To build and protect wealth, Investors don’t need another get-rich-quick scheme.
Instead, look at history’s best investors to understand the basics of investing, the players in the market and their different priorities, what works and what doesn’t, and how to manage volatility.
Announcer: You’re listening to Tradestreaming Radio, with your host Zack Miller. Expand your mind. Become a better investor with the latest tips and technologies from the smartest investors on the planet.
Zack Miller: Welcome to tradestreaming.com. I’m your host, Zack Miller. We bubble up tools, tips and technologies to help investors make better, smarter investment decisions. Thanks for joining us today. On Today’s episode, we’ll have Steven Sears, who’s a senior editor and columnist with Barron’s and Barron’s.com. He’s written a great book called “The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails.” There’s a lifetime of investment experience in here and advice.
It’s not a get rich quick book, which long time listeners know we avoid on this program. It’s a great book. It’s an inside view into how the investment business works and some tools and tips to help you stay away from the mistakes. And some insight into some of the new tools have, particularly with volatility, to help you hedge your risk, as well. It’s an interesting book. Check it out. I have a link to it in the show notes. Thank you, Steven Sears, for joining us on today’s program.
You can find this program and the rest of my archives on my website, tradestreaming.com. You can sign up for a free email over there and I’ll ping you once a week with an overview of everything going on in the market that could help you make better decisions. Check that out. If you’re listening to us to iTunes, you can also find our archives there as well, just look for. Feel free and please make a ranking or comment to let other people know of the value you’re finding in our program. Thank you for joining us. I’m appreciative of every minute of your time I’m appreciative, so thank you and have a great week.
Steve Sears: Hi. This is Steve Sears. I’m a columnist and editor with Barron’s and Barron’s.com, and the author of “The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails.” I’ve also had management positions at two major derivatives exchanges, the International Security Exchange and the Philadelphia Stock Exchange, which was America’s oldest stock exchange. It was recently bought in the past few years by NASDAQ OMX.
Zack: Right. Who is the indomitable investor? Does that person exist? Is that a mythical person?
Steve: No. Those are flesh and blood people. They’ve long existed in the financial markets in America and elsewhere. They simply are those people that always seem to advance in the markets and rarely lose money. I came upon the idea because I’ve always been fascinated by why it is that a few people always seem to do so well in the markets.
Zack: And, again, these aren’t necessarily professionals. These are also individual investors.
Steve: While this small group of people always seem to do very well, but most everyone else seems to flounder. There are all kinds of statistics and studies that show the individual investor, on average, trails the S&P 500 by anywhere from 3 to 10 points for the past 20 years. They never stay in the market for very long. I think about this issue. I’ve been fascinated by these indomitable investors. What do they know that other people don’t know? I ultimately just sort of concluded that they had a framework, discipline and way of thinking about the market that was very common with higher echelons on Wall Street market or the higher echelons in the market, but really not so commonly known on Main Street.
So I sat down to answer what it was and in trying to think about it, find this point of embarkation, I came up with the line that I say in the book are the 17 most important words on Wall Street. They are that bad investors think of ways to make money, good investors think of ways to not lose money. That’s sort of the operating motto or mantra is one that I’ve always encountered with these sophisticated investors and have rarely encountered on Main Street. With this book, I wanted to explain this to people who didn’t work as investors, didn’t work on Wall Street and didn’t work on hedge funds. That key point is the cornerstone. With the rest of the book I tried to animate it to show people the different aspects of it so they can make better financial decisions for themselves and their families.
Zack: It’s not just about the investing strategy. Throughout the book you develop a behavioral framework, as well. Right? You need both those things.
Steve: Absolutely. One cannot exist without the other. The most interesting thing is that even though there is stuff in the book about how to more effectively and smartly buy stocks and sell stocks and things like that, the feedback from many of the professionals, including the head of one of the world’s biggest mutual companies was a fascination with the behavioral aspects of it. Why do people continually make bad financial decisions? Science is starting to prove that there are many things that happen inside the mind that override reason when it comes to investing.
