One of my investing peers, James, recently E-Mailed me with a questions/suggestion for a post on TMWTFS:
“…Recently my interest has been peaked with investing in stocks, I have a more time to look into this than before as the kids are a little older and everything is humming along. I was hoping you could comment on my idea, also if you think it would make another good blog post, maybe it could be how a beginner gets started. I think there would be significant interest as others may be interested in taking the next step from the couch potato.
Here is my very rough plan :). I would continue the couch potato with the RRSPs. I would start a TFSA with Questrade, although I heard there could be some US tax problems, not sure on this. As for stock selection this is were I have gotten so far please tell me how naive I am being. Idea one would be is to just select the stingy or simple stocks that Norman Rothery selects each year in MoneySense. Idea two would be just diversify ten stocks around the largest dividend paying companies and see what is popular on gurufocus and your site. Idea three would be to subscribe to the Rothery report or the Investment Advisor and copy their portfolios and recommendations.
I am not opposed to doing my own homework, however not sure how and would my answers be as good as the above? The stingy stocks or Rothery report does excellent every year, so why not let an expert/guru do the work?…”
When an investor contemplates investing in individual stocks for the very first time they often enter into a realm where many struggle in both performance and finding their investing identity. This identity crisis causes a lot of frustration for a number of good reasons. Going from investing in actively managed mutual funds to index funds or ETF’s is easy; investing your money in a set of individual stocks and being successful can be just plain torturous.
The sad news is that every DIY investor at some point encounters these set of problems and often there isn’t a simple method of solving these problems. Investing successfully takes is time, patience, an understanding of portfolio fundamentals and learning from your mistakes.
What James is suggesting with his comments is what many new investors do when they initially start investing into individual equities; they find a mutual fund manager, columnist or industry expert and try to match those stock choices with their own. I myself have fallen into this habit years ago where I attempted to copy the activities of certain mutual fund managers and wrote about those perspectives in a post titled, Confessions of a Value Investor back in 2008.
Copying the activities or suggestions of “experts” such as those found on gurufocus or subscribing to investment letters such as Norm Rothery’s The Rothery Report, mentioned in MoneySense Magazine, aren’t poor choices if an investor doesn’t know any better. Creating a portfolio by copying choices of leading investment advisors/columnists, such as Warren Buffett, isn’t even difficult or new. The problem is with the assumptions a new investor makes or issues they overlook in a rush to attain success without understanding the flaws in the decisions they make.
It is true that most of these individuals, professional or not, aren’t very interested in beating the index; they want to make money too. They have a good understanding of investing for the most part and coming up with suggestions to invest in is no more difficult than often running a stock screen with a selection of criteria or talking about what stocks they like & why. Even talking heads (often fund managers) on BNN or MNBC business shows talk or discuss their favourite stocks tempting investors to buy or sell based on those recommendations.
Why not let an expert/guru do the work for you and invest in a portfolio of their choices or recommendations?
First are the fees. Costs involved in subscriptions and management fees (MER) for investing in specific trendy stocks run by high profile managers often appear affordable when a novice investor first looks into the cost of recommendations but understanding the limitations of these suggestions often help an investor decide if the cost is both affordable or relevant to their needs.
Some gurus clearly acknowledge their invested positions (either in their funds or personal investments) but their motivations or their conflict of interest at times isn’t as clearly demonstrated. Talking heads want to sound intelligent and responsible in order to attract or retain capital in the funds they manage. Likewise a guru suggesting investing in a list of stocks where they personally have no position doesn’t have a lot of invested interest in seeing those stocks doing well and may be happy collecting the subscription revenues of their recommendations.
Beginner investors should also make a number of conscious decisions about the reasons subscriptions and stock recommendations rarely work for them. Active management through beating the broad market indices has been continuously proven difficult to achieve and any selection of stocks can be easily based on criteria that go above and beyond a novice investors understanding of metrics or fundamentals. Companies are multidimensional and value traps exist nearly in every sector of the market with stocks being cheap for a reason. Is a beginner investor comfortable with investing in a specific company or understand what they’re buying without doing the appropriate homework?
That, essentially, is why this investing practice is not something I endorse for investors investing in individual equities for the first time. The process of investing in recommended stocks appears easy at first but knowing when to buy or sell is something vitally important for any investor to understand. These subscriptions or gurus may not disclose exactly when they’re dumping or buying a stock and by the time you or I learn of those activities the real value or opportunity likely has been lost.
My honest opinion is that no investor is ready to invest in any individual stock unless they’re prepared to take the time to follow this process: Taking Stock in IGM. This process to analysing a stock in the most basic form is how I first learnt to properly invest in individual equities & fixed income products on my own and something crucial I feel is required for an investor to be ready and successful.
Yes it takes time, work and skills that likely a new investor hasn’t had the time to develop on their own yet but investing, like many things, is not something that you can become successful at overnight for a long period of time. Individuals appear successful at first by doing what they think or feel is the best decision but those decisions over time and during different market cycles will start to crack their resolve and bad decisions will be made.
In no way are these investing gurus, or Norm himself, poor investors. They are often smart, wealthy and successful investors but their recommendations are meant to be broad for a number of potential readers and don’t necessarily reflect the needs or wants of you as an individual investor.
My dividend growth portfolio of Canadian stocks itself has been successful over a period of time since its inception but running, maintaining and performing investing activities within that portfolio are made based on my decisions and perceptions and that is not intended to be successful for others; just myself.
There’s no replacement with investing for hard work and while you might not lose a lot of money following any of these recommendations or subscriptions the time you lose in developing your skills as an investor and being success compound over time into a significant loss of time and gains
Also don’t forget to check out the new blog focused on retirement planning by thefinancialblogger at www.donotwait.com. Mike has an awesome contest for readers to enter that can be found here.
Hi Brad: Thanks for the sobering and realistic post. I went over all three parts of Taking Stock of IGM, and I will start to use that as a guideline and see how far I get.
It is hard to ignore the subscription returns, but sometimes if something is too good to be true…
Thanks again, James
James: Sobering & realistic are my forte :). Analyzing a stock to the degree which I've laid out in the Taking Stock in IGM series is time consuming and not for every investor. But for someone who doesn't understand the scope of how I look at these companies it provides a clear example of the work I put into my portfolio to make it successful.
Use that as a starting point and see where it leads you. Understanding the main points is more important than all the specifics. Even putting a portion of your portfolio in a newsletter or "play" account isn't a bad idea. Many investors have an "alternative investment" portion to their portfolio and using a subscription or guru picks would be fine if that portion of your portfolio was 10% or less.