Financial Fortress May 16 with Richard Jordan and Patrick Dougher
Patrick: Welcome to Financial Fortress Radio. This is Pat Dougher. Richard Jordan is with me in the studio. He’s a Chief Investment Strategist in the Dallas/Fort Worth area. We are so excited about you listening to the Financial Fortress Radio because we’re going to give you ideas and tools to help you, literally, invest your money better for higher returns and, literally, you’ll get so much more out of your own estate. So with that, Richard, welcome to show.
Richard: Thank you, Pat.
Patrick: Okay, one of the things that I want to make sure that you tell people, Richard, is really, who should be listening to this show?
Richard: Well, anybody that cares about their investments, anybody that wants to know how to do better with their investments, anybody that’s interested in passing on more money over to the next generation, or having more to retire on.
Patrick: Very good. What should someone expect to get out of this radio show?
Richard: Well, we’ll be talking about a number of things today. We’ll be talking about why self-investors fail, why the key strategies that we use are better than they get from any other brokers or any of the self-investors. So, those are the key ways that people invest. They either try and do it themselves, or they hire a broker.
Patrick: Very good. I know that one of the things we really wanted to cover today are the five reasons that self-investors fail, and I know that there’s been some real major changes in the marketplace just in these last couple of weeks, hasn’t there?
Richard: There’s been a tremendous amount of change. We had a Thursday before last where the market took a 1,000-point drop in about 20 minutes and bounced back. Of course, it didn’t bounce back all the way. And the SEC and the White House are just trying to say, “Well, there must have been some sort of technical glitch.”
Patrick: Very good. So, when we look at the five reasons that self-investors fail, what do you see?
Richard: Well, there’s a lot of reasons why they fail ,but it comes down to basically that they invest with their emotions, and they don’t know how to analyze data from the market and make emotionless decisions; decisions that are based on sound facts, the right facts.
Patrick: Well, where would somebody even get that kind of information?
Richard: Well, obviously, I can’t give away all my secrets, Pat.
Patrick: No, I know that a lot of people, when we look at the market as a whole, the information that is available to invest is just voluminous. I mean, it’s just more than you could imagine.
Richard: Yeah. Financial data doubles every nine months.
Patrick: I figured it was about every nine minutes. When I was in that environment, we had a squawk box going, and three computers, and five different literally sources of information flying across our desk all at the same time. And I think about the average investor, I’m thinking they just couldn’t keep up.
Richard: There’s no way. They don’t get the data real-time, and they don’t get the information or the formulas that are going to work. They hear about things that used to work in the past. That’s what they read about in the newspapers and the magazines is what used to work.
And some reporter heard about it and he wrote about it. He thought he was a real hero but it doesn’t work anymore. You’ve got to keep changing it up. You need to keep investigating different formulas, and you have to tweak them all the time. So, it’s a constant battle.
I’m going to compare this to the tortoise and the hare. The self-investors are hares. They like to make quick decisions based on momentum, or some formula that they’ve written about ,or wrote about, read it somewhere and they used that formula.
And then, all of a sudden, it quits working and they get caught in a lot of these emotional traps. The first one is called conformational bias, and this is behavioral economics from a Professor at Duke that studied economics and how psychological behavior effects inveestments for the last 30 years.
Conformational bias is pretty simple. When we make a decision, especially with our money, something that’s so emotional to us, we look for that information that confirms our decision, not the information that conflicts with our decisions.
So, as a result, we can sit at the dinner table with mom or the kids and say, “You know what? I’m such a great genius kind of an investor because look at this, I just read something today that confirms that decision I made last month or last year on this investment is a great decision.”
There were ten other articles about that investment that said it actually ranked in the bottom 20%, but he didn’t want to bother reading those things. He wanted to read the one article that confirmed he made a great decision.
Patrick: Well, isn’t it a little bit like when you buy a car or something, that it seems like you buy a red whatever it might be, a Mustang or something?
Richard: Sure, red F-150.
Patrick: Right. Okay, so you buy a red F-150, and then everybody on the highway has a red F-150 at that point, isn’t that right?
