the HOTTEST STOCK PICKER on Wall Street | Episode 116 - a podcast by Bryan Ellis - SelfDirected.org

Who is the hottest stock picker on Wall Street… the one that millennials are adopting by the busload, venture capitalists are funding by the truckload, and is capturing the attention of the financial press in an amazing way?  I’m Bryan Ellis.  I’ll tell you RIGHT NOW in Episode #116

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Hello, my friends!  What a great weekend… a lot of time with Carole and the kids, a lot of rest… it’s just what the doctor ordered!  I’m back with you recharged, refreshed and ready for another big week of Investment Excellence, right here on the podcast of record for savvy, self-directed investors like you!

What do you do when you just don’t trust your stock broker or investment advisor, but you believe Wall Street is your only medium for growing wealth?

Well, of course, you turn all of your decision making over to a computer.

Huh?  Yep… you heard it right, folks.  A huge trend in financial planning – particularly among cash-rich millennials – is something called a “Robo Advisor”.  It’s essentially just a software program that you give fully authority to manage your investment portfolio on a fully automated basis.

The premise is an interesting one.  After all, isn’t it true that most of the mistakes made by stock market investors are mistakes born of emotional response that’s not supported by logic?

And wouldn’t the use of an emotionless computer help to mitigate that risk – and make it possible to factor in a breathtakingly large amount of information into every decision on a moment-by-moment basis?

Well, maybe.  I’ll give you my perspective on that in a moment… which, you might find interesting, as I’m both an active investor and was, for many years, a rather successful software developer.

This trend towards Robo Advisory is interesting, and it’s attracting major attention from venture capital firms, and of course, some of the major Wall Street firms – like Charles Schwab and Vanguard – have gotten in on the act with Robo Advisory services of their own.

I’ll admit:  The premise is appealing.  It’s easy to make the marketing case for why Robo Advisory would be a great idea.  After all, clearly, it’s possible to make profits in the stock market… so why wouldn’t a computer… with infinitely better information access than any human… be a superior choice?

Well, so far, it looks like the humans are winning.  Overall, results for RoboAdvisory firms, including some of the big names like Wealthfront and Betterment, are underperforming the market as a rule.

Here’s the thing, folks:  I’m a big believer in the notion of PROPER PREMISE.  And it’s pretty clear to me that the flight to Robo Advisory is based on a flawed premise.

What is that flawed premise?  It’s simple:  Wall Street is the best place to invest your capital.

My friends, the facts simply don’t bear that out.

Look, if you’re going to be an active and focused investor, carefully choosing your own investments and monitoring their performance regularly and adjusting whenever necessary, then it’s possible you can invest in stocks and beat the averages.  Note:  That’s possible, not likely.  It’s astounding, but it’s still true that the goal of most financial advisors is to beat the performance of the S&P 500 – and most of them just don’t do it with any consistency at all.

But the mere POSSIBILITY of making money is no way to choose an asset class.

Where is it POSSIBLE to make money?  Well… in stocks, for sure.  In Las Vegas… very low odds, but very high return potential.  If you really want to go where the money is, you could fund the production of crystal meth and become fabulously wealthy in just a few days, but at the risk of both imprisonment and death.

The stakes aren’t quite so high in the stock market, but the idea is the same.  There’s a concept I’ve discussed with you before:  Reversion to the mean.  That means that things to go back to their averages.  If you’re likely to win 1 time out of every 20 on the slot machines in Vegas, then that’s about how frequently you’ll win over time, even if you lose every round for a while, or even if you win 5 in a row.  If there’s a 90% chance you’ll end in prison or dead by getting into the crystal meth business and you’re presently neither incarcerated or dead, then you should buy life insurance and move out of the country.

And if you’re investing in stocks… the 80-year compounded annual growth rate of the S&P 500 is about 6.5%.  That’s the average.  That’s what it does.  Sometimes better, sometimes worse.  But that’s the average… and that’s what the S&P500 will revert to.

And along the way… volatility.  Unpredictability.  Stress.  Not good things.

Look, I’m not actually opposed to stock market investing.  I think there are almost always great opportunities… but those opportunities are almost never where the public is looking.

So here’s how all of this relates to the notion of having a PROPER PREMISE.  The 3 problems with the premise that Wall Street is the best place to invest your capital are:  (1) you’re investing in a market where the mean to which your returns will revert are basically only in the 6% range; (2) historically, individual investors perform BELOW the index as a whole because they don’t stay the course consistently over time; and (3) the low average return is DESPITE the fact that the market is incredibly volatile… in other words, the high degree of volatility… in other words, risk… is totally out of line with the low level of PROFIT.

And it looks like the Robo Advisors are not yet outperforming their human counterparts.  I think it’s possible that the Robo Advisors could catch up to the performance of human advisors, but the reality is that these applications are created by humans using algorithms created by humans, relying on patterns observed by humans… inherently, the human bias is built in to these services.

The one attractive thing about RoboAdvisors is that they are, by and large, relatively inexpensive.  So if you insist on gambling on Wall Street, at least you’ll lose less in the form of commissions.

You know another way to beat the averages?  Inspired by the 1973 book “A Random Walk Down Wall Street” in which Princeton Professor Burton Malkiel claimed that a blindfolded monkey would beat the market by picking stocks chosen by throwing darts at a newspaper’s financial page – a firm called Research Associates did an interesting study in which they chose 100 totally random portfolios.  And you know what?  98 of the 100 random portfolios actually DID beat the performance of the market!

My friends:  Not good.  Not good at all.

A smarter premise is this:  Everything reverts to the mean, so let’s choose investments with better averages!  And let’s choose investments that aren’t so volatile that the stress induced on the way to making those returns counteracts the financial benefit of the profit!

Want to know how to do that with YOUR portfolio?  Just text the word GUIDANCE to 33444 and I’ll be happy to give you my thoughts about that.

 

My friends, invest wisely today… and live well forever!

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