The Chinese connection, why I'm not a spy – and why we should worry
Not long ago, a special agent – working for a secretive agency that’s in the news a lot these days – asked me to take a Chinese man out to dinner, ply him> READ MORE
Not long ago, a special agent – working for a secretive agency that’s in the news a lot these days – asked me to take a Chinese man out to dinner, ply him> READ MORE
Right now, the VIX index is saying you have nothing to worry about when it comes to the U.S. equity market. But today I’m going to introduce you to another> READ MORE
Many people say they want to find new and unique investment ideas - those off-the-radar ways to make a lot of money. But it’s a lot more difficult than it> READ MORE
“[China has] recklessly built a system that’s going to need to restructure and that just so happens to be metastasizing right when Trump becomes elected.> READ MORE
A few weeks ago, Mark Ford explained why he uses a full-service broker. Last week, he explained three criteria he uses to rate his professional service providers> READ MORE
Last week, Mark Ford talked about why he doesn’t use a discount on-line broker – and why he instead uses a full-service broker to buy and sell shares. (In a> READ MORE
Let’s look at why insider trading is widely perceive as illegal. Many people associate insider trading with financial crime, fraud, scandal… maybe even> READ MORE
If you invest in stocks or funds, chances are that you use an online broker. The days of “let me call my broker” have gone the way of “things my kids> READ MORE
Not long ago, a special agent – working for a secretive agency that’s in the news a lot these days – asked me to take a Chinese man out to dinner, ply him with wine, and help to “flip” him.
Unfortunately, all that I knew – and know – about espionage I learned from James Bond.
And that’s exactly what was so concerning about the situation. Let me explain…
A few years ago, the doorbell rang one morning while I was working at home, in a leafy suburb of Washington, D.C.
I answered the door, and ushered in a well-dressed man and woman who introduced themselves as agents of a well-known American federal agency that investigates (and which shall remain unnamed here).
The two good agents, through smart sleuthwork, had uncovered that a car registered in my name had recently been parked in the driveway of a house a few minutes away. Did I know why my car was there? They asked.
Well, yes, my wife and I owned the nearby house. Our tenants – more on them in a moment – weren’t taking care of the place, and the property management company wasn’t doing their job. So I drove (in the American suburbs, people only walk on treadmills, or if they want to get run over) over to see what was going on. And I parked my car in the driveway of the house I owned.
Ah, the agents said. Since a two-second web search would reveal that we’d owned the house for more than twelve years, I assumed (hoped) that this wasn’t news to them – their feigned surprise notwithstanding. They continued: Have you frequently visited your tenants? What is the nature of your relationship with them?
As I answered their questions, it emerged that our tenant, Mr Lo from China, was a “person of interest” to the agency. This meant that Mr Lo hadn’t been charged with doing anything wrong. But he was on the radar of the authorities as worthy of attention or concern.
Mr Lo worked for a Chinese science and technology newspaper, and had been introduced to us by our former tenant, who was also from China and had worked for the same publication. Mr Lo’s predecessor was a model tenant, and as long as he paid the rent on time, we were delighted to have Mr Lo take over the lease.
After a get-to-meet-you dinner at a local Chinese (of course) restaurant – featuring linguistic awkwardness and mediocre American suburbia faux-Szechuan cuisine – Mr Lo and his family moved in. For the first few months, all was good. But then our property management company, after a routine check-up visit, gave him poor marks – which had led to the two very (overly) friendly agents sitting on my sofa.
The agency – my visitors told me – was very eager to learn more about Mr Lo and his activities. I assumed this had something to do with China trying to get its hands on American science and technology – and that Mr Lo, properly motivated, would spill secrets about China stealing American intellectual property.
To help incentivise Mr Lo, the agents had uncovered his pressure point: he had a high-school aged daughter, and he wanted more than anything for her to attend university in the U.S. (not unlike millions other Chinese parents). But these two agents could easily block the approval of the requisite visa and immigration documentation for her to study at a U.S. college.
The agents suggested that due to my unique relationship with Mr Lo – a mutual interest in ensuring that Mr Lo’s toilet didn’t leak, I suppose – I was the perfect person to encourage him to talk with my new friends. Heady with the idea of getting a foreign agent to flip – I was ready to put on my tux and order martinis – I said I’d be thrilled to help. The agents left, promising to get back in touch once the groundwork was laid.
A few weeks later, the agents invited me and my wife (who I’d brought into the scheme) for a cup of coffee. Their plan: We invite Mr Lo out for a nice dinner (courtesy of the agency) and have a glass or two of wine. We guide the conversation to children and college admissions. And we plant the seed. “Oh, your daughter will be applying soon to university? Hmm, how interesting. If you ever need any help with the whole visa thing, I know just the guy to call!”