Richard: All of a sudden, you see all the red F-150s, don’t you?
Patrick: I know it’s your reticular activator kicking off and saying, “Hey, there’s another one, there’s another one.” But, the other thing is this that when you first made the decision, we all basically, as much as we don’t like to admit it, we make decision emotionally.
Richard: Absolutely.
Patrick: And then, we back them up with logic.
Richard: Exactly.
Patrick: And isn’t that what you’re saying is that conformation bias is you make the decision, and then you look for all the reasons why that was the most amazing decision ever.
Richard: Absolutely.
Patrick: So, what are some of the other things; reasons why people fail?
Richard: How about short-term memory bias, and this is not a joke about having a senior moment.
Patrick: Okay. So, what do you mean, short-term memory syndrome?
Richard: Okay. We tend to remember all of our short-term gains, but we forget about our historical losing cycles, okay. So, we don’t want to talk about what happened to us in 1987, or from 2000 – 2002, or from 2007 – 2009. We just want to talk about what a genius we’ve been in the last six months while the market’s been generally going up.
And a monkey could sit in a closet blindfolded and throw darts at a map and pick winning stocks in the last six months. Now, it’s gotten tricky in the last two weeks, of course. But ,the market has been moving up in such a regular pace in the last six months that anybody could have been a winner if they just got in.
Patrick: Isn’t that the old thing of most of us would never have more than one children if we could remember the pain that it costs us.
Richard: Right. So, a lot of people lost 50% and 60%. In fact, a lot of people don’t know this, Warren Buffet lost 62.9% in 2008 and a lot of the mutual funds lost between 50% and 60%. People want to forget that.
If their $100,000 is only worth $50,000, they want to talk about the fact that they’re back up since last March. They’re back up 30%. Well, all that means is that their account that was originally $100,000 in 2006, that dropped in 2008 to $50,000, is now worth $70,000. They don’t want to go through the pain of remembering that, “Oh, it used to be $100,000.”
Patrick: Right. So, somebody that has short-term memory bias syndrome, they see that they’ve gained some and they’re excited about the latest gain. What else? What are some other things?
Richard: Status quo. It’s just human nature that I want to keep doing what I’ve been doing. But, if you keep doing what you’ve been doing, you’re going to keep getting what you’ve been getting.
So, I run into this a lot when I see an investor and they come and they say, “Well, I’m at so and so. I’m with this brokerage house and they’re one of the top ten brands, and if they can’t make money, nobody can make money.”
So, I don’t care who you’re with. Brokers have another reason why they tend to fail for their clients and it’s called conflict of interest, and we’re going to talk about that at the next segment.
Patrick: Well, one of the things that I want to make sure that people know is that you have a workshop coming up, right?
Richard: Absolutely.
Patrick: So, tell us about the workshops that are coming up.
Richard: So, at the workshop, we’re going to talk about the five strategies that smart investors use to become wealthier, that wealthy investors use to become even richer. And we’ll talk about those strategies in about an hour and then serve dinner. And we’ll be at Southlake Timarron Country Club on Wednesday, May 26th at 6:30 PM, or Wednesday, June 2nd.
Patrick: Very good. It starts at what time again?
Richard: 6:30 PM.
Patrick: And how would someone get registered?
Richard: 972-325-1700.
Patrick: 972-325-1700, they can get registered. Now, who should make sure that they’re at that event?
Richard: Well, anybody that’s concerned about the way this market has been the last couple of weeks, anybody that’s got significant assets. Most of our clients have between $250,000 on up to about $7 million.
Patrick: Very good. So, it’s best that they have a pretty good idea of where they’ve been, and they’ve got a fairly good asset base.
Richard: Absolutely.
Patrick: Okay. So then, as far as what they should expect – 60 minutes of really good information. I’ve been through your workshop a couple of times, and I was really pleased with the fact that it’s not a sales pitch.
Richard: We’re not selling.
Patrick: It’s all about giving people good information. Now, what would be one or two of the strategies real quick that you might see during that time period?