Zack: What’s so interesting about me, and I’ve been writing about the behavioral economists and trying to make sense of that in my writings and stuff like, what’s interesting is we’re getting really good at defining what faults those are. But I don’t think we’ve gotten to the point where we know how to overcome some of those things. Right? Knowing them may be enough, but I don’t think it’s enough. We’re just hardwired differently. Right?
Steve: Well, we are, but you have to have a discipline and you have to have a framework. If you know, for example, that you’re inclined to do certain things in the markets that are adverse to your financial health, you simply just have to have the discipline to stop it. What most people seem to want, and I don’t really blame them, is they want take this pill and you’ll [inaudible 06:13].
Zack: It’s a pharmaceutical approach to investing.
Steve: Right. The key thing is that when everyone develops a financial plan, it’s always based on hope. You never get into the markets because you think things are going to go down. You do it because you think things are going to go up, but what happens is the mind can make a heaven of hell or a hell of heaven. This ties back into the technical disciplines. You have to have a plan.
A very simple one is, you buy a stock, and you can set a stop- loss limit order to 10% of the market. That means you never lose more than 10%. As the stock price rises you continue to raise the stock loss limit order. That’s a simple way. There are other ways to do it. Another simple way is how you buy a stock. What do you do when you buy a stock? Do you buy a stock at the trade’s 90 times earnings and barely trades each day or do you look for different types of stocks? One of the more interesting facts to me is that 45% of historical stock gains are due to dividends. Inflation also plays a big role. Without those two factors individual investors have sharply small portfolios. Right?
Zack: For sure.
Steve: The question then is do you want to put all your money into the Facebook IPO or do you want to try to diversify to find things in the market that work and throw off yield? I think that’s what people want to do, but nobody ever speaks to them that way because when they come into the market, just as surely as Main Street’s essence is buying, Wall Street’s essence is selling. When Main Street meets Wall Street, Main Street rarely has any type of idea or framework of how to do these things. These are relationships that are filled with tons of trust, some of which is misplaced. At the same time, you know as well as I do, few things feel as good as looking at a stock that you have that is surging higher. I have never met anybody who’s successful, who’s part of this group of indomitable investor who doesn’t take profits. Look at Facebook. Everybody’s selling into it. All the best investors in the world are selling into it.
Zack: And the insiders, too.
Steve: And the insiders and retail is like, “I got to get more of this. I got to get more of this.”
Zack: It’s going to be a triple. Right.
Steve: I don’t know. I know where I’d rather be on that side of the equation. This whole idea of finance is really toward the intellectual underpinning of it, called homo econominus, which is economic man. This was started years ago in the 1800s. It puts forth the principle that anybody, people are rational enough to make financial decisions, and to figure out how to increase their own utility, which is economic speak for wealth
I don’t think that’s correct. When John Stuart Mill first came up that idea, the markets weren’t nearly as complicated as they are today. They certainly weren’t as complicated as they’ve become in the past decade. Keeping with Mill’s use of Latin, I came up with this idea of [hoho indominobilus], or the indomitable investor. I’ve really sort of used it as a literary device to help people think about this group.
Now the thing that always fascinates me is people come to the markets, they have no training, they have no real perspective on how things are done, aside from the fact they want to make money. But you know as well as I do, from the people that you talk to, and from your own experiences investing and trading, it is a really rigorous process. If you wanted to get your CFA, for example, it takes you three years, which is the same as law school, and a year less than medical school. What I’ve hoped to do, my quixotic goal, is to give people this book that sums up and synthesizes all these disparate facts and skills so that when they have these sort of impulses, these behavioral glitches, if you will, that they have framework and disciple to fall back on. There are several ways to do it. The subject is almost too big for one book, but I try to pull it all together to at least give people a cornerstone.