And the guy to call would be our agent friend – who would then (I suppose) present an information-for-visa proposal. Mr Lo would talk, and his daughter would go to State U.
How many normal people can say that they’ve helped flip a foreign agent? Not many. I wanted to be one of them.
My sensible wife thought otherwise. “What’s the upside?” she asked. At best, Mr Lo is drawn into the trap. I wouldn’t know what would happen – the agents would have no use for us at that point – but I’d have a good cocktail party story.
At worst, we lose a tenant. We’re put on the U.S. government’s “naughty child” list. And China – the most important country in the region of the world where we’re about to move to – blackballs me.
So I didn’t call the agents back. We never heard from them again.
Mr Lo’s house maintenance skills didn’t improve. I had a few unpleasant dreams about the house being impounded by the authorities after becoming the site of a federal investigation. In any case, we’d grown tired of the endless investment required of a middle-aged house sliding toward old age. A few months later, we sold the property. So my cocktail party story ends with a whimper.
But the episode opened my eyes to a few realities.
Right now, the VIX index is saying you have nothing to worry about when it comes to the U.S. equity market.
But today I’m going to introduce you to another ‘fear’ index. And it’s telling a completely different story…
Let me explain.
The VIX has been in the financial media a lot over the past week. The VIX (or CBOE VIX Volatility Index) is also known as the ‘fear’ index. It’s a measure of anticipated market volatility.
The index is based on option prices of individual stocks in the U.S. S&P 500 index. When investors expect more price fluctuation (that is, for prices to bounce around more), the VIX goes up.
And volatility is greatest when markets fall (as the chart below shows).
As the old saying goes: The market takes the stairs up, and the elevator down.
Quoted as a percentage, the VIX is around 10. That generally means the market expects a 10 percent range of movement in the S&P 500 index over the next 30 days.
For comparison, the VIX hit an all-time high of 89.53 on October 24, 2008, in the depths of the global economic crisis.
The VIX rises when investors are surprised and scared. Investors panic-buy options to protect against further losses. As a result, implied volatility increases.
Earlier this week, the VIX closed at 9.77, its lowest level since 1993. (Note: This comes at the same time as the S&P 500 is hitting record highs.)
The VIX has only ended the day below 10 on 11 days out of 6,893 since January of 1990.
It’s fair to say that according to the VIX index, investors are less concerned about the market falling sharply in the coming weeks and months than they have been in decades.
But a different ‘fear’ index suggests that investors are being too complacent…
A different measure of ‘fear’
You’re likely to be familiar with the concept of a “black swan” event. The term was popularized by the academic and author Nassim Nicholas Taleb to describe a major unexpected market event.
It’s often an event that is heavily rationalized afterwards with the benefit of hindsight. The 2008 sub-prime crisis, the trigger for the global economic crisis, is a good example of this.
In the context of black swans, you may hear reference to something called “tail risk”.
Tail risk simply represents the probability of a black swan event occurring – that is, like a stock market crash, or a major correction.
You see, VIX doesn’t really tell us anything about how the market views tail risk (i.e. the probability of a black swan event). It just tells us about the absolute level of expected volatility.
But there’s another indicator that can. It’s called the CBOE Skew Index, or just SKEW.
This index uses the prices of S&P 500 Index options to measure the perceived tail risk of the S&P 500 over a 30-day horizon.
It does this by looking at how much investors are willing to pay for downside protection (i.e. put options) relative to upside (i.e. call options).
The more downside protection the market wants, the higher the price of put volatility relative to call volatility, and hence the higher the level of SKEW.
In other words, this index tells us how worried the market is about a near-term black swan event.
Take a look at the chart below. It shows the historical VIX index alongside the SKEW index.
The SKEW index is a messy one (I’ve used the 3-month moving average to smooth out the chart), but the trend is clear: Whilst volatility has continued to decline, SKEW is trending up.
In fact, in March of this year, the SKEW index hit its highest ever level (for the available data going back to January 1990).
This means that despite low levels of volatility, the price of put options (i.e. downside protection) is becoming increasingly expensive relative to call options.
Far from saying everything is OK, this fear indicator is telling us the opposite… that the market is increasingly paying more for downside insurance against a black swan event. So there’s more concern about it.
Does this mean that there’s going to be a sharp market correction tomorrow? No. SKEW has been trending upwards since 2008, as you can see in the chart.
However, given that it is elevated and has just hit an all-time high, it does imply that the risk of a sharp correction is rising.
What should you do? We recommend that you:
You’ve been warned!
