The “Secret Sauce” Behind Successful Investing

Much to the chagrin of dentists everywhere, Tootsie Roll has been a staple of the candy business for a very long time.  This article talks about the Tootsie Roll Company being a very secretive organization. (And we thought it was just the CIA that operates in relative secrecy)!  Tootsie Roll doesn’t give tours, they don’t give interviews to analysts and they don’t operate with much transparency. It’s as if they have some magical mystery formulas that they don’t want the rest of us to know.

That reminds of an email that I saw from a friend this week.   He was asking what he should do with his money.  He had just inherited some money from a family member and he was afraid to trust a financial advisor, a banker, a financial planner, an insurance agent, etc. with his money.  This is a potentially life changing amount of money, and he doesn’t want to make a mistake.  He wants to make the most out of this money and is hoping to outperform the market if possible, and he knows that I am not in the business of selling investments so I can be unbiased and impartial.

He has been reading a lot of articles about investing, written by people who manage investments for a living. And the more he reads, the more paralyzed he is becoming.  Everyone has their own special way that they claim can beat the market.  He has been listening to friends and relatives tell him about the investments that their advisors have recommended to them.  Some of those investments have worked out exceptionally well, but some have crashed and burned.  Each investment seems more complex than the next, though.

He has also been to a number of dinner seminars provided by people in the financial services business and each has talked about the benefits of their style of managing money.  It seems like every one of them is touting their proprietary model that will produce superior results.   There are financial services sales people enticing prospective clients every day with their secret formulas.  They all have some kind of “secret sauce” that they claim makes their model better than the rest.  How can a person evaluate a financial advisor?  How does a person know which super secret special model will work?

Here’s the real secret behind the secret formulas:

There is no secret formula!  It’s mostly hype and spin.  And, if anyone legitimately does have a “secret sauce,” it gets copied very quickly and the competitive advantage of the originator gets eroded quickly.

That’s right. The secret is that there is no secret.  It all boils down to fundamentals.  Since the beginning of time (okay, maybe the beginning of publicly traded stock markets), there are some basic fundamental principles that have rewarded patient investors handsomely.  If you want to make money in stocks, cash flow and profits are important things to look for and the higher the cash flow and the higher the profits on a regular basis, the more likely you are to make money.  It’s not rocket science.  Investors reward the companies that routinely make a lot of money.  I know, it’s not all that complex!  And, if an investment sales person told you that, you just might say “That’s so obvious that even my 7 year old knows that!”  It isn’t a secret……and that, my friends is the secret.

So, if you’re looking for a way to beat the stock market, you may be setting yourself up for disappointment at best and failure at worst.  It is theoretically possible to beat the market on a regular basis, but it is highly unlikely to happen in the real world.  Very few managers are able to do it for sustained periods of time.  So, rather than trying to beat the market maybe you might consider performing as well as the market at a lower cost and if you use an advisor, find one that can add value in something other than outperforming the market.

What can that be?  Advice on asset allocation, tax minimization, college funding strategies, keeping you abreast of significant financial news items, helping you plan for your retirement, etc.  There are countless ways an advisor can add value to your life that don’t involve trying to beat the stock market.  How do you find a great advisor?  This article can help you choose one and if you’re worried about finding a Bernie Madoff type of con artist, this article from the CFP Board of Standards can help you prevent fraud and scams from impacting you.  If you know that there really aren’t any secret formulas to beat the market (and if there were, the fees charged for the secret would probably erase the excess return….), you can breathe easy and look for an advisor who can help you think through choices and make decisions that are clearly in your best interest.  Investing really isn’t as difficult as many people (primarily those who get paid to perpetuate this myth…) would lead you to believe!

 

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