They Get a Clean Slate, You Get the Shaft
(This is a follow up article to yesterday's "No One Can Predict the Market" article.)
Recently, I got a mailing from a commodity broker (let's call them "Commodity Wizards") touting their managed accounts, where you turn your money over to a commodities advisor to manage, or buy into the equivalent of a fund he or she is managing. The amazing thing was that each one of their five advisors had achieved AVERAGE annual returns of over 20% in the last 3 years. Wow! Where do I sign up?
Now if I prepared you correctly in yesterday's article, "No One can Predict the Market," all sorts of warning lights should flash when you read something like that. But assuming that their claim is not an outright lie, how could it be true? The answer is very simple, and it has implications that apply to MANY of the investment claims you hear or read.
You see, I'll bet you dollars to donuts that Commodity Wizards did not START with those five advisors. I'll bet they started with ten or more, perhaps greenhorns, gave them some money to manage, and basically said, "profit or perish." The one's who lost money, or didn't make enough, got fired, and the "lucky ones" made it into the brochure, where they eagerly await YOUR money so they can see if their luck holds out.
And what about the losers? Don't feel too bad for them. Some may wash out of the business, but others will just go to work for "Commodity Gurus" down the street, where they get to start with a clean slate.
It is not quite so blatant in the securities and mutual fund industries, but basically the same type of phenomenon occurs. A very poorly performing mutual fund will simply close, or at least hire a new manager who will get a grace period, a sort of "clean slate" from the investors.
Research analysts can also hop from firm to firm, obtaining the clean slate each time they hop. A newsletter author can just close down one newsletter (You know, the one that recommended all the losers) and start up another one. It's sort of like musical chairs, but the hapless investor is most likely the loser in this game.
Just remember. It's not really a change of underwear if you're just changing with someone else. :-) Bob
Recently, I got a mailing from a commodity broker (let's call them "Commodity Wizards") touting their managed accounts, where you turn your money over to a commodities advisor to manage, or buy into the equivalent of a fund he or she is managing. The amazing thing was that each one of their five advisors had achieved AVERAGE annual returns of over 20% in the last 3 years. Wow! Where do I sign up?
Now if I prepared you correctly in yesterday's article, "No One can Predict the Market," all sorts of warning lights should flash when you read something like that. But assuming that their claim is not an outright lie, how could it be true? The answer is very simple, and it has implications that apply to MANY of the investment claims you hear or read.
You see, I'll bet you dollars to donuts that Commodity Wizards did not START with those five advisors. I'll bet they started with ten or more, perhaps greenhorns, gave them some money to manage, and basically said, "profit or perish." The one's who lost money, or didn't make enough, got fired, and the "lucky ones" made it into the brochure, where they eagerly await YOUR money so they can see if their luck holds out.
And what about the losers? Don't feel too bad for them. Some may wash out of the business, but others will just go to work for "Commodity Gurus" down the street, where they get to start with a clean slate.
It is not quite so blatant in the securities and mutual fund industries, but basically the same type of phenomenon occurs. A very poorly performing mutual fund will simply close, or at least hire a new manager who will get a grace period, a sort of "clean slate" from the investors.
Research analysts can also hop from firm to firm, obtaining the clean slate each time they hop. A newsletter author can just close down one newsletter (You know, the one that recommended all the losers) and start up another one. It's sort of like musical chairs, but the hapless investor is most likely the loser in this game.
Just remember. It's not really a change of underwear if you're just changing with someone else. :-) Bob
Comments