P.S. As I write this, our recommendation from the latest edition of The Churchouse Letter is up 6.7 percent in less than 2 weeks. But I expect it to go a lot higher. I’ll be joining a company call later this month, and if I hear what I expect to, the stock could easily jump another 10 to 20 percent in a matter of days. Click here for your no-risk trial subscription to The Churchouse Letter and get the full details.
Many people say they want to find new and unique investment ideas – those off-the-radar ways to make a lot of money. But it’s a lot more difficult than it sounds. So, few people do what they have to do to find those great ideas. And as a result, only few make a lot of money.
What makes it more difficult is that we – the human race, that is – feel most comfortable doing what everyone else is doing (this is called the bandwagon effect).
We tend to think if the majority is doing something, then it must be the right thing to do. Otherwise, everyone wouldn’t be doing it – right? We feel there’s safety in numbers.
Even investors who are resolutely determined to get off the bandwagon often just wind up on another one. Sometimes being contrarian actually becomes the consensus. And the great off-the-radar idea is actually squarely at the centre of it.
Here are a few thoughts about finding unique ideas that really no one – not anyone – else is looking at… yet.
“In other places?” you might say. “Other than where?” To which I respond: Other than where you’re looking now.
If you’re trawling the Financial Times or Bloomberg or Forbes or your favourite financial blog for investment ideas, you’re going to come up with the same ideas that everyone else has. You wouldn’t fish in the carp pond and expect to catch a tuna. So the chances are slim that you’re going to come up with something new and different by looking where everyone else is looking. And most of the time, they will turn out to be the best investment ideas for small investors (and big).
Instead… talk to someone who is involved in a completely different field. Ask your kids where they’re shopping and what they’re watching on TV.
Put down the Wall Street Journal, and pick up a copy of Science, The Atlantic, or Foreign Policy magazine. Find investment ideas other than stock. Try sources of information that have nothing directly to do with finance. And if you come across something interesting, try and create a thread between the subject matter and how you can invest in it.
Hop on a plane and go someplace new. Investing doesn’t have to be overly complicated. But new ideas need oxygen. And you’re not going to find that in the Wall Street Journal.
(I got the idea for this article from a piece by business consultancy McKinsey about originality. I’m not particularly interested in McKinsey (business consulting is full of people who are like financial advisors and personal bankers – the kind of folks who make a living by complicating things). But I wouldn’t have come up with this idea if I wasn’t wandering down a path that was different for me.)
I’m talking about investment idea for beginners. Eat ideas for breakfast. Have them for lunch. Drink them at teatime and fry them up for supper. Throw them at the wall and see what sticks. The more, the merrier.
Why? Because most ideas are bad. The best that most of us can do is come up with ideas that are old and tired, or misguided, or based on incorrect assumptions, or otherwise just plain wrong. Almost every idea I come up with is a bad one.
But a bad idea is better than no idea at all. Because out of the pile of bad ideas, a few good ones will emerge. And any idea is better than no idea.
The trick is to understand that they’re wrong before you take them to the execution stage – before you buy something based on your lousy idea. But the first step is to have an idea – any idea – first.
And also… try reading this book: A Technique for Producing Ideas. It’s less than a hundred pages long. Written in 1965, it has become a classic for people working in creative fields. But it works just as well for investment ideas.
In investing, action is often viewed as “good”. If you’re doing something – anything – it’s better than nothing. Fund managers are often frowned upon for not being close to fully invested… “I’m paying you to invest, not take a fee from holding cash!” If you’re not doing something with your money, you’re wasting time – and, as we know, time is money.
Procrastination – putting off until tomorrow what you could do today – is often painted in terms of regret. It’s the ten-bagger that got away… the real estate deal that would have made you a millionaire many times over if only… the friend of your uncle’s friend who was an early investor in something that went huge – but you didn’t bite.
What you don’t hear about – what doesn’t make for humblebragging fodder – is the amazing stock that they said you just had to buy, and the stock went… nowhere. Or the stock that hit your stop loss and died a humble tax write-off death. You don’t hear the fisherman (he of the “one that got away”) talk about all those times that he tossed his line into the water and came up with… nothing.
Sometimes, sitting still – and procrastinating – is better. There are times – like when you’re coming off a big market victory and are flush with confidence – when doing nothing in the market is the better option. Just because you have cash doesn’t mean you should use it. After all, there’s no better hedge than cash.
Procrastination by itself, of course, is no guarantee of good investment ideas. But often it’s when you’re sitting still, or doing something else, that the best ideas come into your head. And by procrastinating – not indefinitely, but enough – you’ll be more likely to come up with something.
One of the best things about looking for ideas in new places – and speaking with people who are experts at something you know nothing about – is that you can ask the most basic (“stupid” to some people) questions without shame.
If you’re interested in what a person has to say, they’ll usually be more than happy to give you basic answers to your basic questions.
