Saturday, March 3, 2012
In today's essay... ah... er... you won't believe this... We're going to talk about the emotional difficulties of investing...
Don't hang up. We're not turning into the Oprah Winfrey Show. This isn't pop psychology or how to feel about your investments. It's about the serious things that routinely keep people from success with their investments. I'm talking about fear, procrastination, and reliance on false beliefs...
We almost never write about these things. Our daily work is focused on the fundamentals of investing – the how-to stuff like how to value stocks or how to handle allocation. We write about the "hows" and the "whys." We tell you why certain stocks are likely to do better... or worse in the future. But in this work, we largely ignore the largest single impediment to your actual success – how you process information.
As always... a word of warning. We dedicate these essays to giving you the information we'd want if our roles were reversed. I consider this our most important task. If you don't know the context that surrounds our research, if you don't understand how to use it, there's almost no chance you'll be successful.
And I admit... these weekly essays also have a deeper purpose. We all aspire to do good work with our lives. We want our efforts to mean something... to count. I write these messages personally because I believe I'll reach a few people. Not everyone... Not even close.
I know most people will reject these ideas and disregard my efforts. They will say I'm a "scam" and a "fraud." I know these essays – especially this one – will prompt thousands of refunds, costing my firm millions of dollars.
So why do it? I believe I can give some subscribers the opportunity to learn something truly useful. (Remember, there is no teaching, only learning...) The things I'm writing about can change people's lives financially, if they're able to open their minds and think clearly about these strategies. You can judge my efforts for yourself... And I know most of you will cynically judge me. But for some of you... even if it's only a small fraction... these essays could easily be the most valuable thing you get from us during your subscription. In any case, they are my best effort to give something back to you, our subscribers, who have enabled our success.
And so today... I tackle a critically important topic that's intensely controversial. I predict this essay will spur a record number of refund demands. Lest you think I write that in jest, let me begin by insulting you... I'm going to tell you something no one else in the financial industry is ever going to tell you.
The odds are good that you are a horrible investor... You are unlikely to ever make any significant amount of money with your investments. I believe you are far more likely to lose money over time if you continue to buy and sell stocks. This is undoubtedly true of our subscriber base as a whole – and so, more than likely, it's also true about you individually.
Now, with that ugliness in the open, let me tell you why it's true and how you can easily overcome the herd mentality that causes most of the trouble...
How do I know you are probably a lousy investor? Dalbar is a consultancy that has tracked the actual returns of mutual-fund investors for the last 20 years. That's not the same thing as the returns of the fund itself, which is what's commonly published. I use Dalbar's data as a proxy for how newsletter investors are likely to have fared with their investments over the last two decades. Broadly speaking, they are the same population, investing in the same markets. However, you should realize that because mutual-fund investors tend to trade less and invest for longer periods, they probably did better than the average newsletter investor.
That's scary... because the real-life performance of the average investor is miserable. Dalbar explains in its 2011 report...
So while equity mutual funds have gained about 9% a year on average since the study began 20 years ago, the actual annual return earned by the average investor was only 3.2% – which didn't even cover inflation in the period.
The core reason most people can't succeed with their investing isn't because they don't know how (although that's certainly a factor). It's because they don't consider or manage the emotional toll of having their savings at risk. So today... let's look at the top ways people's emotions sabotage their efforts to succeed at investing.
I don't pretend to have all the answers – not on a topic as broad and intensely personal as your psychology. Nor do I believe that if you meditate and center yourself before making an investment decision that you will improve your results. Not unless you already have a great deal of knowledge and discipline.
Today's essay isn't about pop psychology mumbo jumbo. Believe me, there's plenty of that nonsense out there already. Nevertheless, in the feedback notes we get, I see constant evidence of self-delusion. I see countless examples of logical fallacy and almost intentional poor-decision making. And more than anything else... I see defeatism – a false belief that small hurdles to success can't be overcome.
In my experience, unless you're able to formulate a clear plan for your investing – a plan that's logical and based on careful, reasoned choices – you are unlikely to succeed. Likewise, if you're drawing false conclusions or you simply assume that you can't do it, you've got no chance at success.
Let me start by telling you about my own poor choices...
Your faithful editor is broken. For the last six years, I've been dealing with two significantly herniated discs in my lumbar spine – the result of a surfing accident on Hatteras Island during the big hurricane swell of 2006. I'd always been a fearless and relentless surfer (although not a particularly gifted one). As I aged, my passion wrote checks my body couldn't cash. I had a false belief that I was nearly invincible in the water... After all, I had survived countless high-risk situations without any serious injury. Believing I could survive anything in the ocean, I did incredibly risky things – like surfing in huge hurricane waves by myself.
