Financial Fortress Radio April 18 2010 with Richard Jordan and Pat Dougher
Patrick: Welcome to Financial Fortress Radio. This is Pat Dougher. Richard Jordan here with me and we’re going to talk about the way that the smart investors not just make more, keep more – and then transfer more to their heirs.
Financial Fortress radio is all about showing you how the smart money get ahead with less risk, better returns and really do it right. Richard, thanks for being on the show.
Richard: Thank you, Pat.
Patrick: I understand we wanted to talk about the Professor from Duke University this week about the conflicts of interest he runs into. Tell us a little bit more about that one.
Richard: There was a book put out recently by a Professor at Duke that has 30 years in behavioral economic behind him. His book Predictably Irrational talks about the fact that all investors are far less rational than the standard economic theory assumes that people have too much of the wrong kinds of emotions at the wrong time in investing.
For instance, if you had been able to invest back in the market last March when it bottomed out, you would have been much better off, but if you even read recently the report about the money that is still sitting on the sidelines – over $3 almost $4 trillion in cash sitting on the sidelines.
And most of the money last year and up through March of this year have been poured into bond funds which are a really terrible investment with the upcoming inflation and the record amounts of deficit spending that the Federal government is doing.
So, wrong emotion; wrong time. That’s the biggest problem for investors. And the surprise in the book is it’s not just the self-investors who don’t even match the indexes over 90% of the time whether the market is going up or down, but the actual fund managers are the mutual funds and pension funds as well as, as you would expect, the stock brokers who have a conflict of interest since they’re commission driven.
Patrick: Well, I know that on Wall Street – years ago, I was a trader as in trading stocks. I worked at a broker/dealer. I was on a trading desk and we could see – we called it down the throat of almost every investment house in the country. And it was always interesting to see how these guys moved money because it wasn’t the way you’d expect it.
Richard: No, it isn’t.
Patrick: A lot of times, you’ve seen it with the funds. What do they end up doing? In order to look good, they sell what? What do they sell, Richard?
Richard: Well, they sell whatever they’re told to sell; whatever is the highest commission rate.
Patrick: Well, that’s the broker, but when it comes to the fund managers, they end up shooting their what?
Richard: Well, they end up selling their winners when the market is going down so that they can still advertise their rate of return as higher than their competition. So, rather than selling their deadwood in the losers, which you are always taught to do first when the market turns downward, they’re doing the opposite because they’re trying to maintain their fund which maintains their paycheck. It’s all about their money, not your money.
Patrick: And that’s a real key here because one of the things I notice is if a person earns a commission, they’re called a what? In your industry, it’s called a…
Richard: A broker; a stock broker.
Patrick: Or an investment broker, right?
Richard: Right.
Patrick: And they’re going to earn a commission on what they sell you.
Richard: Exactly. But, there are many examples of those, of people in the financial services industry that call themselves financial planners or financial advisors – a loosely used term – when, in fact, they’re just commissioned salespeople.
So, that list is not just stock brokers. It’s people pushing these life settlements. It’s guys that only have life insurance products. There’s a broad range of people out there. Your banker, basically, has a very limited portfolio that he can show you down there, so he’s going to show you CDs and whatever the bank is pushing that week in terms of funds. And all these people are based on commissions.
Patrick: But, that is a conflict of interest though.
Richard: Absolutely. And that’s one of the things that the administration is trying to work against; coming up with new financial regulation. Of course, it’s very difficult because of the amount of money that gets poured into the political action funds.
Patrick: The one thing that’s kind of odd is the industry, the financial planning industry, has more regulation than anything I’ve ever seen.
Richard: Oh, sure. We kill more trees than any business on Earth.
Patrick: Just the IRS beats you.
Richard: That’s it. And not by much.
Patrick: I just noticed that you guys really do a lot. And when it comes to this Predictably Irrational, they’re talking about herds, aren’t they?
Richard: Yeah, exactly. So, if you take a look at the average investor today, they’re still fearful to put their money back in the market. If you look at the fears in today’s market and why we might have a down turn in the market, it’s because the small investor hasn’t come back in.
