F Wall Street

Joe Ponzio's No-Nonsense Approach to Value Investing For the Rest of Us

Joel Ponzio

• Publisher: Adams Media
• Year: 2009
• ISBN:
  9781440519758
• Topic: Business
• Subtopic: Business General
• Index: Business

"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."
—Warren BuffettInvestors shouldn't hate the market because of its up and downs. They should capitalize on it—and give a middle finger to those brokers wasting their time (and money) buying and selling, viewing investing as just buying stocks and not taking ownership of a company.In this book, Joe Ponzio gives an "f-you" to Wall Street and teaches you how to become a sharp value investor who uses economic downturns to your advantage. By buying into companies you believe in—but that may be selling for less than their intrinsic value, like high-end retailers in a weak market and discount retailers in a strong one—you will profit from their long-term performance. It's the perfect guide for anyone fed up with Wall Street's bull.

PART I

GETTING BACK TO
THE BASICS

CHAPTER 1

Change Your Perspective

One day, your paycheck is going to stop coming. Then what?

Believe it or not, life is fairly predictable. As children, we go to school, we play, and we long for the warmth and relaxation of summer. After college, we enter the “real” world where we start working, pay bills, and eventually start our own family. After thirty or forty years, we retire to travel, spend days on the golf course, and spoil our grandkids. Although from time to time life throws a monkey wrench into this mix, it’s generally pretty predictable.

Predictability can be comfortable. It can also be disastrous.

Most people don’t make saving and investing a priority, probably because of one simple reason: predictability. Why do anything when you know exactly what you’ll get—lousy advice, bad investments, and a sales pitch full of clichés?

Only the names seem to change.

So when your paycheck stops coming, you are going to have to rely on other means to survive. You’ll need money—and lots of it—to do so. Forget traveling the world or spoiling the grandkids; you’ll need significant savings just to pay your regular bills—gas, electricity, property taxes . . . the list goes on and on.

Relax.

The truth is that you can have a comfortable retirement; you can be delighted with your savings; you can retire with “a little something extra” every month. But pinching pennies today won’t get you there. You need to change your perspective. You need to shatter predictability.

And it starts with understanding something you already know in your gut.

Saving and Investing Won’t Get You There

Did someone once tell you that working hard, living below your means, and investing in a diversified portfolio was the key to a healthy and happy financial future? Do yourself a favor—call them up and scream, “Thanks for nothing!”

The truth is that you don’t get to be wealthy, or even have a comfortable and happy financial future, merely by saving and investing. In that scenario, you accumulate wealth only if your investments perform well.

If, as will be the case for many people, your investments do not perform well, if you are stuck in the ways of Wall Street, you’ll look back over your life and wish you had started sooner. But even starting sooner was no guarantee you’d make it there.

Continuing down this path, investing in your 401(k), maybe a bit on the outside, leads you down a dead end. Whether you realize it or not, your money is engaged in a war with Wall Street. You need growth; Wall Street wants to give you just enough to keep your account—and then they want to take the rest for themselves.

You can choose to ignore this and go about your life, believing that you’re “in it for the long term” and that your diversified mutual funds are your keys to success. You can believe that executives earning $20 million a year at brokerage firms will put your growth ahead of their own profits or that your advisor understands how businesses and stocks grow without ever having run a business.

And when retirement age hits and you don’t have enough money, there will be more clichés: you should have saved more, you should have taken more risk or been more diversified, you should have started sooner.

Step Right Up

Most people never realize that when it comes to investing they are participants in one of the most amazing magic shows on Earth, and it employs the same old scam—sleight of hand.

The brokerage firms and mutual funds that control Wall Street and the markets want you to believe that investing is too hard and too dangerous to do on your own. With their left hands, they wave the ups and downs of the markets in your face. You never even see their right hands go into your pocket.

The scam is widespread, and, like all great scams, its success relies on the amazement and fear of the spectator (you) and the participation or manipulation of the players (the advisors).

Keeping the public in awe is easy. They show lots of people making millions in the markets, so you want in. Then, they show everyone how difficult it is and how you can lose everything so you don’t take investing into your own hands.

The upside is this: Manipulating the advisors is also fairly simple. After all, prior to working on Wall Street, advisors were regular people like you. For their own reasons, they thought it would be exciting and fulfilling to have a career in financial services, so they applied for jobs at the brokerage houses where they are subsequently trained. In their quest to help people, they ended up being trained by the very system that is hurting people.

These financial advisors are usually smart, good people—people who can think for themselves. They want to help you; they want to make a living growing and protecting money. As they learn the darker, uglier side of Wall Street—the business of investing—more than half of these financial advisors quit. (Wall Street pokes fun at them, laughing that they “wash out.” I believe they simply wake up to an ugly reality they don’t want to take part in.)

The problem with the entire system is that most Wall Street brokerage houses are not in the business of providing growth-oriented investment advice. They are in the business of selling investments. Any advice they have to give is incidental to that end. The brokerage firms have to make money, lots and lots of money. To make it, they have to sell investments. The reality of intelligent investing is such that at any given time there may only be a few great investments worthy of your money. Still, these firms must sell investments all the time. Once they have sold the good investments, they have no choice but to start selling the mediocre investments as well.