Richard: Well, I think the first strategy that we get the highest ratings on consistently from people is the fact that we show them high return/low fee investment solutions.
Patrick: High return/low fee. I didn’t know those existed.
Richard: Well, yeah. It’s sort of the opposite to what you’re used to getting, which is high fee/low return investment solutions from a professional. And again, that professional is typically a broker and his conflict of interest is that he’s driven by commissions.
So, the key problem with that is he does not have a fiduciary duty to you. He only has to sell you a product that, in his opinion, is suitable for somebody like you. Well, most brokers think that all products are suitable for somebody over certain age.
Patrick: Well, that is a real key to look at too is there’s a big difference between the definition of a broker versus the definition of a Registered Investment Advisor.
Richard: Exactly. A broker is a salesman whose primary duty is to generate commissions. A Registered Investment Advisor has a fiduciary duty to the client first and foremost. And the key thing is 95% of registered advisors also carry broker’s licenses. We’re in that top 5% that the wealthy use, and the smart investors use, that want to use somebody that does not have a conflict of interest, that is going to win when they win. It’s much better if you’re on a team who has the same motivation. Don’t you think, Pat?
Patrick: Well, I agree. I encourage you to make sure that you register for this event. It’s free. Just make sure you qualify. And the way that you do is just call 972-325-1700. I really just encourage you to make sure that you call, you leave your information. No salesman will call. It’s just a confirmation type of thing.
The other thing is that if you like to join the call today or join the conversation today, you can call in at 972-299-5759. That’s metro number for Dallas and Fort Worth. Or if you’re outside the DFW area, it’s 866-660-5759. We’ll be right back.
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Patrick: Welcome back to Financial Fortress Radio. This is Pat Dougher. I’m really excited about the conversation today because a lot of people don’t realize that there are just so many ways to mess up in the investing arena.
When you think about – we’re just talking about the five biggest ways that people fail with their investments, but there are so many more ways to do it, so we’re just going to talk a little bit about those. Richard, thank you again. What are some of the reasons that people really don’t do well in the market?
Richard: Well, another thing that we’ve talked about that we’ve just got into in last segment was status quo bias. And this is the tendency for the investor to avoid making changes. And as a result of that, well, let’s just ride it out a little longer. And this idea came from the brokers that sold the idea of buy and hold. Well, we call that buy and hope; hope, hope, hope it comes back because guess what? It may never.
If you’re not making decisions based on sound data and sound formulas, you’re going to make wrong decisions time after time again. And the old idea of buy and hold died in 1987 a very bad death on black Monday in October of 1987, and it was reconfirmed in March of 2000 when we had another big hit.
So, the older you get, you also tend to experience more and more status quo bias because you’ve lived through so much of the stock market when buy and hold worked that you think it’s going to somehow magically come back, and it’s not. Buy and hold has been a disastrous failure since 1999.
Patrick: Well, I think a lot of people don’t even realize the differences in how a sideways market works compared to times when it’s been a massive growth. There has only been a couple of seasons in last 100 years when the market was going up for a significant amount of time. Would you agree?
Richard: Yeah. In fact, if you take the longest bull market out of the statistics since 1920 and you compare the numbers for the last 90 years with that one long bull market out of there, we call that in statistics an off-all statistic. It’s so unusual, it’s so far to the right or left side of the graph that you just can never expect it reoccur again.
Once you throw that out, the number of years that the Dow or the S&P 500 has been up compared to the number of years it’s been down is actually almost exactly 50/50.
Patrick: I wouldn’t doubt. Well, I know that even another big statistic that a lot of people overlook is the whole population growth or expansion and the boomers hitting their maximum income years in the last ten years.
Richard: Well, in their maximum investment years. So, the kids are through college, they’ve been able to save up a ton of money, mom and dad may have left them a little bit when they passed on, and now there’s over $3.5 trillion in cash sitting on the sidelines.
There was over $4 trillion as of March last year when the market bottomed out. About half a trillion has come back into the market. But, guess what? That’s cash that’s sick and tired of making a half a percent at the bank, sick and tired of making 2% on a CD.