Zack: It’s a very broad book and, obviously, a big theme you mentioned in passing, to paraphrase, is Wall Street is there to sell you stuff and Main Street is there to buy it. Can we talk about market structures? Is it that an individual investor has the field stacked against them, like just getting it to the game?
Steve: I think so.
Zack: You need to know too much. You’re playing against the house that has much better computers than you do.
Steve: Absolutely. If you think of the financial markets as a giant ocean of money and you have these waves rising and falling all the time. What we know is the individual investors always chase the biggest waves, right at the top. They almost always wipe out. The Street likes to sell at the top and buy at the bottom. They have patience. The key to investing is persistence. It is duration. It’s not trying to make a quick score right away, but having the patience to do it over time.
If you look at how the market is portrayed by much of the media, and even by some Wall Street. It’s portrayed like a quasi-like casino. Many people make the market out to be, many people, not everybody, but many people, to be like this cankerous yet ultimately benevolent ATM. If you stay in it long enough, you’ll be able to take out a big wad of cash and that’s just not the case for most people.
Zack: Can you be specific about who’s making that statement? Is that the buying holders, the index fund companies?
Steve: Well, I’m really thinking about how it’s portrayed via marketing, and some of the broadcast media. The markets aren’t a sporting match, per se. It’s not some place you can go with funny money, get free drinks in Vegas. It’s incredibly rigorous. I don’t think that’s ever really explained in a suitable way to individual investors.
Zack: Well, it’s not sexy.
Steve: It’s pretty hard work. People see Warren Buffett so jovial. He makes it all seem easy. It is to him, like painting probably was to Picasso. But I don’t think that the individual investor who has to save for his or her retirement, or has to save for kid’s college tuitions, ever truly gets it in that nuanced way.
Zack: Let’s rift on Buffet. I know you mentioned him a couple times in your book. I don’t know if you saw James Altucher’s article this week called Warren Buffett is a Punk. It showed up on Tech Crunch. Altucher can say that, first of all because he’s nuts, but second of all, because he wrote two books on Buffett. Buffett has this congenial grandfatherly type image in the media. He’s the owl of wisdom in the financial realm.
Steve: Well said.
Zack: There is an underbelly to this indomitable investor? He is talking his book. He’s not necessarily completely honest. Right?
Steve: Somebody once said to me, “Of course I’m talking my book. What other book would I talk?” Right? I don’t think it’s a lack of honesty, but I think it’s a lack of nuance that comes across.
Zack: Or full transparency. Something like that.
Steve: If you read any of the securities filings that Bricks or Mr. Buffett file, you’ll see that they sell stuff all the time. But what gets talked about? What he buys. It’s a major media event. Supposedly, he was buying shares in Wal-Mart, and other things like that. Nobody really talks about what he sells. When your primary sources of information on investing are mass media or TV, you oftentimes only get one side of the story. I think that tilts things in the minds of many investors. Everyone says, “Oh, well, Warren Buffett, he’s buying this. Isn’t it great? I want to buy this, too.” Well, he bought it ten points ago. Right? Oftentimes he buys things at terms that don’t exist.
Zack: Like the Goldman Sachs investment? A preferred?
Steve: Yeah, so that he can make a 10% return on that. That’s an interesting point because too few people focus on those return levels. A 10% return is not 100% return. When most people come to the market they want to swing for the fences. You get a lot of guys like Warren Buffett who say I’ll take 10% over two years. That’s huge.
Zack: I think he was guaranteed 10%, too.
Steve: A guaranteed 10%.
Zack: I’ll take that.
Steve: In America we became a nation of investors really almost overnight. It wasn’t until 1974 or ’75 that Main Street even entered the stock market through IRAs. After then after IRAs came the 401(k)s, and then came the Internet. And then in the ’90s things really went nuts with the tech boom and the Internet bubble bursting. So people have been swept along. 40 years is a relatively short period of time. They’ve been swept along. They’ve seen these great dramas in the marketplace. But they’ve never developed these ensuing disciplines. I think because they’re always coming into the marketplace, looking to make money, that they’re perpetually off balance.