Stupid questions can do a few things:
So… I’m off to come up with new ideas. They’ll mostly be bad ones. But one or two good ones might find their way here.
“[China has] recklessly built a system that’s going to need to restructure and that just so happens to be metastasizing right when Trump becomes elected. This is a fire that’s been smoldering and it’s now starting to burn, and Trump is just more gasoline.”
“What you see when the liquidity dries up is people start going down… and this is the beginning of the Chinese credit crisis.”
Kyle Bass, Hayman Capital Management, May 2, 2017 in an interview with Bloomberg
Known in the investment world for making half a billion dollars successfully by betting on the subprime financial crisis, hedge-fund guru Kyle Bass was in the headlines earlier this month with a round of ultra-bearish commentary on China. Using headline-generating words like “metastasizing” and “smoldering,” he said that China’s credit system was beginning to unravel.
Bass may be right, or he may be wrong. But it’s worth remembering that he – along with any other superstar hedge fund manager – is doing what’s called “talking his book”.
Talking your book is when you’re a cheerleader for the long positions in your portfolio, and a doomsday prophet for your short positions (where you stand to gain if a particular security falls in price).
Hedge fund managers clearly have a vested interest in talking their book. They can move markets, especially if they have credibility for past successes like Bass does with his subprime bets.
Bass’s fund Hayman Capital LP had a turbulent 2016. Half-way through the year he was down 10 percent and managing US$770 million (down from US$2.3 billion in 2014). He managed to turn it around and end the year up 25 percent after currency and bond shorts paid off.
Bass has in the past 18 months opened two funds focused on Asia. Given his very downbeat tone on China, this includes bets on the renminbi weakening in particular.
So, when you hear people like Bass making these kinds of proclamations, you should always bear in mind that he’ll be talking his book. Bass gets a lot of airtime in the media when he speaks. In this case, if he can convince more people to either avoid investing in or bet against China, then great – every little helps.
You should also bear in mind that although he made a mountain of money on his sub-prime bets, he’s gotten plenty of things wrong.
How about his opinions on Japan?
“Japan now sits on the doorstep to its own demise. We believe they have reached zero-hour, where things will begin to unwind altogether….
We believe that Japan is teetering on the precipice of financial collapse, and any number of data points or events in the coming weeks and months could be the proverbial tipping point”
Bass’s call for an imminent financial apocalypse in Japan is similar to his more recent rhetoric on China.
But Bass wrote that in a quarterly investor letter that he sent out in November… of 2012. That’s four and a half years ago.
Since then, 10-year Japan Government Bond (JGB) yields have rallied from 0.75 percent to just 0.03 percent. (As yields fall, bond prices go up). And Japan’s stock market is up 60 percent in U.S.-dollar terms (despite the yen weakening).
If you’d followed Bass’s advice on Japan, you’d be hurting right now. Perhaps someday he’ll be right – but after four and a half years, (and counting) it no longer counts. After all, a stopped clock is still right twice a day, as the old saying goes.
There’s more. How about these comments from May of last year?
Hong Kong’s property market is in “free fall”.
“Hong Kong’s in a worse position than it was in prior to the ’97 crisis today.”
China is in a “hard landing as we speak”.
As it happened… Bass is – so far – wrong. Here in downtown Hong Kong, we’re still waiting for the “free fall” in Hong Kong real estate to materialise.
(I actually wrote an email to the journalist who’d published the “free fall” comments, to ask him whether Bass had ever set foot on Hong Kong. He responded that in fact Bass had.)
Recently Bass hasn’t been the only fund hotshot to stake out highly vocal positions on China and Hong Kong. He’s been joined by Pershing Square Capital Management’s Bill Ackman.
Ackman is one of the stars of a recently released docu-drama Betting on zero which chronicles his high-profile bearish bets/crusade against nutrition supplement multi-level marketing company Herbalife. He launched his effort with a door-stopper 334-page presentation in December 2012. His stance was that the company was a pyramid scheme and that the stock would fall. But since then, the stock is up more than 60 percent.
But it’s unlikely there will be any movies made about his bet on the Hong Kong Monetary Authority de-pegging the Hong Kong dollar from the U.S. dollar. He said,
“We believe the HK government will repeg the HKD at a stronger exchange rate to the USD while leaving the LERS [Linked Exchange Rate System] intact…
We believe the HKMA [Hong Kong Monetary Authority] may indicate that the HKD will eventually be pegged to the RMB or to an RMB-led basket when the RMB is fully convertible.
We believe a 30% revaluation to 6:1 [6 HKD to 1 USD] is likely”
Ackman then goes on to talk about how, because of the peg, HKD/USD currency volatility is very low. As a result, call options (i.e. betting on a stronger HKD) are cheap.