And so, just because they’ve got nowhere else to throw it, they’ve thrown it at the market for the last year, and they’ve pumped this thing back up to the point where the PE ratios are near the top of a bull market again.
Patrick: That’s really interesting that only a half a trillion dollars would drive the market up 25%, 30%. What’s it been?
Richard: It’s closer to – it’s between 30% and 40% in the last 12 months.
Patrick: See, that’s why it’s your job to do that stuff. I’m just the announcer guy. So, to reiterate just a couple of things real quick, five reasons we’ve been talking about; we’ve said conformational bias. Conformational bias is just looking for data that supports your decision.
Richard: Right, instead of data that conflicts with your decision.
Patrick: Right. Okay, short-term memory syndrome is…
Richard: Basically, that you remember that you made money in the last year or the last six months, but you forgot you’re still down 30% or 40% from where you were in 2006.
Patrick: And the whole short-term – the status quo bias is really what caused the 50% decline in 2008, didn’t it?
Richard: Well, it’s got a lot to do with it. The professional investors like us have a tendency to move fast because we’re not basing our decisions on emotions; we’re basing it on data.
So, when we see data that says it’s time to get in, or it’s time to get out or it’s time to moderate our holdings and start cutting back or start putting money back in, that’s when we act.
Patrick: Well, isn’t that the definition though of a Registered Investment Advisor?
Richard: Exactly. We have a fiduciary duty to the client to treat their interest first and foremost. So, we measure the amount of risk they want to take. If they want a foundational product with guaranteed interest to take care of them for the rest of their lives, and they want to put the rest in the market which is how most of our investors are; they’re conservative and they want to make sure that their bills get paid.
And then whatever goes to the kids or the grandkids, we’ll have a tendency to move up and down with the market. But, we’re going to do a better job for them that they’re going to get from the mutual fund managers, or they’re going to get from the brokers at all the top brokerage houses because we don’t have a conflict of interest. We have their best interest at heart.
Vince Lombardi once said that a football player that’s worth keeping on the field is one that plays not only with his feet, he has good quick feet, has a good mind, but he has a good heart.
And we have a good heart for our clients because that’s just our nature. Our nature is to treat people like we want to be treated. The golden rule is part of our mission statement, and I don’t think you’re going to find that if you look at the mission statements of the brokerage houses.
In fact, one of the biggest laughs I got was listening to a guy from Goldman Sachs talking to Congress, and the guy asked them, he said, “So, let me get this right. You had most of your people that were professional ready to go short against this investment that you were selling to some of the largest banks in the world. It basically bankrupted the eighth largest bank in Germany. And you knew that and yet, you went out there and pushed that product with that conflict of interest.”
And the guy just looked at him like a deer in the headlights when he said conflict of interest. He just paused and he just stared at him like he couldn’t believe that the guy said the term conflict of interest.
And finally, he said, “Well, yeah, but that’s our job. Everybody understands it. Our job is to collect commissions, and we’re going to be selling buyers and sellers on the both sides of the transaction. So, we don’t care where we get these buyers and seller from. We just want to be able to put them together so that we make the most commissions. Everybody knows that.”
Patrick: Ow! That hurts all under.
Richard: Doesn’t it? Is that the way you think about your broker?
Patrick: I don’t use brokers.
Richard: Good for you.
Patrick: Well, it really is about time to make sure that people know that you do workshops, and you’ve got a couple of them coming up. When’s your next workshop?
Richard: Yeah. It will give you a chance to get to meet us and see if you like us. We’re going to talk about the five key strategies that smart investors use to invest money at Southlake Timarron Country Club, Wednesday, May 26th and Wednesday, June 2nd at 6:30 PM. Call 972-325-1700 to register. No salesman is going to call you back. Just leave your name, phone number and address so we can send you a confirmation letter. You’ll need that to get into the club.
Patrick: Okay. So, it’s 972-325-1700 to give you all of the information so that you can send a confirmation letter to get into Timarron Country Club either May 26th, Wednesday the 26th or June 2nd which is also a Wednesday a week later. They’re going to get about an hour worth of presentation, and then typically you’ll share a meal with them as well.
