At Beck Bode, so much of our work relies on dispelling widely held though unproductive (I would go so far as to say false) ways of thinking about the markets and money. What are the patterns of thinking that we need to jog or disrupt in order to wake up folks to what’s really going on? What are the preconceived notions about money that get in the way of their long-term financial success? Let’s look at six myths that get in the way of successful investing.
Myth #1: I Need to Pay Attention to the Markets On a Regular Basis to be a Successful Investor
Several of us here at Beck Bode like to dig in the archives and watch or listen to old recordings of my mentor, David Mallach talking about his experiences as an investor. One of my favorite clips is one where David shares that there are days when he would go to his office and never even turn on his screens to see how the markets are doing. Now David is in a league of his own when it comes to successful investing; he has made tremendous amounts of money for some of the wealthiest people in the world. The Strategies we employ at Beck Bode are the ones he taught me, and which we actively use for our clients today. And to hear him say that he doesn’t even bother to check on the markets on a given day speaks to the validity of his investment philosophy, which states that we don’t care about the price of an equity, nor do we care about how it has done in the past. If you really want to know how a stock is trading, go to Yahoo Finance but you won’t find us looking there, either. Because all we care about is information about the future, and I will share with you why in a moment. That’s all that matters: quality information about the future. This brings us to myth #2…
Myth #2: Stock Price is an Indicator of Whether a Company is Doing Well or Not
If you’re wondering why we are not glued to our screens looking at the stock price of the day, it’s because whatever market information we gain about a company today is irrelevant to us. This may come as a shock to people who are not familiar with the Beck Bode Strategies. Why are we not looking at the current stock price of a company? The price of a stock today does not reflect any relevant information about where that company is going. The future stock price of a company is not affected by events in the past. Prices are pulled up by expectations of the future. You get no indication or expectation by looking at whether a stock is currently trading at $20.50 a share or $40.70 per share. It's irrelevant. What matters tremendously is what some of the smartest minds in the world whose sole focus is understanding that company's business - what do those people expect the company to be able to earn over the next 12-18 months? And how will those earnings estimates change in future months?
Real price appreciation or depreciation comes from expectations around future earnings. Price appreciation comes from an expectation set by experienced analysts, who had previously said that based on their research they thought a company would earn X, now based on their research believe that the company will earn that much more, namely Y. That is what pulls company prices up.
These analysts are highly capable and highly experienced, working for highly respected institutions with a long history of providing excellent insight on companies. Even so, sometimes they overestimate the future earnings of a company. In such instances, they must come back and revise their estimates down. When they make mistakes in their research and they overestimate, that's what pushes the price of a stock down. None of this information can be gleaned from the stock price at which that company is trading today, nor can it be gleaned from historical information about how the stock price has done in the past.
This brings us to myth #3…
Myth #3: Technical Analysis Can Help Me Predict the Future
If anyone or anything could predict the future, do you really think we would be in business? Technical analysis, which is the charting of past information to predict future trends is just utterly ridiculous. The notion that something that happened five years ago will be able to give me some information about reaching my financial goals 25 years from now is crazy. But how many people turn to the financial media, which is largely focused on technical analysis? Lots of people do this! Why do people tune in? Because they are attracted to certainty. People want to hear something that will put them at ease, let them know that they will have X dollars in the future, that they will be able to send their kids to a particular school, or live a particular lifestyle.
Sorry to break it to you, but technical analysis will not get you to your most cherished goals.
Myth #4: When the Market Changes, I Need to Make a Change to My Portfolio
The idea that aspects of your financial plan need to be adjusted based on what ends up happening in the future economy or in the state of the world. I’ll use the word again: ridiculous.
Here’s how we at Beck Bode help people chart their financial course. We start with a financial plan. That plan states what we need to do and what you need to do to get you to where you want to go. There’s the finite quantitative side of what it will take to get there: it’s how much you will need to save, and how that saving will need to grow, adjusted for inflation, to help you make a comfortable decision to, say, retire. That’s the essence of any financial plan that’s worth its salt.
Knowing that there is no certainty about the future, we need to base your scenario on some quantitative data that at least points the way to how much you need to save, how much you need to earn, over the timespan that you have available. The data we have available to us is the long-term historical performance of all asset classes: equities, bonds, real estate, etc. We look at the long-term diversified equities markets, how has it performed? We look at the long-term diversified bond market, how has it performed? We look at all the different interest rate cycles over time, and all the economic and political happenings over time.
