The New Investing Paradigm

Different Process; Different Result

Have you ever stopped to think why home-made bread tastes better than store-bought?  After all, it is the same basic recipe, so why the difference?  We know the ingredients are not exactly the same.  Store bread usually contains cheaper, lesser quality ingredients to save money, as well as preservatives to keep the bread from spoiling, and perhaps other ingredients to speed the bread-making process.  The process, itself, is different.  Most of us at home do not bake hundreds of loaves at a time.  While most kitchens have what is required to bake a loaf of bread, few vendors have the equipment to make all of the bread they sell.  There are good reasons their ingredients, and their processes are different from those we would follow at home.

Viva la Difference
Is institutional investing different from personal investing?  Should it be?  We are subject to so much marketing done by the industry that few people, I have met, see any difference.  The common questions I get are, "Why not give your money to the professionals?  How do you expect to do better when they have so much more in resources at their disposal?"

Ownership
One thing I know for sure, I am going to take a lot better care of my stuff than anybody else will, period.  That is especially true of my money.  We hear so many stories of people who have lost their whole life savings because of this person, or another.  Would it have happened if they could have taken a more active role in the process?  If made aware, most of us are going to put a stop to our losses at a point which is well before everything being gone. 

The Sales Game
Have you ever been to a new car dealership and hung around the smallest car on the showroom floor?  I can tell you there are few sales people who want to spend time with you since most are hoping to land the next big deal on the "super whatever" with all of the toys.  A financial plan tailor-made for us little people is basically the same one made just for everyone else like you and me.  Let's face it, you and I get to speak to the sales people, not the decision-makers.  The sales people are compensated for how much of our money they get us to hand over, not how much they, in turn, make for us.   

Size Matters
Does a multi-million dollar corporation use different financial controls than we would use for our family finances?  I would hope so.  Most of us can see that hiring a corporate accountant to manage our household books is more than just a little over-kill.  Does a whale have different feeding habits than a minnow?  Of course.  The mistake too many people make is in thinking that personal investing should follow the rules of the institutional investors.  Large institutions follow a "buy and hold" approach because they are at the mercy of their own size.  The bottom line is the sales people in the financial services industry promote buy and hold as the only alternative because they want the sale.  I know few sales people who are going to sell one thing, and promote something entirely different.

Setting Expectations
Institutional and personal investors seek a decent return on investment.  Until they lump a whole lot of smaller accounts into larger accounts, the big institutions can't afford us.  It is not cost-effective for them to treat every investment, and every account differently.  They want to make a good return, and earn a revenue stream from charging fees to cover as many of their expenses as they can.  They want us to believe normal returns are in the mid-single digits, that the game is terribly complicated, and also, that a huge investment of time and resources is necessary (to justify their fees).

A New Paradigm
I believe the investing paradigm is changing.  In the beginning, the game was entirely broker-centric.  The broker controlled the flow of information and money.  Everything was done through them.  Then, when the internet provided unprecedented access to information, the process became somewhat automated by the application of computer and networking technology.  The problem with today's model is bigger is less effective than smaller.  Too big to fail is an invention of the owners of the means of finance, meant to serve themselves and their wealthy clients.  Large industrial companies, and technology companies that grow too large in physical size can't withstand the pressure brought about by the application of technology to global markets.  You may be reading it here first, but I am saying a new future of personal investing is beginning with you and I, today.  We can outperform the large institutions if we don't try to beat them at their own game, and if we don't continue to blindly follow the rules they create for us.  We have the technology, we have control of our own money, we have access to all the tools, and we can learn to use and improve our own ability.  The last thing we should do is to want to be just like them.

"Buy and Hold" hasn't worked in the last decade.  I can't predict if market conditions are going to favour a buy and hold approach over the next couple of decades.  Are you willing to risk your future and take that chance?

Toyota. Buy, Buy, Buy!

Tuesday was a very sad day for me.  I have to admit I had started to believe that Toyota was just like any other huge corporation that had lost its way.   The lure to become, and remain number one in the auto industry was too much for them.  They had lost touch with customers, and worse still, they had put profits ahead of the safety, and lives of customers.

While I was suspicious of the media, and the agendas of the U.S. politicians, not to mention those of the U.S. auto industry, I never, for a moment believed that such unprecedented numbers of every-day people would misrepresent the difficulties they were having with their family automobile.  Now, I understood many, many people were walking away from home mortgages, but that seemed to me like a case of, "I can't pay what I don't have."  In the case of Toyota, they were actually blaming the car maker.  In addition, they were, and are, demanding compensation for problems which were, largely, not the fault of Toyota.

The National Aeronautics and Space Administration (NASA) has studied the problem and in every case, any difficulty caused by sudden acceleration would have caused the engine light to come on.  Only a handful of such cases exist according to the NASA studies.

Once again, we have to wonder what role the media has played in all of this.  As for our own media, the CBC in particular, I was sickened, when on that very same Tuesday, they chose to show the execution of one of the Egyptian protesters by, what appeared to be, the Egyptian police.  Is there not enough violence in this world already?  Is it any less violent to show such an act on national television than to commit the crime in the first place?  Are they trying to incite even more violence?  Do they feel they must go to these lengths to gain viewers?  Personally, in future, I will get my news from the internet, thankyou, CBC.  Just when I think people can't act any dumber...  Perhaps they have been watching their own newscasts for too long.

Having said all that, the thing that sticks in my memory about Toyota's difficulties is the chairperson of Toyota offering his sincere personal apology for not having listened to customers better!  Now this is the type of company I would be interested in.  Management plays a huge role in successful companies.  I can only contrast this with the likes of Firestone.  Firestone knew their tires were defective and that tire failures would result in people dying, but deemed it more cost effective to continue with production.  There were also other tire companies whose products I will never in my life-time buy again.  How's that for cost effective?  And, if I wouldn't buy their products, I'm not about to buy their stock.

The same goes for the likes of cigarette companies, or asbestos companies.  I know there are people in the media (and outside, for that matter), who believe the ends justify the means.  How can we invest in cigarette companies without condoning the sale of poison to people under the guise of free choice?  What type of greedy, mostly self-centred people should we think run those companies?  Do we really think they care about treating employees and shareholders fairly when they are prepared to poison their very own customers?  What about what it is costing you and I in health care expenses?  Should we feel that we can trust these people on any level?

For the free, capitalist system to work, we should reward the best companies that are able to achieve their greatness while upholding their ethical standards.  The only result of rewarding those who cheat and lie is more cheaters and more liers, especially when they are granted special status like "too big to fail".  I would rather make less money investing in honest and trustworthy companies and maintain my own integrity.  It isn't like I can buy it back again with the extra money I might otherwise make.  I say fire the politicians and bankers who created our current financial crisis, and stick with companies who have proven they can be trusted to be profitable while remaining fair, ethical and uncompromising - companies, as it turns out, like Toyota.

Do you believe the end justifies any means of obtaining it?  Why?