Richard: Purely educational. We’re not selling anything. We don’t push products. We could care less what products you currently own or what holdings you currently own. We’re just going to talk in general about things that people don’t understand, or psychology that’s different between the average person and the smart investor.
Patrick: Very good. A couple of numbers that you also may want to keep – I encourage you to take these numbers down. One is direct to Richard Jordan. He’s got offices all over the Dallas/Fort Worth area, but you can get right to his desk at 972-758-4484.
If you’d like to join the conversation today, it’s real simple. Just call in 972-299-5759. If you’re outside the DFW area, it’s 866-660-5759. If you’ve got a question about your investments, or your strategy, or anything that would have to do with your future in the marketplace, then call Richard and ask him about what we’re doing here. We’ll be right back.
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Patrick: Welcome back to Financial Fortress Radio. This is Pat Dougher. Richard Jordan is the co-host of this event. We’re so thankful that you’re listening to ways that you can learn the strategies that smart investors use to grow their money, to transfer their wealth. I know we’ve been talking a lot about the five reasons self-investors fail.
We’ve covered a couple of different things that have to do with conformational bias, short-term memory syndrome, status quo bias. There’s so much more to it. Now, I want you to know that Richard is the Chief Investment Strategist in the Dallas/Fort Worth area. Richard, thank you so much for all you do.
Richard: Thank you, Pat.
Patrick: I want to know more about the reasons why self-investors fail.
Richard: The next reason we see is something called the sunken cost fallacy. So, I bought this stock – let’s take Nortel. It was 100 bucks. I bought it when it was a real bargain. I bought it when it was $30. I had an engineer from Richardson come in and tell me this.
He worked in the telecom industry. He knew everything about telecom. He knew everything about engineering. He knew everything about investing in things based on formulas and analysis. But, guess what? When Nortel started tanking, he couldn’t sell it.
Patrick: Now, why? What’s the reasoning that’s going in people’s head when something starts to falter? What’s going on?
Richard: They’re not making a sell decision based on reason; it’s emotion and the emotion is pride. “Okay, I put $30 a share into this thing and there’s no way I’m going to let it go for less than that. By golly, I don’t make bad decisions. So, I don’t care if it’s at $24 and still dropping, I’m going to hang on to it.”
I get clients walking into my office all the time with bad investments that their broker decided, or even they, with top brand names, “I bought General Motors,” or, “I bought,” whatever, “I bought this speculative thing that was supposed to get blessed by the FDA and they were going to be worth 100 times more in two years if the FDA blessed their medical product.”
Guess what? It didn’t happen. Cut your losses short, get out, set a sell point. If it drops below that, cut your losses. At least sell half of it if you think it’s got a chance to bounce back because you’re waiting for an FDA event or something like that to occur.
But, look at Nortel now, what is it; 30 cents? I mean, this guy lost 99 cents on a dollar and he’s sitting here telling me how smart he is with all the other stuff in his portfolio. Well, when I analyzed his portfolio and his holdings for rate of return on the last ten years, and the last five years, and the last three years, and the last year, and the last six months, he didn’t even do as well as any of the indexes.
Patrick: Now, I hear that and I’m sitting there just thinking surely, somebody would know, you need to have a stop loss.
Richard: This is how important pride is in investing.
Patrick: Well, what about dollar cost averaging down?
Richard: There are all sorts of mathematical ways to improve your odds when you’re investing, and you can read about them, and you can implement some of them. But, the toughest thing to do is to admit that “You know what? 20% of the decisions I make are bad, 20% are mediocre, maybe 20% are really good, and rest fall somewhere in between.”
It’s being able to sell your losses fast, and cut them and say, “You know what? Forget my pride.” This is about producing the best rate of return overall for the client.
Patrick: I remember years ago, I interviewed or helped interview – I think it was Clint Murchison’s wife – wonderful lady. And she was talking about the way that he used to make decisions, and it was amazing. Nine decisions would be just poo, and one decision would just knock it out of the park. But, he knew that going in. That was something that he had an analysis that he went through that made sense. But, most people, they don’t do that, do they?
