The Leopard Eventually Reveals Their Spots

The Leopard Eventually Reveals Their Spots

By: Brendan Magee, 1/10/11

I am in my first month of doing the Investor Coach’s Radio Show on am 1340WHAT. To try and get better, I have made it a practice to listen to other shows to see what they’re doing. Most of the shows I have listened to are steeped in traditional financial planning which means they promote gambling and speculation over prudent investment strategies.

Surprisingly, I tuned into one show and was hearing something that really peaked my interest. The host was talking about what a bad idea it was to try and time the market. He was using a study I had used in the past. He was talking about how if investors took their money out of the market and missed just a few good days out of thousands of trading days how they could incur drastic reductions or even losses in returns.

As I was listening to this, I was happy because I felt as if I was listening to someone who stood on the same side of the aisle as me. I thought here was another person ready to stand up against the establishment and say that stock picking, market timing, and track record investing were not in the best interest of investors.

In the host’s next comments I realized this was not the case. He spoke about how his strategy was to help investors find high dividend paying stocks. So in his opinion on the one hand, gambling and speculation that involved market timing was foolish, but the gambling and speculation that was stock picking was prudent? This to me doesn’t make sense and it’s dangerous to investors.

It’s great to be invested in high paying dividend stocks, but how does this host know who those companies are going to be in advance? How does he know which companies, through circumstances that are unkown at this time, will have to cut their dividend? How does he know in advance which companies will or won’t be the next Bear Stearns, Enron, or AIG?

Suppose I have invested in 10 or 15 of these hopefully high paying stocks, and one or two of them endure a 2008 collapse? What’s going to be the impact of that on my retirement? You don’t have to go far to see it. Some of our neighbors are living the nightmare.

As the show went on though, I did understand the host’s motivation in encouraging investors to invest via stock picking. He was a representative of a large brokerage house. Brokerage houses employ three schemes when investing your money, stock picking, market timing, and track record investing. These are the life blood of the brokerage industry. It is the source of their profits and stands in direct conflict with the investor’s agenda. Try as they might, , the leopard eventually reveals their spots.

So what is the solution to this dilemma? After all one of investing’s golden rules is to own stocks. History has proven that stocks are one of the best ways to outpace the rising cost of living and have your money last.  The key is to have a portfolio of at least 11,000 holdings. That is the minimal amount to be sufficiently diversified. This way if one or twenty five of them tank or cut dividends the impact won’t be too severe. Also when a company unexpectedly has a good year, odds are I will already have owned that company and will be there to enjoy its growth. What most brokerage houses don’t want investors to know is these portfolios are available at a cost lower than most mutual funds.

Proper diversification is the least costly way of protecting an investor against the unknown, as well as the dangers of gambling and speculation.  Any one not speaking about that should simply be tuned out.

Brendan Magee is the president and founder of Inevitable Wealth Coaching in Drexel Hill, Pa. With questions, comments, or suggestions, call 610-446-4322 or e-mail Brendan@coachgee.com. You can also hear him every Sunday at 10:30am on am1340 what during the Investor Coach’s Show.