Go back to those big waves cresting in the ocean and most people are just tossed from one wave to the next, boom to bust. With the book I’m hoping, it’s my quixotic goal, to help people think about that in a different way with these various disciplines of how to size up risk, how to more effectively buy and sell stocks so they can coast a little more and not have such a jagged ride.
Zack: I always feel it’s like the Bible of investing what you’ve written. It’s the book everybody should read, but few will because it’s hard. As people of this era, I don’t think we necessarily like hard things. We’re looking at, as you mentioned, that pharmaceutical pill to make everything easier.
Can we address this from not only a behavioral standpoint, but if we go back to the Wall Street perspective, but from a product development perspective? So, like, creating products that sort of work against our nature. I’m thinking about prepackaged retirement mutual funds. That’s just more selling.
Steve: Selling isn’t bad, in and of itself. There’s a point about the book you raised. It’s quite interesting. I’m trying to synthesize all these complexities down so that anybody can understand them, regardless of their financial background because, let’s face it, we face a huge financial literacy crisis. And what’s fascinating to me, and the sales of the book are fine, but not as good as some of these books that promise you, do these five things and you’ll be the next Warren Buffet.
Zack: I can guarantee your publisher pushed you to write that type of book. Right?
Steve: It’s very interesting. I have literary agents and we shopped the book to the publishing houses in New York. It went to auction and we got a number of bids. It went to a second round and we had some more bids. And then as it came time to seal things off, one of the biggest publishing houses in America said, “We love the book.” The editor wanted to buy the book, but he took it to the sales and marketing committee, which ultimately makes the decisions for a lot of these things and the sales and marketing guy says, “Look, it’s a great book. We think it’s the kind of book everybody needs to read, but we’re afraid people only buy get-rich-quick books.” Another one said, “Well, you know, super idea,” and that sort of stuff, “but you need a gimmick.” I said, “What do you mean I need a gimmick. I write for Barron’s, I worked at two different exchanges, I’ve reported for the Journal.” They said, “You know the guy from Goldman Sachs who did that book, ‘The Biggest Investment Secret.'” I said, “Yeah, but I have no intentions of dying to promote my book.”
Zack: Right. I was going to say he was on his death bed. Right.
Steve: He was on his deathbed. That’s kind of the mindset. I’m fascinated how stacked things are. I told my wife, “God, you can’t imagine how stacked it is against people. You really have to do this type of work yourself.” I think most market regulation and product regulation is kind of a joke. The streak seems to be in some kind of transition, from trying to pick off the customers to trying to make them sticky because they’re realizing now that they make more money if they get the same customer to stick around, as opposed to jumping every two to three years, which is what happens.
I think it would be a magnificent step forward, if the perspectives and financial products, including mutual funds, were easy to understand. I consider myself somewhat fairly fluid, and I can never really figure out what my 401(k) mutual funds are doing. Ever.
Zack: It’s so funny about performance and I talk about this all the time on my blog, it’s still really hard to figure out what you’re doing, after all this time.
Steve: Wow. Look, it is. You really have to be a very sophisticated financial guy to figure out what’s going on. During the credit crisis, I’m sure you had the same experience, I was inundated by all kinds of people coming to me because they were panicked. They listened to their brokers, they listened to other people and they got hammered.
Zack: They were down 50%.
Steve: 50%, 60%, I mean, people were in major financial crises. Some of which they haven’t recovered. The crazy thing was that things rebound. People are now like, “God, I’m glad that’s over.” They go back to doing the same thing. God forbid, something horrible happens to somebody listening and they get mugged or their house burns down. Do you know what happens to those people? They would immediately do something different.