He makes a perfectly good case for a change in his 140-page presentation which I read through.
However, he made the case in September 2011. Five and a half years later, there’s no sign of a de-peg.
I don’t have any issue with fund managers talking their book. They are clearly well-researched and passionate about their positions.
I’m just saying when it comes to how much weight you give to what these guys say, you should bear in mind that there is a huge amount of money at stake here. We’re talking billions of dollars. These guys stand to make more than we’ll earn in a lifetime if their bets payoff.
So, take the hyperbole with plenty of salt.
A few weeks ago, Mark Ford explained why he uses a full-service broker. Last week, he explained three criteria he uses to rate his professional service providers (such as his broker, doctor, lawyer, and others).
This week, he talks about the one critical skill – or rather, the lack thereof – that led him to fire his broker… and why it is essential for anyone looking to keep his or her job.
By Mark Ford
Some time ago, I learned — very much to my surprise — that my stock broker at Raymond James, a big American brokerage firm, was “no longer with the company.”
I was a bit annoyed that I hadn’t been contacted right away. Among other reasons, I had open trades that needed managing. What if something fell through the cracks?
A few days later, I had a meeting in my office with the Raymond James branch manager and a young man who was to be my former broker’s replacement.
They apologised for not notifying me immediately, explaining the situation was “difficult and personal,” and then they proved to me that my account was being tended to properly.
That was half of the reason for their visit. The other half was to convince me to keep my money with them.
Investment firms generally prohibit their agents from trying to take their “books” of clients with them when they move to other firms. (It’s difficult to do that, for reasons I don’t need to bother you with here.)
When a top-earning broker leaves, a turf war begins. The broker and the firm begin a mating ritual with the broker’s best clients, starting with the “whales.” The goal is to grab or retain as many of the big fish as they can.
I knew that. And I knew my old broker would soon be asking for a meeting to make his pitch. And several days later, he did.
But when he did, I refused the meeting. I told him I was sticking with Raymond James and employing his replacement.
Why I did that – why I “fired” my broker – is the subject of this essay.
My broker is a bright man. He knows the markets. He understands the game. And as a top earner in his office, he was indisputably a good salesman. But more importantly, I trusted him to do a good job.
Because of that trust, I mentioned him in an essay I did on municipal bonds. That mention brought him millions of dollars’ worth of business. He was happy to get that business and told me so. I told him, “Just take good care of my readers.” I believe he did.
But there was one little thing about him that always irked me.
He had a tendency to talk when I wanted him to listen. He just didn’t know when to be quiet – and listen.
I’d call him up to ask a specific question about some of my bonds. His answers would come in a staccato tempo full of terminology I didn’t fully understand.
When I’d attempt to interrupt him for clarification, he would talk over me. I don’t know why he did that. It was a habit he couldn’t break, even when I spoke to him about it. It was disconcerting, but it wasn’t a huge problem.
I believed he had my best interests at heart, and he was producing good results. So I let it slide.
But one day, I received a notice saying I had bought shares of Facebook’s initial public offering (IPO). I was shocked. Facebook is exactly the kind of company I would never buy. Why had he done this? I called him up to ask.
He told me my son, who also had an account with him, had requested he buy some for him. It wasn’t easy to buy Facebook’s IPO at the time. But he gave some to my son, and he also gave some to me. He thought he was doing me a favour.
That really shook me. On one hand, I realised he was trying to do me a favour. On the other hand, I wondered how he could possibly think I’d ever want to own a stock that had a P/E ratio of 99.
There could only be one answer. For all his many good qualities — and they were numerous — he wasn’t a good listener, and he hadn’t really listened well to me. He didn’t understand I wasn’t a speculator. He never fully understood my antipathy toward risk.
I don’t want to overstate this. I never felt — nor do I feel now — that my broker was in any way irresponsible or untrustworthy. I give him good scores on both counts. He’s smart and earnestly does his best to give his clients good returns.
But his poor listening skills were a problem for two reasons:
Those thoughts were in the back of my mind when I met Dominick, the young man who was going to start managing my account “if” I decided to leave it with Raymond James.
After the introductions and pleasantries, the manager presented Dominick’s credentials — which were solid — and recommended his character and so on.
I was a bit worried about his youth. He looked to be in his early to mid-30s. But my worries were diminished almost entirely when he began speaking.
The first thing he said to me was something like, “Mr. Ford, I’ve been studying your accounts and their history. I know where your portfolio is right now. What I’d like to know is where you want to go with it. And what else I could do to make you happy with me as your broker.”
Wow! That was a very good opening. He was young, but he was saying all the right things. He had the initiative to study my accounts before we met… and he had no intention of telling me what to do.