Richard: No.
Patrick: They don’t get it; they don’t understand how to sell it and cut something short.
Richard: Most people buy and sell based on emotion, and this sunken cost fallacy paralyzes people at the thought of sitting at the dinner table and saying, “Martha, we lost our butt on Nortel, but we got out and only lost 20%,” instead of riding that puppy all the way down into the basement, and all the way into the grave in this case.
Patrick: Right. Well, I know that years ago, that people would say, “Well, I lost everything I had in the market.” That was $646.28.
Richard: Oh, my God.
Patrick: But, that was the mindset of our grandparents, my grandparents.
Richard: I’ll give you another example. I’ve got a friend who self-manages portfolio, one of the smartest guys I’ve ever known; on the board of GTE, on the board of Nortel, on the board of McCaw Cellular, on the board of Sprint.
We’re talking the guy that’s got insider information in telecom like nobody’s business, right. Worth over $10 million when the market peaked in $2,000. I sat at his kitchen table the other day and I said, “So hey, what’s your portfolio worth these days?” Take a guess, Pat.
Patrick: A million, maybe.
Richard: About $400,000, and he’s living off pension and Social Security. He hasn’t touched this thing. It’s just for the kids. He’s lost 96%.
Patrick: Because he just wouldn’t sell?
Richard: Sunken cost fallacy. When these things started dropping, he knew people internally at the highest levels that said, “Don’t worry, George, this thing’s going to come back.”
Patrick: Buy and hold, right?
Richard: Buy and hold, and listen to emotional information rather than logical data analysis.
Patrick: Well, it sounds like he’s done them all though; the conformational bias – he’s probably still looking at reasons why he was right, not the number, not the dollars, but the reasons.
Richard: Smart guy, high-level guy.
Patrick: And short-term memory, status quo bias, sunken cost fallacy. The things that we’re talking about here we’re just trying to highlight. I know some of the key strategies. I know that you do a workshop several times – well, I know coming up; we’ve got several coming up.
Richard: We usually do about two weeks a month.
Patrick: Two a month?
Richard: Yeah.
Patrick: Okay. So you’ve got one coming up on May 26th and June 2nd, both of those are Wednesdays.
Richard: Correct.
Patrick: How would someone register?
Richard: 972-325-1700. The lady there will tell you to leave your name, phone number and address so we can send you a letter of confirmation. You’ll need that to get into the club. So, please leave the information.
No salesman will call. We’re not going to try and sell you anything. If you meet us at the event and you decide want to engage us for a free consultation, that’s your choice. We don’t sell at the event; we offer free information based on things that investors need to know.
Patrick: What are some of the things that they’ll walk away with, Richard?
Richard: Well, they’ll learn about the key strategies that smart investors use to become wealthy and wealth investors use to become much more wealthy. They’ll learn, for instance, about how to get high returns without stock market risk. They’ll learn about opportunities that they won’t see at any of the big brand named brokers.
Why? Because these opportunities don’t pay commission. And remember the difference between a broker and a registered advisor. A broker is driven by commissions first, and taking care of you second. We’re driven by finding you the best low cost/high return investment solution.
Patrick: Now, when someone attends this, they do need to somewhat qualify, right?
Richard: Yes. Most of our clients are people that have assets in the market, or investable assets with CDs and everything, that are in the range from $250,000 on up to $7 million.
Patrick: Very good. Now, is there any cost associated with this?
Richard: No, this a free event. It’s strictly educational. And obviously, we offer a free dinner so there’s a little something in it for you. You can take an hour of your time to listen and you can decide, “Hey, I don’t like this guy. I don’t like the way they approach the market.” That’s fine. Enjoy your dinner, enjoy the company of the people you’re with, trade some phone numbers, make some new friends, and you won’t hurt our feelings if you say no.
Patrick: Well, having been to a few of them, I would highly encourage people to pay attention to who’s in the room because a lot of people that are there are really – well, they’re class act.
Richard: Yeah, we draw an educated crow; absolutely.
