Mariusz Skonieczny — Why Are We So Clueless About the Stockmarket?

Mariusz Skonieczny has written the below post as a guest on my site. 

He’s a money manager and the author of  Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market, which he has asked me to review on my blog.
 
I know that my readers can be a bit tough on money managers, but let’s see what he has to say, and I welcome (as always) comments and exchanges between the author and you—the reader….


Is investing the same as the business of investing?

Creating art is different from selling art, and the same goes for investing – the business of investing is different than actual investing. Not knowing the difference may cost you the opportunity to retire with enough money to enjoy the rest of your life.

Any kind of business is ruled by the following equation:

Revenues – Expenses = Profits

It doesn’t matter whether the business is a hair salon, cable company, or investment company, unless revenues exceed expenses, the business entity will eventually fail. There will not be enough money to pay for employees, rent, and other expenditures necessary to operate the business. A wise businessperson knows that if the company’s product or service does not satisfy its customers, the customers will eventually leave and the business will suffer. For example, it is possible to lure customers into a restaurant with clever promoting and advertising; however, it is difficult to get them back if the food and service are terrible. The time between the product trial and product evaluation is short, and therefore, people learn very quickly which businesses to support and which businesses to avoid.

The investment industry also adheres to the same business equation; however, the investment business is unique because the time between the product trial and product evaluation is extended. This allows Wall Street to be more focused on their own profits than on your well-being because it will be a long time before you notice that they have taken advantage of you. Through various marketing efforts, the industry convinces the general public that the key to wealth is to work hard, save, and invest in a diversified portfolio for the long term. Most people would agree that being lazy, irresponsible, and spendthrifty is not the recipe for wealth; however, the opposite does not guarantee success. Working hard, saving, and investing is not enough for future financial success unless your money from hard work and savings actually grows through successful investing.

The problem is that the investment industry does not generate revenues from your investment success. Instead, it makes money by charging you commissions and fees which take away from the growth of your investment portfolio. Did anyone wonder why the industry was not recommending an investment in Warren Buffett’s Berkshire Hathaway decades ago which would have made a small investor a multi-millionaire by today? Because the industry does not make money by recommending good investments. It makes money selling investments that generate fees. Warren Buffett summed it up very well:

“Wall Street makes its money on activity. You make your money on inactivity.”   

The industry is interested in growing your money just enough to keep your business, but wants to keep anything beyond this minimum for themselves. Unfortunately, they can keep this scheme going on for years because the majority of people do not place much emphasis on saving and investing. They are focused on day-to-day activities and don’t want to bother. In addition, the investment industry convinces people that investing is just too difficult so they don’t even try and simply hand over their hard-earned money to individuals that don’t have their best interests in mind. There are only two solutions: 1) Educate yourself on investing, 2) Find a true investor, not a salesman, to handle your money. Educating yourself is straightforward. Finding a true investor is more difficult because the investment industry trains its salespeople to be viewed as advisors rather than salespeople. People can inquire about the way their advisors are compensated but this is not enough because these professionals are trained how to answer all kinds of hard questions very well. The only way to distinguish between a salesperson and a true investor is to know about investing and the business of investing because a well-spoken salesperson can convince an uneducated investor that investing in the stars is the way to go.  

 

About the author

Mariusz Skonieczny is the founder and president of Classic Value Investors, LLC, an investment management company. He is also the author of  Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market.

 

 

 





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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10 Responses

  1. DIY Investor says:

    I think you dance around the issue a bit. What you are talking about is the difference between a broker and an RIA. The broker has an allegiance to the firm he works for. An RIA is a fiduciary and has the client's best interests as the primary concern. Go one step further and pick a fee-only RIA and you typically have someone interested in growing the account because he is paid on the basis of the market value of the account.

    I would also throw in that the industry has put in a lot of effort to make the whole process seem overly complicated.

  2. It is in the industry's best interest to make the process seem overly complicated. When people are confused, they will just hand over their assets to them and not even try.

  3. Andrew Hallam says:

    So my question is this: What makes a fair fee structure?

    1. A flat fee per consultation, with no trailer fees?

    2. A fee based on a percentage of annual assets, running less than 0.5% annually?

    3. A 1% fee if the investor makes more than 4% per year, while carrying losses forward? ie. Gain 3% in year 1 = no fee; lose 8% in year 2= no fee; gain 12% in year 3 = no fee because of loss carried forward

    4. A fee paid only if the invesment account beats a model of asset allocation based on the investor's risk model and compared to the performance of a blend of stock and bond indexes?

    What do you charge Mariusz, in terms of exact figures? And what, readers, seems like the fairest of the above?

  4. Jenn T says:

    DIY investor is on to something. And Mariusz didn't have any comment on the fiduciary component, which isn't good, considering litigations mounting about advisors. I've read Daniel Solin's book, "Does Your Broker Owe You Money" and there are things an educated investor does and doesn't do. I think Mariusz is on the doesn't do side.

    I checked out his business. First, no mention of fee structure. Two, this is the quote I found from his site:

    "How many investments will there be in my portfolio?