He wanted me to tell him how he could help me.
This, in my view, is the right way to relate to your broker. Having any other sort of relationship is unhealthy and potentially dangerous to your wealth. You are the owner of your wealth, not your broker. You pay him. He works for you. You are his boss. He should treat you like his boss.
You may be thinking, “Gee, I don’t think I want to be my broker’s boss. He’s the guy who knows about investing. I don’t know enough to tell him what to do. And I certainly don’t want to insult him by bossing him around when we both know that I don’t know what I’m doing.”
Do you ever have such thoughts about your broker? (Or about any other service provider… lawyer or doctor or therapist or car mechanic?) If so, you need to change things. And quick.
It doesn’t matter that you know less about stocks and bonds than he does. It doesn’t matter that you feel like small fry because you don’t have $10 million in your account. It doesn’t matter if all your questions feel “stupid.”
If you aren’t the boss in the relationship, you’re in trouble.
I answered Dominick’s very good questions by explaining my ideas about wealth building to him and even handing him a stack of my published books about business and wealth building.
In the weeks that followed, he was in touch with me at least twice a week.
We reviewed my entire portfolio, made key changes to restructure it in accordance with my asset allocation preferences, and agreed on buying and selling parameters so we could work more fluently in the future.
I’m very happy with everything he’s done. And what makes me most happy is he’s working for me… not the other way around.
Even after so many years of being in the financial information business, yet making a lot of money by ignoring industry conventions, I still find myself deferring to brokers when they start pitching investment ideas. I shouldn’t, but I sometimes do.
And if I sometimes do, I can only imagine the pressure someone else — who hasn’t had my experience or success — must feel when listening to a pitch.
If you’ve ever felt like that, this story was for you. Don’t beat yourself up about it.
Remember, you don’t have to be an investment expert to be a successful broker. You simply have to be a persuasive talker. Brokers are professional persuaders. You should think of them that way.
If they can talk you into a submissive attitude, it makes their job (selling to you) that much easier. If you defer to them as I did with my old broker — even if it’s only out of politeness — you’re in a potentially dangerous place.
You might be talked into making a hasty decision you’ll later regret.
What I’m saying is you should never, ever allow a broker to be in charge of the conversation. You’re the boss. He should listen to you.
Use your broker to execute trades… or to help you solve technical problems… or to answer specific technical questions. Make sure he is listening to you — not the other way around.
Last week, Mark Ford talked about why he doesn’t use a discount on-line broker – and why he instead uses a full-service broker to buy and sell shares. (In a nutshell… it’s all about the personal service). Below, Mark suggests three ways to figure out whether you’re getting the most out of your broker – and how to change things if you’re not.
By Mark Ford
In native cultures, medicine men wield power because of the community’s belief that they have magical powers. To reinforce their mystique, these crafty connivers invent words and phrases that their followers can’t understand. The idea is something like this: “If you don’t understand what I’m saying, how can you doubt my power?”
Modern-world medicine men — doctors, lawyers, and, yes, brokers — sometimes do the same thing. Like their primitive predecessors, they often wield power over their clients by verbally intimidating them.
[One of our main objectives at Stansberry Churchouse Research is to deliver investment insight in ways that people who aren’t finance professionals can understand… so that you can make your own investment decisions.]
Many people (consciously or not) put their brokers (or doctors, or lawyers) on pedestals of reverence. As a result, they are reluctant to question the advice they get, or worse, they feel compelled to follow it out of some sense of submissive gratitude.
The truth is that these sorts of service providers are nothing more than tradesmen. They have knowledge and skills that they sell. To earn their fees, they must work hard and well for you.
So, starting today, I want you to change the way you think about your broker. Promise yourself that you will not let him bully you — that you will actively and consciously be the boss.
Rather than think “Gee, he’s such an expert,” think “I am paying this guy good money. If he doesn’t prove to me that he is an expert, I will fire him.”
And when you get advice, instead of thinking “I had better do what he says,” think “This guy may know his field, but he doesn’t know me. I am the best and sole judge of what is right for me. Only I am qualified to decide what I should do.”
A good professional feels obliged to communicate clearly with his clients. That means translating the arcane language of his profession into advice that can be readily understood.
You can determine whether your broker (or lawyer, or doctor) has a commitment to communication by asking yourself:
A good professional doesn’t treat all his clients exactly the same. He understands that each has his own specific concerns, worries, problems, and needs. A good professional takes the time to understand this and tailors his advice accordingly.
If you feel like you are getting cookie-cutter advice — or if you feel like he doesn’t really care who you are — he is not doing his job.
A good professional relationship is one where the client is the boss and feels like the boss. You should be able to figure out how you feel about your broker instantly.
