The Enemy of Wall Street
Editor's Note: The following first appeared in the July issue of The Wealth Advisory.
As it turns out, I am the enemy of Wall Street. Because I will tell you that you should own a piece of Disney but stay the heck away from Exxon. I will boldly tell you to buy StoneCo (June’s Feature Recommendation, already up 22%) even though I never endorsed any position in Square…
Maverick? Hypocrite? Charlatan?
Sorry, no. Just a regular stock picker, drunk on the notion that I can beat the market with my insight and analysis. Crazy, right?
When I came up in this biz 20 years ago, a person who could consistently pick winners was a celebrity, a rock star...
I studied them. George Soros, Jesse Livermore (from Reminiscences of a Stock Operator), Bill Miller, Warren Buffett, Jim Rogers, etc. I read the Market Wizards books, Trader Vic — anything that would give me insight into the methods that could turn critical analysis into money.
If you step back and think about it, wanting to get on a soapbox and tell people what to do with their money borders on arrogance. But I come by it honestly...
My dad was a cheerleader in high school, a history professor at the University of Richmond, and did a fantastic Louis Armstrong Jr. in his band, the Doctors of Jazz.
That's my dad on the left, playing the trombone under the Eiffel Tower
My brother has a master’s in theater; I joined a punk rock band when I was 15 and stayed on the music stage for 10 years.
Basically, we are a family of loudmouths.
My dad taught me at a very early age how to craft and defend an intellectual position: research. I provided the curiosity. The rest is... history.
Stock Pickers RIP
These days, it’s all about the index fund. In a general sense, I have no problem with index funds. If you’re saving and investing long term for retirement, there is absolutely nothing wrong with having the bulk of your money in index funds.
And the main reason for this is the management fees. If you have to send 1.5%–2% of your money every year to management, well, you are losing a substantial amount of performance over the years. Vanguard founder Jack Bogle’s notion to cut management fees to the bone was a revelation. But the reason management fees for index funds are so low is that there’s virtually no management going on!
If you have a Dow Industrials index fund, then you own the stocks in the Dow Industrials. Which means last June, you sold GE at $13, locking in a big loss.
I’m not saying you shouldn’t have owned GE at all. Heck, I recommended it in The Wealth Advisory in 2013 at $24 a share. I also sold it in 2014 at $26.50 because the earnings trend was weakening. That small act of active management meant we made a little profit instead of taking a massive loss like an unmanaged index fund...
You can certainly point to a stock like Pivotal as an example of the dangers of stock picking and active management. And it’s true: We got whacked, and the stock hasn’t come back at all.
Two things: One, we haven’t sold the stock and locked in that loss. My review of the situation suggests the reaction to last earnings was a bit overdone. And two, on balance, the Pivotal loss is the anomaly, the outlier. Rather than an indictment of picking stocks and active portfolio management, it’s an endorsement. Even with a loss like that, The Wealth Advisory portfolio is averaging 72% on each and every stock we hold.
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Money for Nothing
Right now, there’s a family of index funds that will pay you to own them. I’m not kidding.
Back in February, SoFi Select 500 (SFY) and SoFi Next 500 (SFYX) announced they would waive their fees for the first year. But Salt Financial went one better...
Investor's Business Daily reports:
The company will not only eliminate the fund’s 29-basis-point fee, it will pay investors an additional 5 basis points for at least one year or until the fund has reached the first $100 million in assets.
What this tells you is that for the ETF companies, it’s basically all gravy. They know “index fund” is code for “employer-sponsored retirement plan.” Your money will be in that plan for a looong time, and if they have to wait a year or two to start collecting fees, big deal — it’s money for nothing anyway!
As an aside, this has been my beef with 401(k) plans for years. These plans are basically a handout to Wall Street. After all, how many options do you really have? American Funds, Vanguard, Fidelity, and...? So, on average, index fund fees fell about 18% last year. Should it come as a surprise that earnings for companies like Invesco and BlackRock are falling, too?
But here’s the thing: Fees for actively managed funds have been falling, too. You can see what’s going to happen. The BlackRocks of the world are going to start pushing active management sometime soon.
Then we’ll get a return to the glory days of stock picking and index beating — and the 72% average gain on each and every position in the Wealth Advisory portfolio might get some attention.
In the meantime, our stock-picking spidey sense is telling us it’s a good time to ditch some underperforming stocks. After all, the S&P 500 is up around 20% so far this year.
Amazing performance. And it’s come with weakening earnings, a never-ending trade war, and persistent concerns about global growth.
And yet investors seem certain that a Fed rate cut can juice the economy back to strong growth...
If so, we will have plenty of exposure. If not, we’ve exited some weak positions that will only get weaker during a downturn.
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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