Once you look at the past with a very wide perspective, you will arrive at the conclusion that yes, we do not know at all what the future will bring, but based on 100+ years of data on the stock and bond and real estate markets, for the period of time that our typical client is investing (which is roughly 30 years, give or take), then the equities markets have produced around 10% growth on average per year.
Let’s just say we take a more moderate approach and set an expectation for an even more reasonable rate of return long term, namely 7.5 or 8 percent, not 10 percent. Can we get the client to their desired destination using an assumed rate of return of around 8%, which is lower than the historical rates of return of the overall market? If they do better than that, then it’s just additive – and fantastic! The whole idea, though, is to set expectations that are realistic and achievable. We set the expectations and then we stick to our plan.
To be realistic, we do know that the stock market experiences major corrections of 20% or more- so-called bear markets- every five or six years throughout history, and many smaller corrections all the time. Despite wars, assassinations, economic cycles, epidemics or pandemics, the equity markets over longer periods of time have averaged 10%/year growth. Let me repeat this: despite wars, assassinations, economic cycles, epidemics or pandemics, the equity markets over longer periods of time have averaged 10%/year growth.
I say all this to you because to think that we are going to shift a client’s financial plan a number of times based on a reaction to external conditions is to say that we will react to the ups and downs of the market.
It doesn’t make sense, and we won’t do it.
Myth #5: Tax Considerations Should Drive My Investment Decisions
People often speak to us about not wanting to sell certain holdings because of the tax implications. Look, if you're in a terrible investment, and the best analysts on the street are lowering their earnings estimate multiple times yet you, because you happen to have held that stock for 20 years, refuse to sell – because you’ll have to pay taxes on it… well, you’re in a bad spot. I say you’re in a bad spot because you are not exhibiting the characteristics of a successful investor. You’re letting your emotions get in the way.
If you want to be a successful long-term investor, you need to have a short memory. You need to sell and move on. Tax implications don't have a seat at the table when it comes to decision-making. I’m thinking of the clients who bemoan that they had capital gains of over a million dollars last year. Well, doesn't that imply that they made much more than a million dollars? Hey, what a great problem to have!
In our line of work, it’s important to have courage. Yes, it takes courage to hold the line when clients are afraid about the movements of the market. Look, clients do understand those market movements are out of the advisor’s hands. Yet when it comes to selling a position and having to pay taxes on it, that is within someone’s control. We know that and clients know that, too. It’s easier for a financial advisor to take the path of least resistance and submit to the client’s wishes to defer taxes, to allow a client to hold on to a position much longer than they should.
If you’re a financial advisor and you’re letting a client hold onto something they ought to sell, just because they don’t want to realize a capital gain, you’re doing them (and yourself) a disservice. And if you’re a client holding on to a position longer than you should, then you’re doing your portfolio a disservice.
We say: sell and move on.
Myth #6: The Outward Appearance of My Financial Advisor Reflects the Quality of Advice I'll Receive
Early on in my career, I used to drive a beat-up Nissan Maxima. Even back then I was using the same Strategies we employ at our firm today – the very same strategies that my mentor, David, has employed to manage massive wealth over the course of his career, and the same strategies we use to manage the considerable wealth of our client base. But imagine the reception I would receive today if I rolled into a client meeting driving my old Maxima, as opposed to a Range Rover.
People are attracted to the outward appearance of success. Maybe they think that if they invest with a guy that drives a Maserati, they will be able to afford one. Or something like that.
That a client would place a value on my capabilities as a financial advisor based on my choice of vehicle is unfortunate – and difficult to change. I am not implying that you ignore signs of basic care: dressing professionally and paying attention to one’s grooming is less about being perceived as successful and more about demonstrating professionalism.
But there is a flawed logic that if an advisor drives a particular vehicle, lives in a particular neighborhood, and their kids attend a particular school, that that somehow imparts some legitimacy to them and the quality of their work. Nothing could be farther from the truth.
Are you letting the tail wag the dog?
As a consumer of financial advice, if you are not looking deeper, if you are not asking “Why?” you may be simply buying into “truths” that are widely accepted without proof. Remember, successful long-term investors ask good questions, they don’t let their emotions get in the way, and they don’t let the tail wag the dog – when it comes to buying, selling, or taxes!
So that’s it… I’m sure there are many more myths that get in the way of success, but these are the big ones we encounter. If you have other ones to add to our list, please email me at email@example.com – we would love to compile them and post them for comment on our social feeds.
Ben Beck is Managing Partner & Chief Investment Officer at Beck Bode, a deliberately different wealth management firm with a unique view on investing, business and life.