The same thing happens on the Street all the time and they never ever change their behavior or rarely change their behavior. So the Street, and I think the Street should do it, and I think the government should use its bully pulpit to do it. If we can get this financial literacy campaign going, if we can learn to talk to people in a language that they can understand, that’s designed to help them understand, I think we’d all be in an infinitely better place.
I tell my wife that things are so tough right now and it’s going to get tougher. That it’s incumbent upon us to make really wise financial decisions because it will be even tougher for our children. We have three. I’m afraid that the retirement crisis that we’re about to face in this nation could make the credit crisis look like a kiddy parade.
Zack: And by that, do you mean the vastly underfunded retirements of people on the cusp of retirement at this point.
Steve: Absolutely. The baby boomers are now like five years into retirement. It’s the biggest demographic group in America. The average 401(k), I think is $50 thousand to $80 thousand. For every $300 thousand you have in retirement, you can count on getting maybe $12,000 out of that per year, before you trigger a depletion schedule. Everybody says, “Well, I’ve got a million dollars,” which isn’t that much money for retirement. They think they’re set. But guess what? You can’t take more than 3% of that out per year. If take out 5% than you better make double the return just to break even. I think a lot of people are going to be that situation and they don’t realize it because, I think it’s at the point that you said earlier, people should know about these things, but it’s difficult. People would rather sit on the couch and watch TV and eat a bag of Doritos. Investing takes hard work.
Zack: Maybe we could just talk for a few minutes what your vision for the future market structure looks like. What I do on Tradestreaming is interview very smart people like you, some of whom are entrepreneurs building new investment platforms with increased transparency. With that fiduciary responsibility on the side of the investor. But with all the money that has gone in none of these platforms have any assets to speak of. They’ve been built and funded by venture capitalists, but investors aren’t using them. Yet, most investors polled aren’t happy with their current brokerage relationship. They’re sort of stuck. They haven’t adopted these new platforms yet, but they’re not satisfied with the status quo. Where are we? We’re sort of in this limbo state, I feel like.
Steve: Yeah. I definitely think we are in purgatory.
Zack: What will it take to get investors to change their behavior? I guess this literary campaign you’re describing.
Steve: Well, I think that I would to see, and I’ve had some conversations with some people in Washington and other people hoping to be in Washington, about this idea I have for an investment laureate. If you know that the psychology of most people, most individual investors is to buy stocks because some people on TV tell them to do it or they look towards successful people like Mr. Buffet and try to emulate what he does. We should act upon that psychology and call somebody from the ranks of America’s most accomplished investors. It could Howard Marks. It could be Warren Buffett. There are many people. I had the head of a huge mutual fund company say that he’d like to have that job.
What we do is we have this person, in a cabinet position, or associate of FCC, or some other agency or branch, and we let them begin to lead us into national debate, national education on investing. So, every quarter, at least four times a year, the investor laureate issues a report on the markets. The brokerage firms can distribute those things to individual investors. People say, “That’s horrible. Why would they want to do that? That’s an added expense.” Well the fact is the FCC is funded by something called the Section 31 fee. Every time you buy or sell securities, a little tiny fraction of a cent that’s added on and that money is used to fund the FCC. Well, guess what? Because trading lines are so huge, the Section 31 fees are far greater than what is actually used to fund FCC. Right? And so what happens, Congress here takes that and switches into the general account to do whatever it wants to with it.
Zack: The cookie jar.
Steve: How about that? It doesn’t go into Social Security, mind you, which they say is now going to run out of money in 15 years. You can use a portion of that to get these reports out and these reports would be different from the investor laureate, what people currently get. They would be a lot more nuanced than the constant, “Hey, things are great.
Before you and I got together I was reading the morning notes from all the banks. They all say, “Now is the best time to buy in the past two years. Yields are down,” and so forth. We need people like this investor laureate to come forward and teach people how to think about these things in nuanced ways. You could set up all kinds of different ways to do it. You could give press conferences. There could be stuff on the site about how do people manage winning positions. What do people do in losing positions? Pretty basic stuff. If we have a food pyramid telling people how to manage their actual food diet, why not have something like that for finance, for investing?
