InvestSMART

Sell the products regardless of the client's returns

I got an email from a financial adviser this week. The background is that the Marcus Today newsletter has, for a while, been advising people to hold cash rather than invest in the sharemarket. The email went along the lines of, "It's not so difficult to make the call to get out of a market like the current one, although there are regulatory, practical and other reasons why most advisers won't do this.

I got an email from a financial adviser this week. The background is that the Marcus Today newsletter has, for a while, been advising people to hold cash rather than invest in the sharemarket. The email went along the lines of, "It's not so difficult to make the call to get out of a market like the current one, although there are regulatory, practical and other reasons why most advisers won't do this.

"But making the call as to when to get back into the market is more challenging. If you can show me that market timing has produced superior results compared with something as simplistic as buy and hold over a 10-year-plus time frame, I'll be shocked and very impressed.

"Should you have such results, you might also wish to share them with Professor Burton Malkiel from Princeton. The 10th edition of his famous book A Random Walk Down Wall Street has just been published. When he spoke in Sydney recently, one of his many astute points was that no one gets market timing right consistently. But I'll be happy to be proven wrong."

My reply: it is all too convenient for the financial services industry to buy into the concept that you can't time the market but, of course, the industry grabs on to anything that suggests you can't because it absolves them from trying, from giving any hard advice on "when". Without that responsibility, all the industry has to do is say "it always goes up in the end" and get on with selling products, bugger the client's returns.

But with an annual return of just 5.64 per cent and inflation of 4.7 per cent over the past 75 years, all the sharemarket is giving you is 1 per cent plus dividends (less dealing costs, tax, financial-planner fees, fund-manager fees and the index fudge) - basically, a real return that averages somewhere about zero or less.

Because of that, the sharemarket is all about "which stocks" and "when", not "all stocks" and "all the time" and until the industry pulls its head out of the sand and starts addressing that issue, it is forever going to be operating a huge lie, which charges fees to a client for no return.

The global financial crisis, the current market (and those Challenger ads) have accelerated the realisation that average returns are not enough and that you have to do better than lie in the "matrix" expecting historical returns to repeat. We are going backwards doing that and the only answer is to be selective about "what" to be in and "when".

It staggers me that the Benjamin Graham disciples do all this great work finding the best stocks then throw up their hands and declare they can't time the market.

Well, if they are truly some of the brightest people in the industry, why don't they try? Instead, they continue to pedal anachronistic 1950s lines such as, "Close the market for 10 years". There's so much good stuff out there, they never know, they might learn something.

Why else do you think Warren Buffett is buying bonds in distressed US investment banks during a GFC? He's picking stocks and timing the market. It's all there is.

And if your professor is truly correct, close the sharemarket because it's not worth investing in.

The professor is feeding us what we want to hear and if we buy into the concept that you can't time the market, we will not produce returns for our clients except in a bull market, we will lose them money in a falling market and, after costs, we will lose them money in the long term.

We have to do better or we'll retire dissatisfied that we sold a lie the whole of our lives and no one really benefited from our services.

Marcus Today might be wrong about being in cash now but even if it is, our subscribers have a rare point of view and there is tremendous value in that. If nothing else, those who have followed our advice have not had a single sleepless night during this very unwelcome volatility.

So we'll continue trying to time the market, which means picking and timing stocks, and I suggest you value anyone who spends their time in that pursuit. Because if it turns out that we can't try, the only option we have is to keep selling you the (lie) dream.


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