The big funds have come in since March 9th when the market bottomed, but it’s gone up over 50% because of the big boys playing in the market. The little guys are still scared.
Patrick: Well, help me with that because that would tell me that it’s still a better than average time to be in that arena for a season with careful guard. But, the reason why I’m saying that is that there’s so much money on the sideline.
Richard: Exactly.
Patrick: And the little guy doesn’t determine the direction. He just ends up holding the bag when it gets too hot, doesn’t he?
Richard: Exactly. And so, if you don’t have an advisor that takes the emotion out of investing for you and makes those decisions without emotion, then you’re just going to follow the herd.
Patrick: Well, I know that title actually came from some – I don’t want to say litigation. That’s not the right word. Congress set it up years ago in the 30s, didn’t they?
Richard: Yeah, exactly. The difference between the brokers, which are commission driven, and the advisor, the professional advisor that Congress set up for the wealthy is that the advisor, the professional is called Registered Investment Advisor. At the country club, they often call that a private banker.
If you’re at a cocktail party or something and somebody says they’re a private banker, that’s often what they are, but sometimes, they’re just a stock broker too. So, you have to ask them, “Are you a Registered Investment Advisor?” because they take the fiduciary interest in the client first and foremost.
The client’s goals come before the advisor’s goals. The client’s goals are first and foremost. If the client wants to set a certain level of risk – and they all do – all investments for that client have to be within the range of that level of risk, whereas the commission driven people only have to operate under a guideline of suitability.
Well, suitability is like, “I think anybody over 50 ought to buy one of these, so I’m going to recommend it because it’s got a great commission on it.”
Patrick: So, if it meets certain specs, they’re saying – as far as if they have a certain amount of money or whatever, and once they meet that technical term ‘suitability’ not necessarily really suitable for the client. But, just as long as they meet it and a lot of brokers will just say, “Let’s go for it.”
Richard: Suitable for a whole category of people. And trust me, you may ride in a golf cart with a guy every week for 40 years and think that your risk structures are about the same, but when I get those two people together in a room, they often feel quite differently about money even if they’re next door neighbors, even if they belong to the same club, go to the same church or synagogue, oftentimes their risk appetite varies dramatically.
Patrick: Now, you have a seminar coming up, right?
Richard: We have two coming up on Tuesdays; one in April on the 27th and one May 4th at Brookhaven Country Club in North Dallas at 6:30 PM.
Patrick: Now, I’ve been to that, but how would you describe what they’re going to walk away with from that?
Richard: They’re going to hear about how smart and wealthy investors invest their money differently and do it without emotion by using what the public calls private bankers, but really is a Registered Investment Advisor.
How do they find a guy that takes the fiduciary interest of the client at heart first and foremost and does the right thing for the investor?
Patrick: Very good. And how would they register for that?
Richard: They would call 972-325-1700.
Patrick: Okay. That’s 972-325-1700.
Richard: Exactly.
Patrick: Now, I know a lot of people may want to get into the conversation – with your background, you’re an investment strategist and Registered Investment Advisor. You have been in this field for many years and you work with some very wealthy clients.
I know they might want to ask you a question about how some people got there or maybe they’re already there and they’d like to ask some questions about maybe where they’ve got certain things possibly – without getting too specific – but as far as they might have some things that they want to talk about, they could call in at 972-299-KSKY (5759).
That will join the conversation here. You can ask Richard about your situation or if your IRA is an IOU to the IRS.
Richard: Which it is.
Patrick: For a lot of people, it is. With that, join us at 972-299-5759. Richard, I know we’ve got a couple of minutes before we go to break, but I want to make sure that we really cover this conflict of interest thing. And Predictably Irrational is one of those that you can see a herd going off a cliff if they’re a bunch of lemmings.
Richard: Absolutely.
Patrick: Okay. But, how does someone see that without being in the middle of the herd because, a lot of times, when you’re in the middle of the herd, you just don’t see the edge until it’s too late.
