intensity of training. If you “pay” in the form of not cutting corners while training, you will undoubtedly learn the most and elevate your skills much more quickly. While most people take “you get what you pay for” in investing to mean the more fees you pay an investment advisor, the better your returns are, this is a huge myth.

Many investment advisors that have $100 million of assets are more under management are nothing more than superior salesmen. They would be top auto salesman and top real estate salesman if that, and not the investment world, were their profession of choice, In fact, many times they are able to attract many new clients to hand them over significant amounts of money based upon the fact that they have lots of money already under management. Surely if someone manages $100 million for other individuals they must be competent, right? Wrong. The majority of financial consultants employed by large global investment houses merely turn their money over to an outside or internal manager to manage their clients’ stock portfolios. This means that their clients’ stock portfolio performance would be no different than if they handed it over to a fresh-faced 22-year old recent college graduate. Because a 22-year old kid could do the same thing.

Part of this willingness to hand over large sums of money to a “successful” financial consultant has to do with investment psychology. The appearance of success, such as expensive suits, glib conversation, and luxury cars gives the confidence to wealthy individual investors that their assets are being managed properly. But in reality, how closely correlated is this appearance of success to the returns you will gain from your stock portfolio? I would guess very low.

So in investing, the phrase “you get what you pay for” means much more than just a direct relationship between cost and quality of advice. Because in this case, sometimes there is a strong correlation, but other times, there is no correlation. In investing, your payment must be much higher than merely handing you money over to someone else to let them do the work. Your payment must come in time you invest to thoroughly interview financial consultants to understand if they are really qualified to handle your money and in time you invest to conduct research on your own as well. Pay up in this regard and you’ll build wealth through investing much more quickly.

Maholo, KAEHO.

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