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I continue to be struck by the statistic published recently in the financial press that over half of Canadian investors manage their own accounts, rather than relying on an investment adviser, portfolio manager, financial planner or anyone else who might know a little about the subject.
What troubles me a lot is how these people have come to conclude that they can do just as well as a professional adviser. I don’t know about you, but if I had to choose between one person who has worked as a financial adviser studying the markets eight hours a day, five days a week, 50 weeks a year for the last 20 years, and another person who spent the same amount of time doing maxillofacial surgery, when it comes to investment advice, I think I’d go for the former.
But that recent stat appears to indicate that the maxillofacial guy will go with himself rather than an investment pro for investment advice. I wonder who he’d go to for surgery. An astronaut, perhaps?
What also troubles me a lot is the approach these part-time investment experts are likely to take. Do they really think that investing is a spur-of-the-moment, snap-decision, shoot-from-the-hip kind of game? I sure hope not.
Because if they do, there’ll be a lot less of them around in short order. Do you remember back earlier in this millennium, for about a year or so, when day-trading was the secret to untold profits? You could work from home, work whatever hours you want, and make as much money as you want. All it took was a small amount of up-front cash and a willingness to pull the trigger.
Where are they now? And why didn’t corporate finance pros, securities analysts and portfolio managers flee their jobs in droves to become day-traders? Because they knew.
As you should know. So if you are a non-pro who has decided to make your own investment decisions, fine. But you should know this: you are going to have to do the job almost as well as the pro you’re replacing yourself with. (I say almost as well, because you might be saving a few dollars in commissions by going it alone—or not, if you trade too much.)
That includes you now doing the job of your former adviser, who created your financial plan, made you diversify, saw things in the market that you didn’t, and made you become more disciplined in your approach to the markets, especially at giddy times, and at nadirs.
But it also includes the analysts the adviser relied on, as well as other departments in the brokerage firm such as economics for macro forecasts, or the tax department for those kinds of issues. You’re going to have to do almost as well as all that, or suffer incrementally on your overall return.
Let me touch further on just one aspect of this going-it-alone approach: stock analysis. I have written several times in the past (May 15 through June 26, 2008) on how you can determine the intrinsic value of a common share using the dividend discount model (DDM).
But that’s something you do only after you’ve decided, through rigorous fundamental analysis, that it’s a stock you want to own in the first place. The fundamentals come first. The DDM simply tells you whether a stock you’ve already determined to be good is also trading at a good price.
In my opinion, there is a right way and a (very popular) wrong way to doing that fundamental analysis. Going forward, I intend to show you both. So if you are one of these do-it-yourself investors, I invite you to stay tuned. It might help you to shore up the analysis side of this second job you’ve decided to take on.
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