Richard: Well, again, you’ve got to use an unemotional approach and that basically means a statistical approach to analyzing the situation. So, whatever situation you’re in, the market situation currently, a personal portfolio – how do you meld those two and combine them to get the best possible rate of return for the investor within the range of risk they’re willing to take? That’s really what the question is, isn’t it?
Patrick: Well, I think so. Most people, they want to grow their money as fast as they can with the least amount of risk. That’s a given. But, most investors don’t do it, do they?
Richard: No. A lot of them just rely on the big brand names. And as you’ve heard in the news, if you heard the news on Friday, Goldman Sachs is being sued by the government for fraud and deceptive practices in relation to the subprime mortgage bond business, and it’s just a horrible mess that they created.
And they weren’t the only one. All the major brokerage houses and banks were involved in it. And any time you’ve got an investment bank on one side of the house and brokers on the other side of the house, you’ve got a conflict of interest. One’s creating products and the other is getting paid commissions to sell those same products. And that’s the problem.
Patrick: Very good. Well, I know that a lot of people want to join you on that seminar, so just call 972-325-1700. And if you’d like to join us on the show, it’s 972-299-5759. We’ll be right back.
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Patrick: Welcome back to Financial Fortress radio. This is Pat Dougher. Rich, we’ve been talking about Goldman Sachs. They’re in the news again. And this time, it’s a bit of a nightmare.
Richard: It’s not pretty.
Patrick: So, tell me more. SEC is coming after them. What did they do that was so offensive?
Richard: Well, they created these products with an affiliated outside company that they have a vested interest in. And basically, these products are in the category called collateralized debt obligations or collateralized mortgage operations otherwise known as mortgage bonds.
Now, the bonds people are familiar with are the ones sold by Fannie Mae and Freddie Mac which also, by the way, almost went belly up and the Federal government had to rescue them.
And it all had to do with the subprime mortgage bonds being grouped together and sold and rated as a AAA investment by the bond business and, as a result of that, people bought into them. And not just people, but major investment banks around the world. It’s affected the economies of almost all the industrialized nations globally.
So, certainly, there’s been damages done and the SEC would like to get money back for investors here in the US which will run into the billions of dollars.
But, they’re also individual banks – large investment banks – that have been run out of business because of this and others whose stock have dropped like a rock.
Patrick: Now, isn’t this the first domino, though? When you think about Goldman Sachs, that’s the big boy – or one of the big boys on the block. But, this problem of – they’re another kind of derivative I imagine of a bond, aren’t they?
Richard: Exactly. It is that whole category called derivatives that the government now wants to regulate under Obama and it’s very difficult to do because it gets into the area of commodities and options. And as a result of that, it’s going to include a very big area because commodities and options are used effectively to manage risk for agriculture and for the mining business.
But, collateralized mortgages, that grouping turned out to be a total nightmare. It was very similar to what happened in the savings and loan crisis in the early 80s. People bet too much on real estate going up. And as a result of that, somebody got left holding the bag.
Patrick: Now, as far as this real estate debacle, it’s really just in its infancy, isn’t it? A lot of people are hurting and I’m not trying to bring bad news, I’m just going – we’ve got a whole slew in the next few years of adjustable rate loans that are going to start falling into this black hole.
Richard: Exactly.
Patrick: Wow.
Richard: Yeah. There are still more foreclosures to come. I heard from somebody in the mortgage business that has 25 years experience just Friday that the business, the top 10 or 20 mortgage banks that sell mortgages in the Dallas/Fort Worth metro are about to release 90,000 foreclosures onto the market.
If you drive down the streets of many subdivisions, you’ll see houses where the weeds are growing up – and in nice areas as well as poor areas – and they’ve got a white sticker in the window that says there’s antifreeze in the pipes and please don’t try and drink the water.
That’s a house that’s been foreclosed on, but it’s empty. And rather than sell it when the market was down, the banks have been holding onto them. Now, they’re ready to dump them on the market, so we’re going to see another wave of real estate pricing attacked by this strategy because the banks didn’t want to take the big hit for their bad decisions.