Here’s the rub: These companies are tasked with making more money next year than they did last year. To do so, they must do one (or both) of two things: sell even more good and mediocre investments, or sell some bad investments. (Naturally, nobody would buy “bad” investments, so the brokerages have come up with clever ways to market them. “Bad” investments are usually called “speculative,” “aggressive,” or some similar term.)

Of course, Wall Street is not full of dummies. Quite the contrary, these brilliant minds have come up with crafty ways to sell you mediocre and bad investments without you suing them. They’re called mutual funds—and most of the 15,000-plus out there aren’t worth a nickel of your savings. Here’s how it works: The Wall Street firms convince you to buy their “preferred” or “recommended” mutual funds; then, the mutual funds go out and buy the great, mediocre, and bad investments from the brokerages.

But wait. Aren’t mutual funds supposed to grow and protect your money? In theory, yes. In practice, the truth is a little uglier.

Like brokerage firms, mutual funds are businesses. Although most people either don’t understand mutual funds at all or, at best, believe they are just pools of money invested for growth and safety, the fact is that mutual funds are businesses that want to grow every year. How do they grow? Simply put, mutual funds companies are paid based on how much money they manage. Assuming the fees are the same, a $1 billion mutual fund will generate 100 times the revenue that a $10 million mutual fund will generate. Assuming both mutual funds lose 30 percent for you, the “big” fund still makes 100 times more money than the “small” fund.

Most mutual fund companies are paid based on how much money they manage rather than on how well they manage it. The brokerage firms control the money. In order to have access to the trillions of dollars that the brokerages control, mutual funds buy “aggressive” investments, pay some of the brokerages’ expenses, and even offer kickbacks every three months!

They do this—and more. Of course, it’s no sweat off the mutual fund company’s back because they’re doing all of this with your money! So long as your brokers and advisors can convince you to “stay in it for the long term” and scare you into the “safety” of diversification through their mutual funds, everyone will keep getting paid. Except you.

It’s natural, then, to ask, “Why would the advisors allow this?” Trained by Wall Street, many advisors are so busy trying to bring in new accounts to save their jobs and make a living that they don’t have time to study investing beyond what their firms teach and tell them. For the most part, they’re good people who want to do the right thing. Still, they go to the big firms where they believe they are learning to invest, and they come away with little more than sales training. As time marches on and the mutual funds start paying the advisors “trails” (additional commissions every three months to motivate the advisors to keep you invested) and take them out for golf excursions and vacations, most advisors don’t realize that it is all at the expense of your goals.

For you, the problem with this scenario is that these brokerages want your account to grow just enough so that you don’t bother with it. If, for a 4 or 5 percent annual return, you won’t bother with your account, they’ll gladly invest your money at 12 percent, lose some money buying and selling bad investments, whack you with hidden fees and charges, and deliver your anemic return on a silver platter (that you paid for, by the way).

The Wall Street executives will make their bonuses; the mutual funds will generate millions in extra fees; your advisor, distracted by the firm’s subtle threats, will be so focused on bringing in new assets, accounts, fees, and commissions that the only advice offered will be: Stay the course.

And you’ll wish you had started sooner.

Long-Term Investment Results

Wall Street is in it for their own profits; most mutual funds can’t achieve true growth because they often buy bad investments and kick money upstairs to the brokerages and advisors; most advisors are so focused on bringing in new clients that they can’t focus on investing.

Although nobody can say for certain, it is estimated that the average mutual fund investor will earn an average annual return of 4 percent to 6 percent in the future. Sound far-fetched? Think about this: According to a DALBAR study, the average investor in a stock-oriented mutual fund earned an average annual return of just 5.66 percent over the ten years ended December 31, 2007, and just 4.48 percent over the twenty years ended December 31, 2007 (and that was before the markets crashed in 2008)! At those rates, it would take twelve to eighteen years for your account to double (assuming you didn’t pay any commissions or account fees). That also means it would take between fifty-one and seventy-six years for $50,000 to grow to $1 million.

Let me say it another way. This means you are at risk of being in serious financial trouble if:

1. You need more than $1 million at retirement; or,

2. You have less than fifty-one years to retirement; or,

3. You have less than $50,000 saved today.

Because of this, a lot of people think they need to take more risk to achieve better returns. In fact, a lot of younger investors are usually advised to do just that. The problem is that more risk doesn’t mean higher returns. In fact, more risk almost always means greater losses.

MY ADVISOR, THE THIEF AND MORON

The year was 1999. I had a cushy, non-investment related job making much more than most people my age, so, I set up an appointment with the financial advisor at my local bank. His business card beamed the name of one of the largest firms on Wall Street, so he had to be good, right?

As I walked into the bank, I held my $1,500 check with pride. I was going to join the club of savvy, rich investors. The advisor smiled and waved me over. He finished up his phone call and turned toward me. Within seconds, he determined that I needed a Roth IRA, a retirement account. Who was I to argue? Seconds after that, he showed me a graph of his favorite mutual fund, th...