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One of the most important decisions you make as an investor is where you place your trust. In this article, Paul Merriman discusses this issue and tells what he trusts.
To me, trust is the most important variable in the investment process. When trust is present, my anxiety level drops. I don't worry about my investments or worry that somebody else is doing better than I am. I trust my investing method and I trust my understanding of myself. I am quite confident that 20 years from now I'll have basically the same investment strategy as today. I do expect to continue learning, of course, and to fine-tune my strategy to reflect whatever I learn.
Even though trust is a vital part of dealing with other people, organizations and institutions, it seems to me that few people trust any one thing for very long. Investors move from one financial advisor to another. They skip from one stock to another and from one mutual fund to another. Often without realizing what they are doing, they make major changes in their asset allocation based on seemingly fleeting information.
All this seems to be counter-productive to long-term investment results. The financial media and the investment industry seem to be conspirators and boosters of this phenomenon. In my view, these are tactics that may be effective in attracting money, but they don't do any favors to long-term investors.
THREE THINGS AN ADVERTISEMENT MUST DO
In crude terms, a manager who wants your money has to persuade you to do three things: give up your trust of your current manager, place your trust in a new manager, and then keep your trust in the new manager. If you study financial ads, you will see that most of them are trying to build the bridge of trust. Underneath much of the advertising and marketing of the investment business is the unspoken hope of undermining the trust an investor has in his or her current advisor or money manager. Dreyfus hopes you will lose a little of your confidence in Fidelity, and vice versa, to cite two well-known names. A stockbroker who wants your business hopes you will feel uneasy or uncertain about your current broker. In fact, the whole business is designed to capture control of your assets, and millions of dollars is spent every year to achieve that goal. (Would investors be better served if all that money was spent on better investment research? I don't know, but it's an interesting idea!)
A NATION OF SKEPTICS
As a result of all this, it is no great surprise that many investors have lost the confidence that anything could be a really good long-term investment. Americans are well trained to be skeptical of advertising. But surely we can trust the unbiased media to tell us the facts, right? Perhaps not. The job of the media is not, as you might think, to look after the best interests of its readers. The job of the media is to sell more advertising. And media companies learned long ago that it's next to impossible to sell magazines or newspapers or television shows unless you have something new, different, exciting and better. Which publication would you pick up first: one with a banner headline promising a hot new investment (or diet, for that matter) that could double your results and make you the envy of your friends? Or would you grab a competing magazine whose cover says a 25-year-old diet product or investment strategy is still the best?
Every hour, every day, every week, every month, the media have to hawk something new and different. A magazine may persuade you to adopt its newest "killer" investment strategy this month. But it's got to tempt you with something new next month. Otherwise, you'll be just one less reader that magazine can deliver to its advertisers.
And while I'm on the subject of the media, how much do you know about and trust the folks who write for financial publications like Money magazine? Do you trust them to know what's best for you? Do you trust them to be straight with their readers and to present the complete story? There are several studies that followed up on some of the successful investors profiled in those popular magazines. People who later contacted those investors have found that in some cases the investors simply lied to the magazine about their strategies or investment performance. More frequently, those investors who had been so successful continued to follow their "winning formula" only to see it turn sour.
Yet the magazines almost never bother to follow up on their subjects. (Kiplinger's Personal Finance is an exception.) Doing so would detract from the hot new topic of the day. And as some media advisors would say, returning to a former subject would be "moving backward" instead of forward. Furthermore, magazines would be very reluctant to suggest in print that the strategies they described in such glowing terms a few months earlier-strategies that presumably many readers had copied-didn't work out. There's little room for that in a "feel-good" publication designed to provide a big draw for advertisers selling eternal hope.
Another place we put our trust is in what's familiar and in the names we know. Mention the Janus Fund favorably enough times in the media and millions of people will have a positive impression of it, even though many of those people couldn't explain why. From 1970 through 1992, Janus Fund achieved a 16 percent compound rate of return. That return, and the resulting publicity, helped Janus to become one of the nation's largest growth funds. And even though the fund under-performed for years, the favorable impression persisted. This is fine for Janus, but that favorable impression comes bundled with expectations for superior performance. And Janus managers, who are paid partly on the basis of the fund's size, aren't likely to go out of their way to make sure new investors understand that the fund is unlikely to live up to all these expectations.
WHAT DO YOU KNOW?
Ultimately, nobody can reliably tell you what is the best investment for you without knowing a lot about markets, investing options and your particular financial and emotional needs. You're likely to be the expert on yourself. But unless you are an investment professional, you'll probably have to rely on other experts regarding markets and specific investments. However, the more you know, the better off you will be.
We know people who have substantial investment portfolios but only a general, vague knowledge of stocks, bonds, annuities and mutual funds. Many of these people think these subjects are beyond their grasp and they rely totally on advisors. They are prime candidates for stockbrokers, financial planners of various stripes and mutual fund salespeople-and in a new wrinkle recently, fund salesmen masquerading as bankers. These investors seldom, if ever, delve into a prospectus, a proxy statement or go past the photographs in an annual report. Their investment decisions boil down to one all-important choice: who they trust.
Other people we know read or at least browse through the Wall Street Journal, Investor's Daily, financial books, magazines and newsletters. They make a good effort to understand the investment process. But all the information and investment choices and all the data now available are overwhelming, and many of these people eventually throw up their hands. They are still do-it-yourself types at heart and rarely will they trust any one advisor. But they tend to lend their trust to the media, believing that the Money magazines of the world have done their homework for them.