Patrick: Well, who’s going to take the hit?
Richard: Well, obviously, the people that still own real estate in those subdivisions. And some of these subdivisions are golf course communities. They’re wealthy communities along lakes, they’re not just middle-class neighborhoods. This going to his across all socioeconomic boundaries. It’s not just in poor neighborhoods.
Patrick: Well, it would seem to me that if that happens, the government may actually have a vested interest in trying to keep some property values up. And the only reason I’m thinking that – let’s say in my subdivision 25 homes were sold, dumped; well then, my resale value drops to the floor.
Richard: Exactly.
Patrick: But, if my resale value drops to the floor, then the tax bracket, or the tax value, that the area has assessed on my community, I can fight, right?
Richard: No, not really, because what happens is you go to the committee that assesses that personal property tax and they say, “I’m sorry. That was a distressed home sale. We consider that an [21:37 inaudible] statistic and we won’t count it in the average value of homes in your community. Your tax is still as high as it was last year.” Oh, my God. Yeah.
Patrick: And it’ll probably even get raised higher.
Richard: Well, it can, but mostly they’re staying flat. But, it’s still unrealistic because of the property that’s been dumped on the market in the last couple of years. So, a lot of people have gone to fight these property values have been severely disappointed in taxes.
Patrick: Wow. That is amazing. Well, I will tell you, you should come to Richard’s event. It’s April 27th and May 4th. It will be at Brookhaven Country Club. Start at 6:30. Call and register. It’s 972-325-1700. And Richard, who should really attend this?
Richard: Really, anybody who is interested in becoming a smart investment advisor, anyone that is interested in doing a better job of getting returns with their money with the same amount of risk, much higher returns or anybody that wants to reduce the amount of risk they’re taking and get the same kinds of returns they used to get several years ago before we went through this big bear market.
Patrick: Now, to attend, you really need to have a little bit of a head start. You’re not looking for somebody that’s just beginning the process. You’re really looking for folks that have an IRA – well, actually, between the husband and wife, have an IRA and it has a significant value. What’s a good range for you?
Richard: Typically, $250,000 or more.
Patrick: Very good. So, that’s 972-325-1700. If you’re really looking for the right kind of advice to get you where you want to go in the next few years, then you’ll want to come to this event. If you want to join the conversation, it’s 972-299-KSKY (5759).
Richard, I know that this conflict of interest that Goldman has gotten involved in, it’s not even the tip. There are a lot of other ones out there is I guess what I’m trying to say, aren’t there?
Richard: Basically, the top 50 banks were involved in this subprime mortgage crisis. They’re just getting singled out because they were one of the companies that first created this kind of instrument. They were also involved in creating the insurance instrument called the credit default swap that basically guaranteed those investments.
Unfortunately, for about three or four trillion dollars in bad real estate loans, there’s over $64 trillion in credit default swaps that have been sold back and forth in a spider web between the top 50 – 100 banks.
And if I call yours, you’re going to call mine, and then he’s going to call his and all these banks are going to make demands on each other and it would bring the whole system down, so it’s never going to happen. These insurance policies that were created for the subprime mortgage business will never be collected on because it would literally decimate the financial system. So, it’s just one big joke on the investor that put his money in it in the first place.
Patrick: My goodness. That is just amazing to me. I know that a lot of people are thinking, to a great degree, that the worst is over.
Richard: Right.
Patrick: But, you’re saying that it may just be getting started in some areas. Is that what I’m hearing?
Richard: Well, like I said, that value of your real estate is really probably not going to go anywhere fast anytime soon. And a lot of the reason we’ve seen increases in the market in this first quarter was the stimulus that the Federal government put out there for first-time buyers and also for people moving up.
Now, that stimulus package ends at the end of this month. If you don’t go out and buy a house by the end of April, all that’s gone. And we’ll see what the real numbers are after that.
Patrick: What’s the opportunity in this? What do you think is the opportunity that either investors or people with money have when everybody is running in the other direction right now in real estate?