Patrick: Yeah, you do. So, to register, it’s just 972-325-1700. Now also, people may want to contact you directly.
Richard: If they have a personal question and they don’t want to ask it over the air, call my desk, 972-758-4484, and I will return all calls typically after the market closes at 3:00 PM. So, if you don’t get me right away, I’m in a meeting, just leave it on the voicemail, I’ll be happy to get back to you later in the day.
Patrick: The other thing though that’s really important is that I know you do a ton of research. You probably spend 30 – 40 hours a week just on the research rather than selling. I appreciate that about you.
972-758-4484. We’re talking about the five reasons self-investors fail, and you just want to make sure that you connect with Richard and you stay tuned. We have more coming up after the break.
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Patrick: Welcome back to Financial Fortress Radio. This is Patrick Dougher. Richard Jordan is with me here as the co-host of this event, and we’re really thankful that you’re listening. There’s so much information that most people really – well, not just want to know, need to know, on what’s going on with their investments, on what are the real secrets, the key strategies that smart investors use to invest their money, and to pass on their assets from one generation to the next.
I know that we want to talk about some of the key strategies even right now. I know, Richard, you have a couple of other keys that you use and that you teach in your workshops and stuff. What are some other ones that you use?
Richard: Well, one of the key ones is opportunities that they won’t find at the brand name brokers. In fact, they won’t find them at the low-end brokers either. They won’t find them at Schwab, they won’t find them at TDA, they won’t find them at Scottrade because they don’t have access to them.
These are funds whose information is only available to Registered Investment Advisors, and the reasons brokers know about these things, but they won’t tell you about them, is because they don’t pay commissions.
Patrick: Well, again, it goes back to the definition though, doesn’t it? A broker is a salesperson. Registered Investment Advisor – that whole industry or that category of the Registered Investment Advisor was actually set up by the government, wasn’t it?
Richard: In 1940, they set it up for the wealthy.
Patrick: So, today, though a lot of people don’t realize what that really means because for a lot of people, somebody that’s a Registered Investment Advisor can still carry some of those other licenses, can’t they?
Richard: Well, 95% of the Registered Advisors also carry a 6 and a 7 which gives them the right to collect commissions on the sale of stocks, bonds, mutual funds, and annuities. And the fact that the commissions they collect are typically five times or more what they would earn as Registered Investment Advisors, these are the guys that want to get rich quick on your money, using other people’s money, they’re going to get rich quick and you’re going to suffer the consequences of their poor decisions.
Patrick: Now, a lot of people wouldn’t see that though initially because the different prospectuses show a different picture, don’t they?
Richard: Well, the prospectus is kind of a funny animal. It has to tell them some of their costs. For instance, in mutual funds, the range of cost that we uncover typically range up to 8% on a fund; 8.2% is pretty typical.
But, the disclosed funds and the prospectus are typically only around 2% or 2.5%. But, there’s another category called undisclosed fees, and the undisclosed fees are usually two to three times higher than the disclosed fees, and the undisclosed fees are only referred to in vague generalities and the prospectus as operating costs, or variable expenses, or spread expenses. Do you know another word for spread expenses, Pat?
Patrick: No.
Richard: Commissions.
Patrick: Oh, okay. Well, it makes sense because the spread typically is the different between what you buy and you can sell it for.
Richard: How about incentives? What is an incentive for in the prospectus?
Patrick: Again, I would imagine some form of commission.
Richard: It is. It’s you sell so much of our fund and you get the free trip to Haiti, or Fiji, or whatever.
Patrick: Very good. Yeah, I understand what you’re saying. So, you’ve got this conflict even though they say they’re Registered Investment Advisors, but yet you don’t participate in any of that. Is that right?
Richard: Right. So, that’s what the big brokers have learned to do is they call themselves a private banker or a personal banker. They carry the registered advisory license, but they also carry all the commission license. It’s clearly a conflict of interest, and the SEC allows it.
There was a professor at Duke that wrote a book called Predictably Irrational. It’s a great book. And he talks about how the self-investors fail which you would expect. They fail 92% of the time in a bull market, 96% of the time in a bear market – pretty dismal odds of you ask me.