If you don’t feel in charge, you aren’t.
If you don’t feel you can speak frankly about any fears and concerns you have, you are not in charge.
If you don’t feel free to criticise him, you are not in charge.
Here’s what you need to understand: The only way you can feel like the boss is if your broker feels like you are the boss. If he doesn’t — if he thinks you are just another schmuck who needs his help — you will never be in charge.
Well… how do you feel about your service provider now? Are you feeling a bit upset? Have you realised that you may be getting less from him than you deserve?
If so, here’s what I suggest. Call or email the offending party and tell him you want to have a 15-minute meeting about your “professional relationship.” If he asks why, say that you want to talk about whether “the value I’m getting is worth the money I’m paying.”
If he refuses to have the meeting, you don’t need to put another thought into it. He isn’t doing his job. Get rid of him.
If he does give you a meeting, go in prepared. In just a few simple sentences (that you have prepared beforehand), tell him exactly how and why you are unsatisfied. Don’t be judgmental.
Express your concerns as statements of your future expectations. In other words, don’t say “You talk in an intimidating way.” Say “I want crystal-clear explanations of all your advice and full, clear answers to all my questions. Can you provide me with that?”
That’s really all you have to do. If you end up “firing” him, don’t spend a moment regretting it. Just go out and find someone better.
And find that better broker by interviewing a few different ones. In the first meeting, list your expectations and ask if he can meet them.
Be the boss. It is your money.
Let’s look at why insider trading is widely perceive as illegal. Many people associate insider trading with financial crime, fraud, scandal… maybe even American home-decorating mogul Martha Stewart (indicted by a U.S. federal grand jury in 2003 on nine criminal counts, one of which was securities fraud).
The reality, however, is that insider trading – under the correct circumstances – is perfectly normal. For the most part, it’s mundane. It’s an everyday occurrence that – if the timing is right – is completely legal.
Insider trading is simply buying and selling of shares by company insiders (like senior executives and board members), who have access to non-public information about the company (like up-to-date sales figures, plans for expansion or internal projections).
It’s insider trading that isn’t legal that grabs the headlines… Here’s an example of illegal insider trading: the investment banker working on a confidential acquisition transaction who tells his buddy to go buy stock in the target company. Or the husband who, after his partner shares some negative insider news about the company she works at, goes and shorts (i.e. bets against) the company stock. This is insider trading that’s breaking the law.
You see, everyday, legal insider trading can potentially offer us some clues into a company’s prospects. Because someone who knows a lot about the inner workings of a company – more than the public – choosing to buy, or sell, shares of the company can (though not always) be a very powerful indicator.
To determine how “powerful” the indicator is, let me outline a few types of insider trading.
Firstly, what is the seniority of the individual doing the trading? Insider trading by a CEO is typically more consequential than a mid-level employee. This is purely because we should assume on average that C-suite executives know more about the company than less senior employees.
Secondly, how many insiders are trading? If it’s limited to one or two people, then there’s less importance to what we see. On the other hand, if there are a handful of senior execs all buying or selling at around the same time, it’s worth paying more attention.
Thirdly, the size of the company is important. Smaller sized company management often has a much better “big picture” view on the health and prospects of their company, than, say, a senior executive of a blue-chip behemoth.
Finally, are the insiders buying or selling? Insider selling isn’t necessarily a bearish indicator, unless it’s widespread and consistent. One individual may be making a personal asset allocation decision to diversify (if company stock accounts too much of his portfolio, for example). Or he may be selling because he has to pay for his kid’s university fees. Most of the time, we have no way of figuring out why a person sells.
But insider buying is another story…
I become very interested in a stock when I see senior insiders of small-cap (market cap of US$300 million to US$2 billion) companies buying it.
What’s the logical explanation for that? Either they are trying to send a message to the market that the company is in great health (although it’s potentially costly way to do that!). Or more likely, they are positive on the business and they think the stock is very under-priced.
Incidentally, that’s the exact set up we have for our recommendation in The Churchouse Letter… It’s a small-cap, under-the-radar stock. The core luxury products it crafts are considered “works of art”, with prices to match. Despite roots that trace back hundreds of years to one of Asia’s wealthiest families, I’ll hazard a guess that 95 percent of our subscribers have never even heard of it.
And the chairman (who is the majority shareholder) has just bought more shares.
Don’t get me wrong – this isn’t the only reason we’re recommending this stock. We also believe it’s very cheap on a valuations basis, considering it’s a fast-growing prestige brand.
And we think that over the next year the share price could easily double.
High-powered insider buying of an obscure, unheard of stock like this is a compelling bullish indicator
P.S. Interested to see this stock in The Churchouse Letter? Click here to subscribe.
