My Investment Fortune Teller

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.

 

 





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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14 Responses

  1. I just knew that "Barry" was buying gold.

  2. Apple is also a popular stock these days … I wonder if Barry already bought 🙂

    I am starting to be really conscious of these movement. It's easy to go with the flow. It takes a conscious decision to stop yourself from going with the flow and telling yourself that there has to be a bargain elsewhere. I made a few mistakes a few years ago (as most investors do) and patience for the right price always pays in the end.

    When I bought BNS (Scotia Bank) in the lows of February 2009, I had many telling me it's still going down. My answer was, I'll buy more if it continues. I bought a few others around that time realizing they had been beaten by the market because their fundamentals had not changed.

  3. DIY Investor says:

    There are of course a lot of "Barrys" around and, what is interesting, they tend to be very intelligent. In my experience they are usually in a profession where they have gotten ahead by studying and working hard. They figure that if they do a lot of homework, or choose a manager who studies a lot of charts, they can beat the market. What they fail to realize is that the by the time the information gets to them it is widely disseminated and is reflected in prices.

    Early in my career I bought long bonds when everyone was saying to buy shorter maturity paper. All the "Barrys" presented superb reasons why interest rates had no where to go but up. It got to the point where I figured that everyone who was going to buy had to pretty much have already bought. Success in this instance gave me confidence to avoid chasing the investment du-jour and served me well in my career.

    Stay in touch with Barry. An inverse indicator is very valuable. 🙂

  4. @Financial Uproar

    Hey Financial Uproar:

    Maybe I should create a market based newsletter called "Barry's picks". But I'll report on the opposite of what Barry is actually doing. Good call on assuming that Barry is loading up on gold. Any gold holder who knew of this guys track record would be scared to death—and keen to sell their gold.

    Barry is in his early 50s, and here are two of my favorite quotes from Barry:

    "Bonds are for wimps"

    "Index funds are for conservative investors. I need to make money"

  5. @The Passive Income Earner

    Hey Passive Income Earner:

    I think you're right. The best buys are the "loneliest" buys. And the worst buys are accompanied with loads of favoritism from the masses.

    What was the book about popular dellusions and the madness of crowds?

    I should ask Barry about Apple stock. If he buys it, perhaps the rest of us could try shorting it. That's a joke, of course. Things always go higher than we expect them to—and lower than we expect them to.

  6. @DIY Investor

    DIY Investor:

    You're right, they do tend to be very intelligent. Investing doesn't make sense to them—but they can't accept the realities of it. You can't do better by just trying harder.

    I was just reading about fundamentally weighted indexes as "the new paradigm" and chuckling a bit as I read about them. Bogle does a great job explaining in that little book of common sense investing that fads of this nature come and go—and that data mining has never worked as a means to find a future "mehtod" of outsized returns, thanks to a reversion to the mean. If you want to ensure your fair share of the market, buy and hold a total stock market index. Any messing around will increase taxes and almost certainly reduce returns.

  7. Hey Andrew,

    The conclusion is just like a bell going off. Poor Barry, but after reading that, it certainly makes me think again! For my own part, I still have a stake in precious metals, but I haven't added back to my position since selling at the previous peak simply because the price hasn't been right.

    What is your take on future inflation and deflation trends, and the state of the world economy?

  8. @Kevin@InvestItWisely

    Hey Kevin,

    I think you're OK to hold some precious metals–up to 5% or 10% of your total portfolio.

    As far as your inflation/economic question, Buffett and Graham always suggested that the best hedge against inflation is stocks. Companies increase product prices during inflationary periods, so profits increase for most businesses, matching inflation.

    From what I've read about investing (and this might sound like heresy) worrying about inflation and deflation trends, interest rates, economic policy etc is a bit of a waste of time and brain space.

    Taking a page out of Buffett's philosophy, he suggests that if some magical genie whispered in his ear what the future U.S. economic policy would be, or what inflation was going to do, it wouldn't change a thing that he does. He would just keep buying great businesses at or below their intrinsic values.

