Sometimes clients come to us with questions about a book they’ve bought or a website they have come across that purports to reveal “secrets” about investing.
While it’s only human to dream about achieving huge returns, when our clients ask us, “Why would a personal investment professional sell their best-kept secrets to investing success?” the answer is simple: They wouldn’t.
Here’s why we recommend taking everything you hear in the financial media – and from your typical Wall Street investment firm – with a (big) grain of salt.
Can a Genuine Wealth Managment Solution Really be Top Secret?
Among popular investment books, you’ll find titles like Secrets of a Stock Exchange Specialist, New and Advanced Investors Share Their Winning Secrets, Uncover the Secret Hiding Places of Stock Market Profits (hiding under a log, perhaps?), and the (redundantly) titled Undeclared Secrets that Drive the Stock Market.
For many wealth advisors, such titles inspire exactly one thought: If your secret is so incredible, why are you selling it instead of using it?
It’s an obvious logical gap in the active management game. Think about it: If a market-beater discovered an amazingly effective strategy, why would they sell it and let the masses in on the secret, thus shrinking the pool of returns for themselves? The only way that makes financial sense is if the profits from the book were greater than the profits they reaped from applying the "secret" strategy -- which, frankly, doesn't speak well for the strategy's effectiveness.
Sound Investment Guidance Doesn't Include Magical Thinking
Anyone who discovers a way to consistently identify mispriced securities – a.k.a. stock picking or beating the market – has two choices:
Use the system to benefit themselves financially
Sell it so that other investors can use it
If a financial advisor discovers a market-beating system and shares it with untold others, this will disperse the returns among numerous investors.
It’s just not rational. The only possible exception for selling a system -- rather than using it -- might be a financial advisor that was motivated by charity, rather than profit. A few may even exist, in some hypothetical universe somewhere.
Investment Professional or Professional Fisherman?
Think of it this way: If you were an angler who knew of an excellent fishing spot, would you tell the world about it or keep quiet and enjoy it yourself? A fishing hole can’t support an unlimited number of users.
And “beating the market” isn’t so different. Due to the flexibility of prices, using secret, super-effective advice will only serve to deplete the fishing hole. Buying an under-priced stock simply pushes its price up until suddenly, it’s no longer under-priced. Excess returns can only be generated when you can purchase a stock for less than it’s worth: In efficient markets, successful strategies self-destruct. Once you’ve taken advantage of that “secret,” it’s already too late.
So while active managers may claim to have ways of identifying mispriced stocks (ironically) what’s actually mispriced is their advice. Their willingness to sell -- rather than employ -- their own advice proves that it’s really worth little or nothing and, in fact, usually has a negative value because of how much time it wastes and the extra risks involved in following it.
It’s a totally one-sided transaction in which they get paid - and you are left holding the bag.