The other day, a friend jokingly asked me if I was still out there, trying to save the world. Without missing a beat, I replied that I was actually trying to save the world . . . just one investor at a time!
I said this because my friend caught me in the middle of doing a personal experiment on brokerage firm research. Here is the whole story …
It seems people are on a constant quest for the holy grail of investment opportunities. They are convinced that somewhere, hidden in the mounds of research generated by the research departments of large institutions, there is great investment advice that they could profit from. If only they knew exactly what to look for, and how and where to find it, they could strike gold!
People have been conditioned, mainly through the media, to believe that investment success is directly related to the quality of economic forecasts and stock-specific research they can access. Furthermore, they also think they have to move quickly to take advantage of opportunities as they present themselves.
Investment Advice Given Immediately After the Disaster in Japan
Take the recent—and, sadly, ongoing—natural disaster in Japan. Amidst the heartbreaking images and stories pouring out of that shattered coastline were many opportunistic market reports. Investors were urged to quickly get into this industry sector or stock, and get out of that one. An environment was created where they felt it was imperative to make instant decisions in order to keep ahead of the tsunami that was certain to hit the financial markets.
At this time, as a personal experiment, I obtained reports from most of the large brokerage firms, both banked owned and independent. After all, it’s a logical assumption that if anyone has the depth of resources, both financial and human, to provide the kind of insights you need to stay out of trouble during a crisis, it would be these deep-pocketed research departments.
I printed out every report I received, put it in a file, and then planned to open it when the shock of the disaster had worn off and the frenzied response had subsided. Earlier this week, I noted that there was little or no news on the crisis in Japan, so I decided this was a good time to open the file and review all the commentaries from mid-March.
Almost every report was along the lines of the following excerpts:
… Japan is faced with its worst disaster since World War II . . . with preliminary estimates of reconstruction in the US$150 – $200 billion range (3-4% of economic growth).
… share prices of uranium producers have plummeted due to the expectations for lower demand for uranium … as concerns about the potential for nuclear disaster build, the anti-nuclear movement’s case for alternative forms of energy such as wind and solar power are strengthened… For wind and solar power, we like ABC co …
… Following the Kobe earthquake in 1995, many of the Japanese building codes were changed to encourage the use of wood/lumber. With a massive, multi-year rebuilding effort ahead, Japan is likely to look to its traditional lumber supplies, including Western Canada. The Canadian lumber producers most exposed to Japan are DEF co and GHI co …
… While total steel requirements are difficult to forecast, it is expected to be enough to push steel prices higher. Stocks with leverage to steel prices include JKL co …
… construction equipment and heavy machinery will be required … MNO co, the global heavy equipment manufacturer stands out as a potential beneficiary …
… Japan will need to replace the electricity supplied by the nuclear reactors that will not return to service; other sources of energy such as oil, natural gas and coal could see a boast in demand … here we like PQR co …
Even removed from the intense emotional atmosphere of those initial horrible days, many of the suggestions felt uncomfortably like ambulance chasing.
Then I read the following commentary, which was strikingly different in tone and content:
… our goal, as always, is to carefully balance the investment needs of the individual strategy with frictions and day-to-day realities of the market. We focus on those factors within our control and making the most of the flexibility our process allows…
… at these times, we are highly aware of the possibility of being exposed to securities where one party has more or better information than another. So our response in these cases is to hold back and avoid trading if we don’t have to on a particular day.
… when the Japanese stock market became extremely unsettled, we decided not to trade at all as part of our multi-country strategy. Bear in mind, these are highly diversified strategies and there are many opportunities at any one time to buy or sell stocks that fit the needs of the portfolio.
The first approach reflects an investment approach that is reactive in nature. It’s full of forecasts and predictions.
The second approach reflects a disciplined and defined strategy, with proactive implementation.
What approach would give you more confidence as an investor?
The first commentary is an example of the type of “research” investors are offered as daily fare. These particular comments were excerpted from a weekly update put together by the “Investment Research Team” at a large brokerage firm. It purportedly represents the best ideas of this particular institution.
The second commentary came from Dimensional Fund Advisors, which adheres to a rigorous scientific process and investment discipline. They certainly know what they are doing as they manage over $225 billion dollars worldwide—including $100 billion in international equity assets, which includes Japan.
The science of investing has proven time and time again that the second approach yields not only better results, but also does so more consistently and reliably. For this reason, the second approach—with its disciplined, defined strategies and proactive implementation—has formed the core of our investment philosophy for years. I strongly believe that an important role for someone offering investment advice is to help a client stay on track with his or her long-term investment plan, and to avoid short-term emotionally driven decisions, which can wreak havoc on his or her portfolio. This role is never more important than during short-term market volatility, whether it be positive or negative.
In conclusion, the findings of financial science are not locked up in a vault: they are widely available to anyone who chooses to research them and apply them. It is still beyond me why so many investors, advisors and institutions ignore the findings of 60 years of financial science. It’s certainly the case that brokerage houses profit from client trading, and crises of various sorts offer great opportunities to further whip up the emotional climate and entice their clients to … trade more.