Richard: Well, again, when it looks like the market is going to be dropping, you want to be shorting the market. And when it looks like it’s going to come up, you want to be investing in it. So, I would still be shorting real estate investments like real estate trusts.
You may notice that the number of commercial foreclosures is still going up and that’s a direct result of the lack of consumer spending.
Patrick: Man. I understand. I know that you’re going to be covering a lot of this information at the next workshop.
Richard: Absolutely.
Patrick: And that’s April 27th and May 4th are the next two that are coming up. You can register at 972-325-1700. Now also, if somebody wanted to get in touch with you directly, they can call you at 972-758-4484. Is that right?
Richard: That goes direct to my desk. If I’m not in a meeting, I’ll take that call.
Patrick: Excellent. I know that for some people that are not calling in right now, but they do want to connect with you, I want to make sure that they have your number which is 972-758-4484. And Richard, you cover all of the Dallas/Fort Worth area, so if you’re in the area, give him a call. I know that you’ll enjoy working with Richard. I have, and you will too. We’ll be right back.
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Patrick: And welcome back to Financial Fortress radio. This is Patrick Dougher and Richard Jordan here. We are talking about investing the smart way. What I’m really talking about are ways that smart money invests to lower risk, increase return and, really, then transfer that wealth that they built to the next generation.
Richard, I know you’re an investment strategist in the Dallas/Fort Worth area. You have been after this for a long time. You’ve worked with very wealthy individuals and you found that there are some keys to investing the smart way. What are some of those keys?
Richard: These keys work whether you’re wealthy or just middle-class. So, we’re not interested just in working with wealthy clients, but the secrets that we’ve learned to keep the wealthy happy are the same ones that the middle-class are ecstatic about.
The first, of course, is how to get high returns with low fees. The problem is, in the current scenario, most people that get into the stocks and bonds market are sold funds, mutual funds of various sorts by the brokers because that represents a high commission environment for them, and that isn’t the best place to make money.
Patrick: Well, tell me a little bit about that because when I think of mutual funds whether they have charges up front, or internal, or whatever, but I know you’ve done some research on this and found that the returns that they post are not always the truth in investing.
Richard: It’s not the whole truth I guess is the best way to put it. The SEC allows them to advertise their gross return, which is the top line, and all their costs are buried in a 100+ page prospectus.
As a result of that, the costs of an average mutual fund range from 5 – 8%. And so, when you look at a fund and it says it’s been making 10% the last ten years and you’re paying 8% in costs, you’re really only getting a net, bottom line, about 2% on that fund, but you’ve got to go through over 100 pages of material to find that.
Now, I know how to go through a prospectus and rip it up in about an hour, but most people won’t even touch it because it just looks too intimidating.
Patrick: Now, is that also assuming that they’re in a tax free investment like an IRA? Because if they’re just in a regular investment, wouldn’t taxes and inflation be eating those things alive?
Richard: Well that’s, of course, always true that taxes and inflation affect your investments just as much as fees do.
Patrick: Wow. So, what’s another key that the wealthy use?
Richard: Well, they’re always looking for a way to get high returns without stock market risks so that they can balance out their assets across multiple areas. So, a lot of the things that are pushed today to get that by the commission marketplace includes things like life settlements and we know that that is a conflict of interest environment.
It’s kind of like the Wild West out there. It’s very thinly regulated, the returns are hard to verify, and the cost of doing business is very high, and the liquidity is almost nonexistent. If you buy are share of somebody’s life insurance policy and you need to cash it in right away before that person matures – that’s what they call it in the business. It’s kind of a joke, isn’t it? Matures?
Patrick: Sure.
Richard: Before they pass away, what’s it worth? Well, there is no secondary market to sell that thing on.
Patrick: Well, one of the things that we might be doing is losing some people on this term. A life settlement – how would you define it?
Richard: It’s a share of a life insurance policy that you bought into for the purpose of an investment hoping that person would pass on.
Patrick: And they try to buy them with the expectation that that person will live…
Richard: A certain life expectancy.
Patrick: Three to five years or something like that.
Richard: Typically, that’s the range. Yes.
