Thursday, July 24, 2008

BUY OR SELL SOMEBODY WINS AND LOSES


YOUR BUY IS MY SELL!

I had an interesting discussion with my broker today about a stock that was underperforming the expectations we had when we bought it. Coincidentaly at the same time I was reading an analyst review of the same security in the newspaper. It got me to thinking about how the industry handles analysis and recommendations on securities.

Let’s say you work with a portfolio manager who has every initial after his name. Your portfolio is a diversified mix of 30 securities. Your portfolio manager/advisor has 120 clients; all unique just like you! Allowing for overlap, your advisor needs to track and analyze say about 125 securities. If each security is given 5 hours of review quarterly that means approximately 2500 hours of work! Of course, you want your advisor looking at new securities and opportunities too, as well as meeting with you quarterly and of course she needs to prospect for new clients to stay in business. It becomes clear that analysis is truly a full time job for the research team not the advisor!

That is why they have specialists who utilize their CFA degrees and statistical skills to probe deeply into each security in a given sector. Far from your advisor being a one person show, they have the benefit of the brilliant minds and skills of all the top analysts. That obviously explains why we never lose money on a recommended stock selection! Just kidding folks.
With all the geniuses burning through the data and a skilled advisor reviewing the data it’s just like having a guarantee of performance! So why doesn’t it work that way? Well we all can make a mistake so maybe it’s not so much a guarantee as an extremely likely outcome that we will not lose money! Okay, that’s not really how it seems to work either…..what gives?

Well to get back to my discussion with the advisor; after a lot of discussion over several months we finally decided to unload a phone stock that was not adding value. The advisor had done their homework and provided the research results from the in-house sector expert who after following the stock for years had finally put up the sell sign. We were getting out with a small loss and a couple of years wasted.

What was interesting is that the newspaper I was reading was quoting a telecom analyst of some renown who had just reviewed the stock in depth and switched from a “hold” (industry code for a sell recommendation) to a vigorous “buy”. Hang on folks; they reviewed the same material, used the same math, and likely have the same accreditation. So how does it end up that they both come to the decision they had previously been wrong and it was time for a change in recommendation? And then, they both come to the exact opposite decision from the same data!

Just think; one of them will be considered brilliant and one will be considered a moron! Which one am I listening to? Well the obvious answer to those who know the industry is that they are both wrong! The data is obviously not clear and both are making bets on how things will end up. The thing is they are betting with my money and your money! The investor is the pawn in the game; the sucker with the money in many cases.

So who wins? Well the security industry wins of course. I sold and thus generated a commission and somebody bought my security based upon the opposite analysis and paid a commission. So are the analysts and brokers in cahoots to get our money? Not really. They all think they are right and they all think they are helping us get rich!

In six months I will let you know how it comes out! Until then I will keep reminding myself that my advisor has guessed right more often than not. How do I know that? Look up composite benchmark and then start tracking the performance of your advisor. Hopefully my advisor is doing the same with her researcher! As my friend John Home says, “You get what you inspect; not what you expect”!
Tracking results, SOIS MIKE

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