If you invest in stocks or funds, chances are that you use an online broker. The days of “let me call my broker” have gone the way of “things my kids wouldn’t understand” – along with Styrofoam Big Mac boxes at McDonald’s, dial-up modem connections, and school buses without seatbelts.
But not everyone uses a discount broker. Here, Mark Ford explains the value he gets from placing stock orders with a real, live, talking person. Old fashioned… or smart?
(One of the reasons we founded Stansberry Churchouse Research is to help equip our readers with the tools to take care of their own finances… without having to pay someone else, and without falling victim to the finance industry’s doublespeak. But I can see how some people would find a lot of value in having someone help them out – the right sort of person and on the right sort of terms.)
My colleagues think I waste money… because I use a full-service broker for my stock transactions.
They use online discount brokers, like Boom Securities, Charles Schwab, or Interactive Brokers. They tell me that I’m crazy to pay some guy sitting in a cubicle by a phone a ton of money to do what I can do myself.
They may be right. But let’s talk about what the full-service brokers are supposed to do, what they actually do, how much you think they are charging you, and how much you are actually paying.
There are basically two types of stockbrokers: full-service and online discount.
A full-service broker gives financial advice, makes stock recommendations, answers your questions, supervises your account, and executes orders.
An online discount broker just executes your orders.
Full-service brokers usually charge you 1-2 percent of the assets that they are managing for you each year. If, for example, you have $100,000 with them, they will charge you $1,000-2,000 to manage it.
Some full-service brokers offer commission-based accounts. With these, you pay the broker a fixed amount on each transaction.
Online discount brokers charge a small fee for every transaction. If you don’t trade, you don’t pay anything.
If spending as little as possible is your objective, an online discount broker is the way to go.
But for many people — particularly older people — having someone you know who will answer your phone calls and explain your monthly statements is a considerable benefit.
I use a full-service broker. And I pay him good money. But I ask a lot of him.
For one thing, he is responsible for keeping up with the portfolios of my investment newsletter company. To do that, he has to read all the issues and execute all the recommendations in a timely and consistent manner.
My broker also provides me with a customised monthly report broken down by portfolio. (I designed it so I can understand it.) He comes to my office whenever I want (usually once a month) to go over everything. He answers all my questions thoroughly, gives me any research I ask for, and answers my emails and phone calls promptly.
None of what I have described so far is enormously time-consuming for him. Nor does it require any particular genius. After all, my broker is not doing original research or making recommendations.
But if he didn’t guide me through trades, I would never do it. I am just not interested in that kind of work. And I feel that my time is better spent doing other things.
So, I’m happy to pay my broker’s commission based just on keeping me up to speed with my company’s recommendations. But he does much more than that.
For one thing, he manages a proprietary options strategy I dreamed up for what I call “legacy stocks.” Again, without his help, I’d never do this.
He provides the same high level of personalized service to my three boys and my mother-in-law — even though their accounts are much smaller.
I’m not much interested in talking about financial markets, but when something happens that will affect my stock account, he makes sure I am forewarned. For example, we recently spent 20 minutes talking about the dramatic change in the Fed’s bank lending rate and what that would likely mean for my stock and bond portfolio.
And every so often, he brings me a sweet deal on an IPO — something he can get for me because I’m such a “good” client.
I feel safe with my broker because he respects my sentiments. He knows I’d rather make a slightly lower rate of return when the markets are strong if that can protect me from getting stomped on when the markets turn against me.
He also adheres to my never-lose-money rule by monitoring my asset allocations and by minimizing volatility in my accounts.
As you can see, I get a lot of value from my relationship with my full-service broker. And that’s why I’m happy to pay his fee. He charges me 0.5 percent of the total dollar value of my stocks and options each year but not for the value of my bonds or cash.
In other words, if I have $5 million in stocks and options and another $5 million in cash and bonds with him, I pay him $25,000 per year.
That’s a lot of money. If you figure out the cost over 20 years, including the effect of compound interest, it would be several million dollars. My colleagues think it’s a sin to fork over that kind of money when you can do the work yourself. I could do it, but I don’t want to do it. Like I said, my time is better spent doing other things.
If you have a lot of money, make a lot of money, and don’t want to manage your stocks, you should consider getting a good full-service broker like mine.
But if you don’t have a lot of money, don’t make a lot of money, or actually enjoy executing your own transactions, you should definitely consider using an online discount broker.
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Legal disclaimer: The insight, recommendations and analysis presented here are based on corporate filings, current events, interviews, corporate press releases, and what we've learned as financial journalists. They are presented for the purposes of general information only. These may contain errors and we make no promises as to the accuracy or usefulness of the information we present. You should not make any investment decision based solely on what you read here.