Patrick: But, if someone invests in that – in fact, didn’t you have a client that they had invested in it and then they needed money?
Richard: Well, I had a lady come to one of my seminars and she bought almost a half million dollars worth of these things from a guy that’s on the radio on another station on Saturday mornings and this guy always pushes nothing but life settlements. It solves all financial problems.
Well, it didn’t solve hers because less than a year after she spent 95% of her retirement money on this concept, she needed cash for her husband’s health and she couldn’t cash these things in. There was no way for her to cash in. She needed money because the health insurance company wouldn’t invest in procedures that he needed to guarantee his life was going to be extended.
They call them experimental procedures because he was in a rare category of disease, so anything that you treat it with, obviously, doesn’t have enough statistics so they can call all treatment for that kind of a disease experimental – funny how that works.
Patrick: Interesting. I know that there is a lot of money that’s running into that arena. I also know that, right now, it’s fairly unregulated and that usually is a future landing spot for the SEC or somebody like that anyway, isn’t it?
Richard: Yeah. We certainly hope that there is some regulation done soon there to protect the investor. Now, other things we talk about at the seminars is huge estate and income tax savings ideas because, for some reason, people that have already paid taxes accumulating an estate don’t want to see that estate evaporate when they pass away because Uncle Sam wants to attack the estate and collect taxes from somebody that’s already gone. Uncle Sam finds it pretty easy to collect taxes from somebody that isn’t around to object to it.
Patrick: Right. I know that there are some easy strategies to put in place – structures if you will – to protect someone’s investment. What’s sad is that some of the biggest boys in America throughout the years, have said, “I know more than those guys. I can set it up myself.” And then guys like Disney and the Vanderbilts, they get just walloped with sometimes 10, 20, 30, 40% of their estate going to the government.
Richard: Over half.
Patrick: Over half.
Richard: In fact, we could see estate taxes up over 50% again because only 10% of the people pass on with more than a million dollars and the other 90% of the population considers those people wealthy even though the book, The Millionaire Next Door, says that two out of three of those millionaires started with nothing. They just did a good job of saving their money and investing it prudently.
Patrick: Wow. Well, I do want to make sure that people know about your workshop. It’s coming up April 27th and May 4th. It’s at the Brookhaven Country Club. Starts about 6:30, but you have to register for it. If you want to come, register at 972-325-1700. Now, is there any cost associated with this?
Richard: No, there is no cost.
Patrick: Okay. And you’re going to be teaching about these principles that we’re talking about right now and more, a lot more, because there’s a ton more information that you present that is really insider secrets that they walk away with some massive value.
Richard: Absolutely.
Patrick: So, it’ll be a great workshop. I hope you come. If you want to join the conversation today, it’s 972-299-5759 (KSKY). Just call in. You can ask Richard about your situation, how he might be able to help you get clarity and maybe get you some better options than you might currently have.
So, I know that there’s a few more secrets, some more keys. I want to make sure that we go to those. So, what’s next?
Richard: Well, one of the things we talk about is taking the emotion out of investing. If you take the emotion out of investing and use mathematical analysis, you can determine much better when to enter and exit the stock and bond markets because if you use your emotions, you’re going to want to buy high and sell low.
By the time you think it’s okay to get back in, the market is already run-up. Most of the run-up it’s going to have in a bull market and by the time you’re willing to admit you made a mistake and the market’s slid, often most investors that self-invest and even their advisors, because they invest with emotion and don’t use mathematical formulas, sell their stuff when it’s near a low.
That’s the opposite of how you want to make money. You want to buy low and sell high obviously. So, you need to use mathematical constructs in order to make those decisions and that’s the toughest part in advising a client is for me to go against their nature and emotions and tell them, “Look, you have to trust me on this. This decision is made best mathematically.”
Patrick: Right. But, the only thing about that is that usually the buy or the sell signals come at the exact emotional moment when that’s a wrestling match. Wouldn’t you agree?
Richard: Absolutely. In fact, there are reports out there that consistently indicated in the last 75 years that when 60% of the advisors are telling you to buy, you need to sell. When 60% are to telling you to sell, you need to buy.