But, the scary part is that the fund managers, the pension funds and mutual fund managers, fail because of a conflict of interest. Now, he, being a Professor from a liberal university – he, of course adds that it’s terrible that they put him in such a position that they have a tendency to fail just because of human nature. Oh, poor them. Poor fund manager is making $10 million, $20 million, $50 million or $100 million a year. I really feel for them. Don’t you, Pat?
Patrick: Oh, it hurts all under.
Richard: Yeah, it does.
Patrick: But, I know that you’ve seen and used strategies and tools that have actually produced good rates of return.
Richard: Yes.
Patrick: In fact, one of the things that I was really surprised – in your workshop, you talk about how a lot of the prospectuses will actually post returns that are not what someone would experience. What do they call that?
Richard: Well, they post top-line returns. The SEC allows them to post gross returns which is the return that the fund experienced before the costs. The costs they buried in that 100 or 200 page prospectus. You have to find out what those costs are.
There was a study by Morningstar that ended about at the end of the last bull market over a really good 10-year period, that ended right around beginning of 2007, and it said that the average fund in the top 50% averaged 9.65% per year compounded rate of return, but that’s the advertised rate.
Patrick: So, what was the reality?
Richard: The reality, Morningstar went through the prospectuses, just like we do, and they found that the actual rate after fees was 1.45%.
Patrick: Each year?
Richard: Yes. It dropped 8.2%.
Patrick: Wow! That’s scary. What are a couple other things real quick on the other strategies that you teach?
Richard: We’ll talk about some nontraditional asset allocations like hard assets, what you should do with real estate right now, what you should be doing with precious metals. A lot of people think gold’s got to run to 2,000. Some people are saying it won’t. It’s getting kind of frothy at 1,240. What do you think, Pat
Patrick: Well, I just look at what’s happened in Greece, and Europe, and England, and America with a slight amount of overspending. I mean, you have what? Greece nearly went bankrupt, and there’s this European Union that may just disintegrate.
Richard: And Germany is threatening to jump out of the EU.
Patrick: That’s right. Germany is threatening that. I know that, recently, there were some really interesting reports on who would be next if Greece defaults, who has such a high rate of indebtedness to GDP.
Richard: Well, the obvious answers are the other countries that are highly socialistic like Spain like France, like Portugal, but I guess the surprising one that’s on the top ten list is right all here in the United States of America since we elected, what’s his name?
Patrick: Yeah, really. Well, in fact, I know England was above us, and then it was.
Richard: England’s now in the top five along with us. Yeah, it’s pretty dismal.
Patrick: The only ones that were kind of a little better was I know Australia and Switzerland.
Richard: And Canada was at the bottom on the list too.
Patrick: Yeah, that’s really good. Well, I want people to get in touch with you, Richard. They can call your number direct, 972-758-4484. They can also learn about the strategies at your workshop on the 26th. That would be Wednesday the 26th, Timarron Country Club.
Richard: Southlake.
Patrick: In Southlake. And then, June 2nd, same thing, Wednesday night, starts at …
Richard: 6:30 PM, plenty of time after work.
Patrick: About an hour of good information.
Richard: Strictly educational.
Patrick: And then, dinner with a great group of folks.
Richard: Great folks.
Patrick: There’s no cost, but you do need to qualify, right?
Richard: Absolutely. We would like to see you, like most of our clients, with at least $250,000 on up to about $7 million. That’s our typical client base.
Patrick: Very good. We want to make sure you’ve got the number; it’s 972-325-1700. That will register you. No salesman will call you. They just want to make sure that you get your name, your address and your phone number so there can be a letter of confirmation.
Richard: Confirmation letter so they get in the club, yeah.
Patrick: 972-325-1700. And I just want to make sure, again, call Richard if you have a question direct if you not want to air it over the show here, it’s 972-758-4484. You can also look at FinancialFortressOnline.com to get a copy of the transcript of this radio show. We’re so thankful. We’ll talk to you next week.
Transcript by:
Lainie Cotell
www.magiscript.com