That trust may be misplaced. These investors usually don't have a clue that many of the articles they rely upon were spawned in the public relations department of a mutual fund company, a brokerage house or some other investment product firm. And my experience is that the well-meaning writers don't know enough about the fine points of investments to spot many of the potential dangers of an investment decision.
HOW MUCH DO THE WRITERS KNOW?
Many times the press touts studies showing the benefits of buy-and-hold investment strategies. The articles reflect the common attitude of so many investors who have given up trying to time the markets. Rarely do these articles even hint that there is another side of the story. It's not that there's a plot to keep market timing and market timers in obscurity. But if a writer doesn't know enough to ask the questions, the writer won't even find out that there's more to the story. And yet readers tend to trust that they are being given the whole story.
IN BANKS WE TRUST
"Guaranteed" is probably the ultimate word of trustworthiness. We trust banks to look after our money, and especially we trust the U.S. government to insure bank deposits. For more than half a century, that guarantee has been good, and there's no sign that's likely to change in the near future. But bankers, unable to make big profits by selling insured savings accounts, are now selling uninsured mutual funds and annuities. Relatively few bankers tell customers in so many words that the mutual funds they sell are "guaranteed"-which they aren't. But those bankers are trying to take advantage of the trust we place in banks not because of the banks themselves but because of federal insurance.
DO YOU TRUST A GUARANTEE?
Even "guaranteed" isn't all it's cracked up to be. In 1926, if you invested $100 in guaranteed U.S. Treasury bills, that investment today would be worth roughly $18, adjusted for inflation and taxes. If instead you had invested $100 in long-term government bonds, you'd have $72 today. The same investment in the S&P 500 Index would be worth $2,384 today. But if you had been really adventurous and put your $100 into the index representing small-capitalization stocks, you'd have $9,853 today, adjusted for inflation and taxes. Again we meet the issue of trust. Back then, people trusted guaranteed T-bills. They didn't trust small-cap stocks. Those who made and stuck with "trustworthy" investments ended up losing.
Do you trust the notion that there is a "right" way for you to invest your money and think your job is just to discover it? Better think twice about that. Everybody has a better idea for what you should do with your money, and everybody is eager to do it for you. Whatever your portfolio is, there is only one person in the world likely to agree with it completely: whoever designed it. I challenge you to find any stockbroker or money manager who would look at your portfolio and conclude it's perfect for you and urge you to make no changes.
SUMMING UP
I'm in the money management business and just like my competitors I try to present my views and my results in the best light, because I believe in them and their value to my clients and other investors. But as a money manager, I remind myself every day that my livelihood and my business depend on the trust of clients. I know from long experience that if I have my clients' trust, I can do my best work for them. I don't take that trust for granted, because I know it is a relationship that's hard to win and easy to lose. And once lost, it is almost impossible to get it back. Everything I do and everything I say is aimed at earning that trust, gaining that trust, earning that trust again-and keeping it. Even though I don't like it, I know that once I lose a client's trust, for whatever reason, the client must move on. Otherwise the client's stress will rise and so will mine. When the trust is gone, so is the client.
I believe the investors most likely to succeed are those who are constantly learning more about investing and who find their advisors and money managers worthy of their trust. To me, that means an advisor or money manager who has two things: competence (the knowledge and tools of investing) and the same interest as the client (in other words, no conflict of interest). When you find such a manager, give him or her your trust.
WHAT I TRUST
Unfortunately, this essay doesn't have a nice, neat bottom line that will resolve the issue. I spent some time recently thinking about what I trust, and I'll share some of my thoughts with you in the hope that it stimulates your own thinking. It was valuable to me to compile this personal list, and I recommend that every serious investor go through the same process. First, a few non-investment items got me warmed up for the exercise.
- I trust that I am better off not smoking;
- I trust that I would be in better physical shape if I exercised more;
- I trust I will live longer if I cut back on the fat content in my diet;
- I trust that filling my life with love and laughter, as well as work that adds value to the lives of others, brings true happiness;
- I trust that my son, Jeff, will continue to do a fine job of running my business, continuing to deserve the trust of our clients and managing the money my wife, Suzanne, and I have saved.
Most of us could make such a list. It's a little more challenging to identify the things you trust about investing. Here's my list:
- I trust I will end up with more usable money in my lifetime with tax-deferred investments than with taxable ones;
- I trust that in the long run, stocks will make me more money than bonds, even though my portfolio contains some bonds to reduce volatility;
- I trust that a major portion of the money I have set aside to leave to my children is best invested in equity mutual funds with the additional discipline of market timing;
- I trust that professional salesmen, such as stockbrokers, will not place my interests above theirs, and that I will be better off to avoid such advisors, no matter how much I may like them personally;
- I trust that well-chosen no-load mutual funds will do better in the long run than equally well-chosen load funds. And I trust this will remain true despite the fact that there will always be some exceptions;
- I trust diversification over concentration. No matter how good I may be at picking a market timing system, a fund or a fund manager, diversification will serve me better than putting all my trust in just one system, just one fund or just one manager;
- I trust I will experience less risk if I build a portfolio of U.S. and international stock and bond funds;
- I trust I will have less anxiety if I use an investment strategy that is designed to protect against market risk;
- I trust that automatic, mechanical market timing systems are much more likely to succeed than ones which are subject to judgment and emotional reactions. Most people make investment decisions based at least partly on how they feel or what they think about the Federal Reserve, President Bush, health care, their own financial needs and their spouses' feelings. Yet the fact is that how you feel and what you think makes absolutely no difference to the market. The market has never changed its course because of how you felt!
MY ADVICE
Make your own personal list of things you trust. If you're willing to share your list, I'd love to see a copy.
"What is true is what I can't help believing."
--Oliver Wendell Holmes
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