10 Aug AN INTERPRETATIVE TALE: “TALKING YOUR BOOK”
Once an investor makes a commitment to becoming a better investor they must overcome a number of hurdles. One of the most difficult hurdles to surmount is the interpretation of information, reading between the lines or what I call true listening. It is difficult to listen because to truly listen you must understand the point of view of the person that is imparting the information. You must understand their motivation. You must understand what they hope to achieve. You must understand what they hope to gain and then you must have a mechanism to relate this to what you hope to gain from listening to them. It’s not easy. On Wall Street when you listen to an alleged expert you must always be aware that they are “Talking Their Book.”
Talking your book is not the exclusive domain of Wall Street. It’s everywhere. When a professional politician speaks to the merits or deficiencies of a plan they are talking their book. They are positioning themselves or their party or their cause for the next election. When a hedge fund manager says that the world is coming to an end or that things have never been better you can rest assured that they are trying to influence your behavior so that the positions in their portfolio profit. Talking your book is as old as mankind so I am not saying anything new. What this tale hopes to teach is a way to delineate the different types of advisors you will encounter as well as the different types of advisors that handle your money. It will also serve as a basis for terms that I use throughout these tales. I have selected specific acronyms that connote images that will be accurate and help you assess the merits of the information presented.
SAD– A SAD is what I call a sales-driven advisor. I use this term because it is my experience that if you hire or deal with a sales-driven advisor you will be SAD. These are advisors that are compensated based on what they sell not the quality of what they sell, nor the quality of their advice. For the time being, SADsrepresent the majority of the advisors in this country and should be avoided. Yes, I have met a few good ones but they are the exception. If your advisor works on a commission basis they aren’t looking after you. In case I’m not clear, some examples would be brokers at Merrill Lynch, Smith Barney and Wachovia or should I say Bank of America, Citibank and Wells Fargo.
FAB– A FAB is what I call a fee-based advisor. I use this term because it is my experience that if you hire or deal with a fee-based advisor you will have a chance at a FABulous outcome. Please note. I said a chance at a FABulous experience. There are no guarantees. However, you are skewing the odds tremendously in your favor if you deal with a FAB instead of a SAD. Examples of FABs are professional financial planning firms and registered investment advisors. I warn you. They have to be good at what they do or your outcome will be no better than with a SAD.
HAM– A HAM is what I call a hired asset manager. These are typically mutual funds and as you can tell from the name, I find that most HAMs are hogs. They charge entirely too much money for the very little that they provide. There are exceptions to the rule, but for the most part investors are far better off using low cost index funds and exchange traded funds than employing the services of a HAM.
MAD– A MAD is what I call a media-driven advisor. I use this term because you will be MAD at yourself if you listen. MADs are professional advice givers, usually trained journalists, and most are very good entertainers. Their advice is often sensational, disturbing or provocative. What is clear is that their objective is to keep you coming back for more. They write books and are held out as experts even though the vast majority of them have very little experience managing money for people. I’ve always maintained that there is a big difference between managing money and managing money for people.MADs don’t know the difference between the two.
PAD– A PAD is what I call a politically-driven advisor or philosophy-driven advisor. I use this term because they are trying to PAD their future. You can’t listen to a Sunday morning talk shows without hearing aPAD. They also appear very often on business shows and it’s important to recognize that what they say has nothing to do with the merits of the subject matter.
RAD– A RAD is what I call a results-driven advisor. This is a very difficult creature to recognize in that they come in many forms. They can be Chief Executives at companies that seem like good investments. They may be hedge fund managers that have a history of success. They may be SADs, FABs or HAMs that are actually results driven and don’t fall under the characterizations of their respective peers. These are the very best people to listen to though they are often the least heard.
Since this tale is meant to teach you how to interpret the news let’s look at a simple example.
You turn on CNBC and you hear Joe Kernen, A MAD, interviewing Bob Doll, a HAM and the Global Chief Investment Officer Equities for Blackrock. You say to yourself—Let’s listen to what the expert has to say. If you don’t know that Mr. Doll’s job is to promote Blackrock and that Blackrock is a hired asset manager then you have no basis to evaluate the merits of what he says. For example, if he says that his firm is investing in Utility, Health Care and Pharmaceutical stocks, you have no idea that this means that he is bearish on the market. You may in fact think he is bullish. He is not. His charter or prospectus calls for his funds to be fully invested in stocks at all times. These sectors represent the safest sectors of the market to own in bear markets and what he is saying is that the market is going down and he is positioning his portfolio to lose less then if he had other stocks. He is talking his book, and he is telling me that he is bearish. The uninitiated hears something entirely different.
Does it matter what Bob Doll has to say? Not really. It’s entertaining and I am as entertained as everyone else. However, no serious investor bases their investment approach on opinion, tips or hearsay. As an exercise, for the next week or two, write down the names of every person that provides you with investment advice or voices an opinion. Then, research their background and determine which of the 5 acronyms most fits the person. You will be amazed at what you will learn.