Patrick: I’ve also seen that one of the best sell signals is when the investment shows up on the cover of Time Magazine. That’s it. It died.
Richard: It’s already over. That’s right.
Patrick: Well, I know that you’ll want to go to Richard’s workshop. You can register at 972-325-1700. It’s April 27th and May 4th at Brookhaven Country Club 6:30. You’ll want to be there.
You can also connect with Richard directly if you have a question for him Monday through Friday at 972-758-4484. It’s his direct line.
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Patrick: Welcome to Financial Fortress. This is Patrick Dougher and Richard Jordan. We are talking about the way that smart investors preserve their capital, invest right, really weather these financial storms, and we’re helping people create a financial fortress.
Richard: Absolutely.
Patrick: I know a lot of the stuff we’ve been talking about, Richard, is emotion versus systems. You use formulas. Everything you do is formula based.
Richard: Absolutely.
Patrick: And I know that you’ve seen how that really does create the best returns and the smart money tends to use formula based investing. So, who’s one of your – I want to call it icons. Who’s one of your people you look at and go, “That guy does it right”?
Richard: One of the heroes of the business is a fellow that figure out that the simple formulas that everybody was using like 200 day moving averages back in the 70s and 80s didn’t work anymore when we had the market crash in 1987 on Black Monday – 22% drop in one day.
Patrick: Well, I will tell you. I was there. I had just gotten into the industry. I’m not a financial advisor anymore, but back then, fresh in, 200 day moving average on Friday gives the signal to close, but what happens on Monday?
Richard: 22% drop and most brokers you couldn’t even reach until Thursday after the market had dropped 31%.
Patrick: 508 points. That’s all I remember. 508 points in one day.
Richard: More important, it was 31% drop.
Patrick: No one could get a hold of anything. You couldn’t get a hold of your broker until Wednesday anyways.
Richard: No. He was either hiding under the desk or he’s already thrown himself out the window.
Patrick: It was really bad.
Richard: It was.
Patrick: There was a lot of people that were really shocked. Now, today, 508 doesn’t sound bad.
Richard: No, not out of 12,000 or 11,000, which is where we’re at right now, but back then one of the professors at Harvard had figured out – he had been tracking his formulas against the market for years and he created a fund back in ’88 that was just for the wealthy. Minimum investment $10 million, and now it’s $20 million, and it’s made consistently over 30% a year after fees.
Now, remember mutual funds talk about gross returns and they hide their costs in a prospectus, but when you come to my seminar, you’re going to hear about what the returns are after fees. Does that sound like a smart way to get information?
Patrick: Well, it seems to me like the right way to look at anything.
Richard: Wouldn’t you want the bottom line first?
Patrick: Well, it’s the only one that counts last time I checked. That’s the one that actually means something. And by the way, I just want to make sure people know. You can go to Richard’s April 27th or May 4th workshop at Brookhaven Country Club by calling 972-325-1700. Now, I know that he’s done really well.
Richard: He has for really wealthy people.
Patrick: Right, but that’s one of the keys is that he did it right from the beginning. He just worked with the people that understood his game and it made all the difference.
Richard: And now, smart investors have gotten behind that too, but they still represent a small percentage of the market. So many people just want to buy from a brand name because it’s easy. They see the name on television a lot. They got familiar with the name, perhaps, as the provider or guardian of their 401K at the big company they worked at, so they assume that this must be the best place to keep their money, but the private funds that are mathematically based do much better.
Patrick: Is it hard to find people that use that approach?
Richard: Well, there aren’t many out there because these funds are not commission driven, so the brokers don’t want to sell them. They know about them. They may put their mom in them. They put their brother in them, but they’re sure not going to put you in them because they’re not willing to lose their job over it or work for nothing.
Patrick: So, what you’re really rolling out of these different workshops are the secrets that the brokers, don’t want you to know.
