September 1, 2006 –
Every once in a while, I’ll read other successful people’s blogs to see what’s on their mind. We try to concentrate on the blogs of successful entrepreneurs to see what we can learn from them. Sometimes I’ll go online and read maverick Mark Cuban’s blog just to see what he’s thinking. Mark Cuban is an American billionaire that made his money on the dot.com boom in the early 1980’s. That’s why I was shocked when even a tech guru like Mark Cuban wrote in his blog that investing in the market was, in his words a “crap shoot” — that in reality, nobody could predict with reasonable accuracy which stock markets in which countries were going up or down and especially, nobody could predict with any consistent accuracy over the long run whether individual stocks would rise or fall.
I thought, have I actually figured out something that even a billionaire that made his fortune from technology, has failed to realize? Am I really that far ahead of the curve in the investment game? I thought, “Maybe Mr. Cuban made those comments because he undoubtedly has been deluged with calls from financial consultants from major global firms wanting to manage his billions of dollars.” And we know he’s smart enough to see through all the smoke screens of these consultants.
So I’m here to tell you what I know Mark Cuban has realized. So here are a couple of things that do make investing a crapshoot:
(1) Most financial consultants, private wealth managers, etc. that are employed by large firms are SALESMEN first and foremost.
If you have a choice between an equally competent independent financial consultant (unaffiliated with a large firm) and one affiliated with a large firm, choose the independent one. The number one goal of almost every financial consultant employed by a large firm is to make the firm and themselves as much money as possible. This goal may not necessarily translate into making you as much money as possible, and most times, it does not.
Most firms will always preach do what’s best for the client, but in reality, their compensation structures often silently encourage financial consultants to do what is right for his or her wallet at the expense of their clients. This may result in financial consultants fully investing you up front at times when dollar cost averaging would be a better strategy (because consultants are not compensated for idle cash in your accounts).
Payout structures at many major Wall Street firms increase as the fees and commissions generated by the financial consultant increases. This incentive structure has caused many a financial consultant to go “bowling for dollars”, an approach that causes a financial consultant to call all of his clients to sell any possible product or service just to generate any possible additional fees or commissions in order to reach the next higher payout level. How many times have you received a call from a financial consultant that starts “I was just thinking about you today because I had a really good idea”? Now you know why.
(2) Although many financial consultants are well versed in asset allocation strategies, they know little to nothing about portfolio management and thus utilize internal and external portfolio managers to manage your money.
Don’t get me wrong, it’s not necessarily bad to have a financial consultant that just uses internal or external portfolio managers to manage your money. In fact, you can achieve very good returns with this arrangement and you may be quite satisfied. But most times you’re probably only satisfied because investment firms are notorious for expertly low-balling your expectations.
Everyone knows the saying “Those who can, DO. Those who can’t, TEACH”. Think of the financial consultants who solely use money managers on behalf of their clients as those who TEACH. Next time you meet with your financial consultant, ask them well or so poorly. Some will be able to answer this question with precision and clarity but most will not be able to tell you anything at all. Think about what this implies.
One of the most common things you have heard by now is “past performance does not guarantee future performance.” If your financial consultant cannot inform you why certain stocks that you own are performing well and others are not, is he or she really even qualified then to choose the portfolio managers that manage your money? What types of questions is he or she asking to determine if that portfolio manager will have success in the future? Or is he or she just looking at past performance figures? And as we all have learned by now, past performance does not guarantee future returns.
Until next time, follow the MoneyMites to make More Money.
No, you idiot J.S. Cuban hasn’t realized what perhaps you may have because he doesn’t need to. He’s already made billions and doesn’t need to make billions more in the stock market. If he needed to, then he would have realized what you’ve realized already too. And as far as your those who can, do and those who can’t teach theory, that’s also stupid. How about people who “do” and who “teach”? There are plenty of those. I know because my martial arts instructors were some of the best, most highly trained operatives in the world, so they definitely could “do” and they also “taught”.
But that’s not very zen of me I know. So we’ll end my comments with a nice zen like feel. There is a concept called “kime” which means tightening of the mind. Cuban accomplished what he did because of a singular focus on a goal. Likewise the overwhelming majority of individual investors can accomplish returns ten times better than the usually do if they also had this singular focus. That’s not a joke. Ten times better than what you have accomplished in the past is not out of the question. But most are too lazy to learn how to build wealth so they turn their money over to a large investment house and stagnate in mediocre returns for decades. Master the “kime” of investing and your returns will explode.
Thanks JKIM