In 2006, my luck ran out. The reality was painful, both to my ego and the false reality I'd enjoyed for 20 years. Following my injury, everything about my athletic pursuits changed. I stopped surfing by myself altogether. I got used to the pain, the numbness, and the limitations of having a permanently weakened back. I began to practice yoga. I gave up heavy weightlifting. I thought I'd avoided surgery and the real, inevitable consequences of my recklessness.
But no... In January, under a howling wind and rough sea conditions, I went out fishing on the flats in a tiny boat with a flat bottom. On the way back, there were three- to four-foot seas – which delivered an unbelievable pounding.
My back exploded in anguish. The next morning, I woke up with indescribable pain starting from my right hip and running all the way down my right leg. I couldn't straighten my leg. I couldn't walk. I couldn't rest comfortably in any position, except on my stomach, with my right leg pulled up as high as possible against my side. I was in pure agony...
I'd ruptured a lumbar disc. I had emergency surgery two weeks ago, which unfortunately didn't clear all the material from my nerve root. I've been in constant pain now for more than a month. I can't pick up my two young sons. And I'm facing still more surgery.
The ruptured disc was above the two that had been previously herniated. And while I don't have any real proof of this... I suspect that had I dealt with my injuries earlier, I might not have suffered this more severe injury.
These injuries were largely self-inflicted and stem from simple poor decision-making. First, I ignored the reality of aging. I made demands of my body and took risks that were unreasonable.
Then, even after I'd gotten hurt, I didn't bother to learn anything about the surgery I should have gotten six years ago. I was afraid of it... So I didn't realize that it's minor surgery, frequently done on an outpatient basis. Then, I procrastinated about dealing with the continual pain I was having. I simply hoped it would go away. I believed that if I did nothing, it would get better. And while that does happen with lots of ailments (the human body does the healing, not your doctor), severely herniated discs don't normally resolve on their own. I had false beliefs. I had poor information. I made poor choices. And I refused to take any action to better my position.
I see our subscribers constantly do the same things with their investing. Here's a great example... Let me show you a few of the letters we've gotten recently about Mike Williams, our bond analyst and the editor of True Income.
As most of you probably know, I have heavily endorsed Mike's approach – which is to invest in discounted corporate bonds. I've written about the advantages of discounted corporate bonds numerous times. Most individual investors are far better off buying these bonds than buying stocks.
The reason is simple to understand and easy to prove: Discounted corporate bonds offer you stock-like returns with far less risk. Why less risk? Because as a bondholder, you have firm rights to both the income and the principal of your investment. There's simply no doubt in my mind that most of my subscribers would be better off if they gave up stocks altogether and instead, only invested in corporate bonds.
Let me give you the plain facts about our foray into corporate bonds. True Income began publishing high-yield bond recommendations in February 2009. The cumulative return on all of Mike's recommendations (winners and losers) is 68%. He has made a total of 46 recommendations in three years. Currently, his portfolio has 37 winners and nine losers, a win percentage of 80%. The average return for each recommended position is 31%, currently. The annualized return on the portfolio is 28%. (The annualized return is lower than the average return because most of these bonds are held for more than one year.)
For comparison, consider the recent performance of two of our all-stock advisories, Stansberry's Investment Advisory and True Wealth. Looking at the last Report Card, my win rate in the Advisory was only 57% over the last two years. The annualized return was only 8%. The numbers for True Wealth were, sadly, even worse: only 53% winners and an annualized return of 5%. (Note: Dr. Eifrig's advisory, Retirement Millionaire, did perform slightly better with an 84% win rate, but he produced a much lower annualized return of 13%. And "Doc's" portfolio does contain an allocation of bonds, so it's not the best way to compare real-life stock returns to real life corporate bond returns.)
Now... I understand... this comparison is not perfect. The last Report Card deliberately selected a bear market for the purposes of the evaluation, and it didn't cover the full three years of the True Income track record. But... you shouldn't forget that Mike Williams launched his portfolio six months before the worst bear market ever in the high-yield market.
Mike's performance has been so extraordinary that it might be slightly misleading. During his tenure, the Merrill Lynch High Yield Index, which is his benchmark index, has only returned 16% annualized (compared to Mike's 28%). The S&P 500 is essentially unchanged during the period, trading around 1,350 back in February 2008 – right where it sits today. I'm certain you'll recall how volatile stocks have been, too.
Looking at these numbers, you can see clearly for yourself that everything I've said about Mike and corporate bonds is true. Corporate bonds have far outperformed stocks – both measured against the index and against our best analysts (including me). That's simply a fact. Not only that, but Mike has far outperformed his benchmark. And this performance was accomplished during one of the worst periods in history for corporate bonds, repercussions of which continue to plague Mike's portfolio...