    It might sound like a lazy philosophy (and it is) but history also suggests that it's the most profitable. There are always smart people, during every generation, trying to guess macro/micro economic trends, but that hasn't tended to help them, as a group. You'll always get the profitable casino player, and that story proliferates to encourage others who think they can beat the casino, but I don't think the average genius level think-tank can beat the long term market returns of the stock market after all fees and expenses, regardless of their jumping around with their pulses on the economy and their strategically timed moves into alternative investments. So, to put it bluntly, thinking about the state of the world's economy might not be the best use of an investor's time. My addiction to reading about financial history has really solidified my view on this one.

    What do you think?

  9. Hey Andrew,

    I think that maybe I think too much for my own good 🙂

    Going for intrinsic value at that point of time is not a bad strategy. Current economic policies don't bode well for economic growth, but you do make a good point about increasing profits, as you did in terms of foreign businesses in another comment.

    Since it is hard to predict exactly how inflation and other policies will affect the economy, a strategy of going after value rather than trying to chase bets may pay off. Chasing bets worked for some people who went into real estate from 2000 – 2005, but, in the US at least, hasn't paid off too well for people going in after that.

    My current strategy is going to remain simple for now, with broad-based indexes investing and an allocation of 5% to 10% in precious metals. I may cash out the gold while leaving the other metals in there. I believe that there is much more upside potential to say, palladium and rhodium, once hotter times do return. The political pressure will be intense as unemployment persists and becomes worse, so I believe it's only a matter of time before they try to throw more gas into the fire.

  10. Hey Kevin,

    I think chasing profits is a funny thing. It's a bit like going into a casino. If it works out for some people, they'll just end up going back into the casino for a second helping. And ultimately, the house is going to burn practically everyone who plays the game.

    Of course, a guy like Charles Kirk or George Soros could be the exception. But are they just a couple of guys who flipped "heads" a lot.

    We can't bring up Buffett on this argument, because his style of investing is based on buying great businesses at or below intrinsic value. And Buffett is sacred ground. So much for my impartialness!

  11. I wish I had a "Barry"!

    I agree with the others, like Passive, buying when nobody else does, is a lonely experience and sometimes still, a little anxiety creeps in. But after the transaction has happened, I know it was the right thing to do. Often, I just need to self-talk my way through it.

    Do any of you more experienced investors, including Andrew, ever get anxious over a transaction? Do you ever second guess yourself?

    Another great post and discussion.

  12. @Financial Cents

    Hey Financial Cents,

    I don't know about the rest of these guys, but the best investments I've ever made have been those that always made me feel sick to my stomach when making them.

    I bought USG at $4.35 in 2001, shortly after it went into chapter 11 protection. It made sense to me. It was the last of the Wallboard companies to seek chapter 11 after mounting asbestos litigations, it formed a protective asbestos claim union with the other Wallboard companies, and eventually, this great business, founded in 1903, was the last one standing outside of Ch11, until June of 2001. Their profits were near record levels, they were insured by Berkshire Hathaway, and Buffett had bought a load of shares at $18 a piece.

    I bought at $4.35, and the price promptly fell to $3. I couldn't find a single analyst who had a kind thing to say about USG. I felt sick about it for weeks (I invested about $20,000 in it).

    Now ask me about Pfizer! I have a cost average of about $16 per share, and I'm averaging down on that one too. Does it also make me feel nauseous? Definitely! Do I second guess the decision? Yeah, often! But I'm not going to sell. That's not to say that we shouldn't sell if we second guess ourselves.

    If you're losing sleep, sell down to the sleep level.

    I feel far more comfortable doing this with broad stock market indexes. This is one of the reasons most of our money is indexed. I have my wife's account in Vanguard indexes, so overall, I think about 70% of our money is indexed.

  13. Nu2this says:

    Hi Andrew,

    I just read your recent article in Moneysense magazine and preordered your book yesterday.

    I'm enjoying reading through all these old blogs. As you know, the price of gold has skyrocketed. Did Barry stay invested in it?! If so, he has done well!!

    Mark

  14. Hey Nu2this:

    It's great to have you on board. As for my buddy. He'll probably sell gold after it drops. That's what he does. He buys high and sells low…..time and time and time again.

    Thanks for ordering the book. I think you'll like it!

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