Richard: Exactly. They don’t want you to find out that there’s a better way to invest your money. They’d rather that you just keep watching the commercials on the golf tournaments, on the sporting events, on the 6:00 news, and think that that big brand name is going to take care of you and help you walk along the beach after you retire for 40 years, and it’s just not going to work because they take care of themselves first.
Patrick: But, Richard, I was told that I was supposed to buy and hold.
Richard: I understand. Buy and hold worked pretty good back in the 50s, and 60s, and even into the 70s, but by the time we got into the late 80s – well, Black Monday 1987 was a perfect example of why buy and hold didn’t work because it took six years to get that money back. And if you did buy and hold during this last spare market, you’re still not back up to $14,000 are you?
Patrick: Well, and that’s the thing is that you seem to go sideways and there’s a ton of bad debt that’s out there. Wouldn’t you agree?
Richard: Right.
Patrick: So, what are the things that people will really walk away with at this workshop coming up?
Richard: Well, not only buy and hold won’t work, but all these suggestions that you read about in the newspapers and magazines about, “It’s simple. You can just lay on your couch and divide your portfolio into two or ten pieces and invest it in the certain categories of assets and fall asleep and just rebalance it once a year and become wealthy,” doesn’t work because most of those strategies pretty much follow the S&P 500 or one of the other major indexes like the Russell 3000, and all of those have lost money in the last ten years.
Patrick: But, I always thought that you could use some fund analysis service out there and find the very best.
Richard: Unfortunately, the services, that you can find on the Internet for free, are the ones that help you chase the returns in the past. You can’t determine how to do investing for the future and that’s the problem.
If you’re chasing returns that have already occurred, you’re going to be following the herd. You’re not going to be using formula based investments. You’re going to be using your own emotions to make the decision.
Patrick: Right. Well, I’ve never seen driving looking out my rearview mirror as the way to live long and prosper.
Richard: Good way to smack into a semi.
Patrick: Yeah. That’s a good way. We’ve seen that around here. Okay. So, we’ve got not real good returns in the last ten years. Buy and hold doesn’t work real well. Formula based makes all the difference.
Richard: Absolutely.
Patrick: I know that there’s also some, well, some opportunities that the big brand companies don’t look at. What would be examples of some of that type of investing?
Richard: Well, again, the big brand name brokers are driven by commissions and commissions are found mostly in the mutual funds and the variable annuities. And I’m not saying that annuities by themselves as a category is a bad idea for an investor, but once an investor gets older and he wants to preserve his capital, a variable annuity is just another way to buy a mutual fund. That represents a lot of risk.
So, the fixed annuities are the better way to buy annuities for people who have already arrived. Variable annuities really are more suitable for people in their 40s.
Patrick: Now, I know you also promote certain nontraditional asset allocation. What would be an example of some nontraditional investments that you might consider at this time?
Richard: Well, one of the things you should look at right now, of course with the record spending with all of the governments around the world, not just the Federal Government of the United States, is you should look at precious metals right now.
Precious metals are important, but you may not want to buy them and hold them in a safe in your house and then worry about how many guys you’ve got to hide in your house to protect yourself.
Patrick: Well, there is the old adage – God, gold, guns, and groceries. It’s the ultimate survival trip. Wouldn’t you agree?
Richard: Yeah, I’d like to sleep at night.
Patrick: The thing that’s kind of funny is that some people have been – either they’ve bought it and it hasn’t done well for years and years, so a lot of people sold it right before this last big run-up. Do you think it’s got very much further to go and we’re not even promoting it necessarily. We’re just saying – do you think it will do pretty well?
Richard: Yeah, I think over the next five years you’re going to still see some run-up and another thing you should be looking at is the fact that the bonds are definitely a bad place to be right now and you want to short them. We’ll talk about all that at the seminar.
Patrick: That’s great. Well, come to the seminar April 27th or May 4th. Make sure you call to register at 972-325-1700 for Richard’s event. And then also, if you want to call Richard direct, 972-758-4484.
You’ll want to be with us next week 5:30 – 6:30 as we talk about how to create the Financial Fortress for you and your investments. We’ll talk to you next week.
Richard: Thanks again.