    Because we believe that wide diversification destroys returns, we manage concentrated portfolios and as a result, your portfolio will contain about ten positions."

    And in one interview I read of Mariusz's, he revealed that he has only been at this a very short time, and until very recently, has done badly. Then he cites Ben Graham as someone to follow. But Graham believed in diversification. But Mariusz must think he's pretty special if he can throw diversification to the wind and only hold "about ten positions"

    Andrew, thanks for your blog. I've learned a lot. And I've learned to dig!

  5. DIY Investor says:

    I believe investors should have at least 80% of their retirement funds invested in low cost exchange traded funds participating in the overall stock market, overall bond market, international stocks and possibly some esoteric asset classes like small cap foreign and junk bonds. To set up and manage I believe a fair fee is 0.4% of the market value of assets and I believe that many people can, after a year or so, learn to do it themselves!

    If you believe people can pick stocks or actively manage a fund etc. paying 1% of assets is probably fair given the time element involved.

    Performance based fees are tricky. They are used a lot in the hedge fund business because investors are presumably sophisticated but have room for abuse for non astute investors in that they can lead to excessive risk taking. In other words you face a moral hazard problem

    Jenn T. is exactly right in questioning the diversification principle in holding just 10 positions.

    I am a Solin fan. Your readers may enjoy the following youtube where Solin talks to Google employees

    http://www.youtube.com/watch?v=Y0LSG2omvEg

  6. @Jenn T

    Jenn,

    I can definitely see your points about having just ten positions being too risky. To play devil's advocate, if you're an investment genius like Charlie Munger (and I bring him up because he once managed a very concentrated limited parternship fund) then you'll believe that there's a higher probability of success with fewer positions. That said, there's a higher probability of failure as well. You'll probably either run far above the indexed return or below it, having less of a chance of matching it, but coming out looking like a genius or a fool.

    The odds of Mariusz being an investment genius in line with Munger is pretty slim—but not impossible.

    I think it was Peter Lynch who coined the phrase, "diworsification" when suggesting that the more you water down the quality pool, the more you'll mirror an index. But then, Lynch was famous for having a crazy crazy number of stocks, so he was pretty diversified. And his old Fidelity Magellan fund, despite the great run he gave it in the 1980s, has lost ridiculously to the index, long term. My guess is that it wouldn't have done much better, even with Lynch at the helm. It just grew too big, and he was probably more lucky than skilfull. If you want to see a terrible long term track record, check out the chart of his old fund: http://finance.yahoo.com/q/bc?t=my&s=FMAGX&am

  7. @DIY Investor

    DIY investor and Jenn

    DIY investor: Thanks so much for that Solin link. It made me realize, above all, what an extraordinary business Google is. They truly have their employees' best interests at heart. If you haven't read this article, check it out. It's also about google, and on the same line as Solin's message.

    Jenn: I love that you're asking Mariusz the tough questions. I look forward to hearing his defence. And thanks for bringing up Solin. I too, have read his book, "Does your Broker Owe you Money?" and his "Smartest Investment Book You'll Ever read". Like DIY investor, I'm a huge fan of his. Thanks for you comment!

  8. @Andrew Hallam

    Oh–sorry! I didn't leave the link to the article that I think you'll really like.

    http://www.sanfranmag.com/story/best-investment-a

    The business profiled in the above piece also really reminds me of your business. Hats off to you, DIY investor!

  9. What makes a fair fee structure?

    I don’t think any particular fee structure is going to solve abuse issues across the board. The problem is that the participants in the investment industry do not ask themselves one basic question – How do I make money for my clients? The question that they ask is – How can I make the most amount of money for myself? There isn’t any particular form of fee structure that will make the industry care. People will try to find a way around any structure that is put in place in order to extract the most fees.

    When I started my company I wanted a fair fee. I wanted to get paid only when I make people money. I read that Warren Buffett used to charge only after he delivered 6 percent per year. Am I able to do this? No, because the regulation in place does not allow financial advisors to charge performance fees. There are ways around it, of course. When you cater only to accredited investors, the law allows performance fees. I have a problem with catering only to wealthy individuals. Wealthy individuals have lots of choices. The less fortunate ones are stuck with poor advice because good hedge fund managers don’t want to bother with them. There is no money to be made when someone gives you $20,000 to invest. So, the easiest thing for financial advisors to do is to stick it in a mutual fund and move on to another client.

    Why won’t regulators allow performance fees for non-accredited investors? I believe this is because the industry would abuse it, and the public has to be protected. It’s easy to imagine some unscrupulous broker or advisor putting a widow’s entire life savings into some speculative stock with the hope that it could double or triple. If he or she were to be right, then he or she would get paid a high performance fee. If he or she was wrong, the only person with the downside would be the widow.

    How do I charge?

    Because I can’t really use a performance fee structure, I charge an annual fee based on management which is 1.5 percent.

  10. DIY Investor says:

    @Andrew Hallam

    Great article. Thanks! It's going in my file of resources like one of the commenters said.

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