Zack: Like a Surgeon General position for investors?
Steve: That’s exactly right. Now I saw some professors recently from Harvard. They’re so frustrated with the sorry state of regulatory affairs in the United States, but they came up with appointing somebody they call a sentinel. I thought this was an interesting idea. A sentinel would represent the rights of individual investors in the regulatory schematics. They would be the ones that come in and take a look it and say, “Well, how does this impacts investors?” I can tell you from my own experience when I was on the Street, it’s a big tug-o-war or battle between Washington and Wall Street and Wall Street mostly wins.
Zack: Yeah. It’s hard to beat Wall Street.
Steve: It’s hard to beat Wall Street.
Zack: Steve, one of the reasons people tune into the show is to hear about new resources. I try to identify books that I think are really valuable. “Indomitable Investor,” your recent book is one of them. Are there any other resources that you can recommend, I’d like to end on this, that you find useful in your own resource and education that will help listeners out there?
Steve: Absolutely. In my office I keep a shelf of books nearby I consult them all the time. Edwin LeFevre’s “Reminiscences of a Stock Operator” written in the ’20s or ’30s about the great speculator Jesse Livermore I find to be so helpful to me. It takes you into the mind. It’ll change the way you think about the markets, which is what I hope my book does. There’s another book, it’s a pretty wonky book called “Trading & Exchanges” by a gentleman named Lawrence Harris. He was the former FCC economist. He’s mostly a professor at USC. That is an excellent book.
Now if people really want to make a commitment, there are two Niall Ferguson’s books and there are two of them called “The House of Rothschild.” It’s a very serious review of the family’s rise from the Jewish ghettos of Europe to the pinnacles of finance. That’s a great book. Howard Marks’ “The Most Important Thing” was sent to me recently, and I’ve really enjoyed that, along with “Lords of Finance” and “Unconventional Successes” by David Swenson. I’m fascinated with this whole idea of how we went from a nation of savers to investors. “A Piece of the Action,” by Joseph Nocera is good. I can read all the time. I could keep going.
Zack: I can tell. What about websites or tools that you find online, or are you mostly an offline researcher?
Steve: That’s a great question. What I mostly try to do is I get my research almost directly from the banks. Actually, I did find this neat site that just came out within the past year, called, YCharts. I’m always fascinated by how looking how things were traded in the past, what the valuation levels were. Everyone will have their own personal style, but I think never paying more than 20 times earnings in stock is a good thing for most people.
YCharts, thus far, is the best online site that I’ve seen. It’s just ycharts.com. But the other thing that I do, and I hope everybody else will think about doing too, is I sign up to get reports directly from all the various agencies. I get all the fed reports directly, including the Beige Book, the FMOC minutes. I get all the unemployment reports directly because I don’t ever want things filtered. Oftentimes what shows up in the, and here I am talking against my book because I am a journalist, oftentimes will get, like its reported in many other publications aside from Barron’s, is just a fragment and the most salient points never make it into print. I try to sign up for everything I can possibly get so I can look at the information directly without it being filtered. The one thing that I’m a huge fan of is the Institute for Supply Management, ISM.
Zack: And you mention this in your book.
Steve: I mention that in my book and that’s an area I would go to their website and sign up for it. The global economy is the story right now. Is it growing? Is it expanding? Will the EU break up? All the portfolio managers that I know and the strategists that advise them, simply follow the ISM because it expresses is the economy? If the economy is growing, the ISM is rising above 50. Is the economy is contracting than it’s dropping below 50. It’s an easy way to do it. I can’t tell you the number of times that I go to that site and look at the data.
Zack: That’s great advice. Steven Sears, the author of the new book, “The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails.” Thank you for joining us on Tradestreaming.
Steve: Thanks for having me. I really enjoyed it.