If you keep your eyes and ears open, you’ll find some magical investment barometers.
It might take a few years of careful study, but when you find your own investment “fortune teller,” never let go.
I have one I’m going to tell you about.
No, it isn’t a revered stock market based newsletter, it’s not the Wall Street Journal and it’s not an investment magazine touting the latest trend.
It’s a guy I’ll call Barry.
With a deep, booming authoritative voice, Barry could probably sell snow to the Inuit. But it’s not his salesmanship you can profit from. It’s Barry himself. After seven years of watching this master at work, I’ve realized that I can make some profitable stock market moves with his help.
First, a bit of history is in order.
When tech stocks were all the rage in the late 1990s, Barry put his entire retirement portfolio in tech stocks. It rose incredibly for a year or two and then Barry’s money vaporized into the abysmal land of false promises and broke speculators.
Barry lost about 80% of his nest egg.
During a conversation with Barry, a few years later, he asked about my investment club. Call it luck, skill or a deal we made with the devil, but our investment club’s returns have beaten the S&P 500 by more than 6% annually over the past 11 years. Over the past 12 months alone, we’ve beaten the market by 12.8%.
After a particularly prosperous year for our club, Barry wanted in. OK—so he became a club member…..but he dropped out after only ten months. The reason? The investment club went ten months without a gain, and that was too long for Barry to wait.
Needing to make fast money, he decided in 2006 to buy a house for investment purposes in Oregon. Disastrously, he bought at (or near) the market peak. He wanted it initially because houses were “moving” and he figured he could make a fast buck.
The last I heard, Barry was trying to sell it. Why? Because he had lost money on it. He bought high and he wanted to sell low.
Barry is also the only person I know who has lost money on Berkshire Hathaway stock. A stock that has handily beaten the market over the past year, the past five years, the past ten years, and the past twenty years and the past thirty years, it has been a bit of a gravy train for long term buy and hold investors.
Barry paid $3100 per share. Today it sells at a pre-split price of $4000 per share. But Barry sold it at $2,800. Why? Because it hadn’t moved in the six months Barry held it.
A few years ago, Barry was asking me about Bill Miller’s fund. The celebrated Legg Mason fund manager had beaten the market 15 years in a row, disproving (in Barry’s eyes) my suggestions that index funds are the vehicle to give you the greatest chance of stock market success.
But I was starting to figure something out.
If Barry wanted to buy the fund, it was going to collapse. He wasn’t just “bad luck”—Barry was a barometer for a frothy market. If he wanted it, it was destined to collapse. And collapse it did. The entire advantage that Miller built over the S&P 500 index (over more than 15 years) was completely wiped out over just three short years.
In 2007, Barry came to me and said, I’m buying Fidelity Magellan. The fund famous for its great run under Peter Lynch, in the 1980s and 1990s was having a great short term run. Barry wanted in. And that’s when I knew that it was destined to plummet. And it did.
As an investor, Barry is a walking disaster. But he’s not alone. John Bogle, in The Little Book of Common Sense Investing suggests that most people chase performance this way. OK—they might not be as extreme about it as Barry is, but they shoot themselves in the feet by chasing what’s hot and avoiding what’s not. In a 25 year study where the S&P 500 index made 12.3% annually, and the average actively managed fund made 10% annually, the average investor made just 7.3% annually.
Here’s a look at how hurtful that performance lag would have been over those 25 years:
$10,000 invested at 12.3% for 25 years = $181,758
$10,000 invested at 10% for 25 years = $108,347
$10,000 invested at 7.3% for 25 years = $58,209 (the return for the average investor)
It didn’t matter whether investors owned the S&P 500 index, or whether they owned actively managed funds. Typically, their investment results underperformed the funds they owned. Let me use Mark (a man I just met) as an example to explain why.
Mark invests in a slew of actively managed mutual funds. But when the markets collapsed in 2009, he found that his portfolio had fallen by 35%. So he sold everything.
“Did you get back in,” I asked, “when the market fell lower?”
“No,” he suggested, “but if the market keeps recovering, I’m going to get back in.”
Today, the markets are nearly 30% higher than they were when Mark sold. Essentially, he sold low and he wants to buy high. He might not be as extreme as Barry, but he represents how most people think when they invest. During times of duress, they don’t put money into their mutual funds (some of them even sell!) But after the stock market has done well, and the consensus for its future is rosy, they buy more.
You might be wondering about Barry right now. What’s he buying and what’s he selling? If you’re wondering, then you’ve caught on to the fact that the guy is the ultimate investment barometer. Do what Barry does, and you can feel good about it at the time. But it won’t take long before you feel the same pain he must (by now) be getting very accustomed to.
OK—I won’t be selfish, I’ll tell you what Barry is doing.
Barry is buying gold.
Every single part of this little story is 100% true. The only thing I changed was “Barry’s” name.
Caveat Emptor, my friends. Caveat Emptor.