His results include five bankruptcies, four of which left us with essentially no recovery. Normal recovery in the event of bankruptcy, historically, has been about $0.45 on the dollar. That had, in the past, put a floor under the possible losses, but today's market is different. (Mike is adjusting his strategies as a result.) But the thing to remember is, even though some of the risks have increased, the portfolio's volatility and total returns are still far, far better than stocks. That should be readily apparent to any investor who is sentient. This isn't rocket science: If you can make 28% annually in bonds, why would you ever buy a stock?!?
How do our subscribers process this information? Over the last three years, we've paid out almost 10,000 refunds to True Income, a refund burden that is far higher than any other letter we publish. In other words, people take our best advice, and they despise it. We have refunded far more people – far more – than we've kept as subscribers. There is no logical rationale for this...
Again... just in case you don't believe me, here's a recent letter from a subscriber. I've gotten hundreds of notes just like this one...
What's interesting to me about this letter – and the hundreds just like it – is the amount of self-deception, false beliefs, and defeatism. It is not difficult or even time-consuming to find a dealer who will deal in convertible bonds. Millions of them trade every day. Likewise, Mike Williams constantly reminds his readers to buy a portfolio of bonds, not just one or two. To buy only six is to invite volatility and risk into your portfolio. That's not Mike's fault. And to have selected three of the riskiest out of the six is simply foolish. You can tell that the reader looked to see which bonds were trading at the lowest prices (thus offering the biggest yields).
To put so many of these risky bonds into a small portfolio was a huge mistake. But you don't see the reader acknowledging any of these simple facts. Instead, he pretends that by doing the opposite of what Mike recommends he's likely to succeed. And he's talking about an analyst who has nearly doubled his index's return since the inception of his letter. That's self-deception on a truly massive scale.
I tell this story not because I hope to change that reader's mind. It is obvious to me that he will never be successful with his investments. He's doing almost everything wrong. He doesn't understand the tools he's using. He has completely unrealistic expectations. He doesn't understand the first thing about managing a portfolio – and he doesn't understand risk.
Like the poor folks in the Dalbar studies, he will constantly buy at the top and sell at the bottom. He has no plan. He has no discipline. He has dozens of false beliefs. And worst of all, he won't act to improve his situation. If I had this conversation with him, it would only make him mad.
I hope you will put yourself in a different frame of mind. You have many tools at your disposal to help you improve your results. You can learn to invest in corporate bonds. I'm certain anyone can earn 10%-15% per year in corporate bonds if he is simply willing to read Mike Williams' letter and follow his strategies. He's published a great beginner's guide to bonds that contains everything you need to know to get started safely and to be successful. But first, you'll have to conquer all the self-defeating things you believe.
Here's what I suggest: Start with a small amount of capital. Just buy a single bond. See how it goes. Learn how to do it. Anytime you're trying something new, test it. It will make it easier because there's not as much to worry about... you're only "testing" it out. That makes it fun and exciting, instead of a scary big commitment.
Yes, there are regular stock strategies too that can improve your results – the kind I write about in my newsletter, which includes shorting stocks from time to time. I understand that most of you won't short stocks because you think that's too risky (false belief). But if you read about it for a little while, you can get the knowledge you need to be more successful. Again, just try it. Short a single share. See how it goes. Learn how to do it... Then evaluate based on the actual experience.
Likewise, I've been urging subscribers for years to try selling puts. This isn't easy to do. Just as with buying bonds, you'll have to do a little work to find a broker that's willing to work with you and to give you the margin you'll need to make these trades. Take action to improve your situation.
(By the way, our current best offer on Doc Eifrig's trading advisory, Retirement Trader, closes on Monday. Retirement Trader focuses on super-safe trading strategies, like selling puts. Do yourself a favor. Buy it. Take action to improve your situation. Tell yourself that this year... you're going to try to generate a 20% annual return with safe options. It can be done. And it's not risky... Doc has never closed a single position for a loss in that advisory.)
Yes, I'm speaking about my products here. But of course, there are many providers of this kind of information. Whether you learn from us or from others, don't remain frozen. If you're having poor results, understand they aren't going to improve on their own. You have to take action. Get out a piece of paper right now. Write down what you'd like to be doing with your assets. Make sure what you expect is reasonable. Think about what you need to do to be able to consistently achieve those results. Look for ways that are well-established... that prove you will be likely to do it, too. Throw out your false beliefs. Make rational decisions based on facts. Don't pretend small hurdles (like finding a good broker) are larger than they really are.
If you do nothing, the portfolio you have today is likely to look exactly the same (or slightly worse) in 10 years. That doesn't have to be the case, if you're simply willing to take action now to improve your results. We have tools that can help you... but as Smokey the Bear used to say about forest fires, "Only You Can Prevent Piss-Poor Portfolio Performance."
Date Range:2/23/2012 to 3/1/2012
Date Range:2/23/2012 to 3/1/2012