Late Edition

There was a TV show in the late 1990s where the main character received each morning the next day’s paper. This gave him info to solve crimes, etc. As a related aside, I actually wrote a short story with the exact same premise in the early 1990s, but that just goes to show you, it is not enough to know, or to have;you must act.

When it comes to most investment bank analysts, they must be using a copy of the previous day’s edition of the Wall Street Journal when it comes to their recommendations. Like clockwork, once a company reports bad news, andafter its stock has already cratered, the analysts who are paid big bucks to tell you when to buy or sell a given stock downgrade from Buy to Sell (or Overweight to Underweight or whatever system they use).

Case in point, on January 31st Under Armour reported weaker than expected earnings, and once the stock had cratered nearly 25% to around $20 per share, the same analysts who were recommending that you buy the stock in the $40s were now telling you to dump it – after it had dropped 40%, 50% or more. This is not an isolated case, in fact telling their clients to sell a stock after already declining precipitously is common practice for Wall Street investment bank analysts. Often these sell recommendations are a great contrarian indicator for the stock bottoming.

What happens next? After the stock rallies 30%, 40% or more, many of those same analysts who told you to sell now step back on the bandwagon and suggest you buy…and so the cycle continues. No wonder the average investor vastly under performs the overall market. When so-called professional analysts are in effect telling you to buy high and sell low, under performance is all but inevitable.

More Wall Street Follies

Those very same big brokerage firms that have paid out tens of billions of dollars in fines over the last decade for doing all sorts of questionable things to their clients (just google the name of your ‘favorite’ investment bank like Merrill Lynch or Morgan Stanley along with the word ‘fine’ and dozens of articles will appear representing billions of dollars in penalties) have been vigorously opposing the new fiduciary rule which heretofore has not applied to them.

Registered Investment Advisors (RIAs – which is what Coastwise is) are held to a higher standard – a Fiduciary Standard – than brokers at places like Merrill, Morgan and the like. In a nut shell, Fiduciaries have to do what is in yourbest interest whereas those working at brokerage firms can do what is suitablefor their clients.

Sounds like a subtle difference? Take a typical situation. Let’s say your so-called ‘advisor’ (usually a salesperson) at Brokerage Firm X wants to put you in the S&P 500. He can put you in Brokerage Firm X’s own S&P 500 mutual fund even if it costs far more than an alternative like SPY or a Vanguard S&P 500 fund. Hard to believe but there are actually proprietary (sponsored by the investment bank) index funds that charge upwards of 10 times a low cost version. Those extra fees can have a massive impact on the balance of your account over time.

It is very common when we review portfolios for prospective clients that they are packed with funds created by the investment bank itself where their (soon to be former) advisor works. The big brokerage firms can benefit 3 ways: they earn management fees on the fund, they could earn sales and/or trading commissions for selling you the fund, and they might receive trading commissions for buying and selling the stocks within the fund itself.

It is no wonder why these brokerage firms are vehemently opposed to adopting the fiduciary rule (one that already governs RIAs) and were successful in getting the Trump administration to suspend its impending implementation. They made up some crazy backwards reasoning as to why it was not in their clients interest that…they do things in their clients interest…. Bottom line, always ask for a clear explanation on expenses, and what fee, or combination of fees, your advisor (and the firm he works for) earns on your account.

What a Difference A Year Makes

This time last year the Dow was sporting a “15 Handle” (as in it was trading in the 15,000s, nearly 6,000 points lower than today). Of course then financial commentators were proclaiming the end of the world as we know it. Stocks were dead, time to bail out and ‘wait for things to become clear again’ they screamed. Of course waiting for things to be ‘clear’ in stock investing invariably translates to buying high after selling low.

The next time the market drops hard – which it will sooner or later (not even Trump can talk his way out of that, although mark my words, when it happens he’ll blame others as quickly as he’s taking credit for today’s rally), think about how dark things looked in early 2016.

If you need cash in the next year or 2, consider taking some profits, hedging, or moving into more conservative/less volatile stocks.

Do this while the feeling in your stomach is all warm and fuzzy. Just as it seemed like the markets could do no right a year ago, today it appears as though the market will march forever higher (which it certainly will over the very long-term, but there will be material drops along the way).

Investing by looking in the rear view mirror is always risky.

Contact us today for a complimentary review of your portfolios to ensure they are well positioned for your near and long-term financial objectives.

Featured Posts
Search By Tags
No tags yet.
Follow Us
Recent Posts