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OPINION

Investing: An Alternative Approach

An aggressive investment advisor or stockbroker might not agree with this article. You see, it takes a rather simplistic but safe approach to investing.

What I am advocating is mutual funds — not just any mutual funds, but mutual funds that have produced a steady stream of income and have consistently traded within an acceptably safe range — the difference between the high and low of a stock over a one-year period.

This type of investment might not be desirable for a young couple just starting out who might want to have more of their investment portfolio in equities — common stock of publicly traded companies. You see, over time, equities have shown a steady increase in value.

What I’m advocating is different than equities. I’m talking about funds that put their money into debt instruments (bonds) of governments and corporations, as well as dividend-paying preferred stock.

A Personal Experience

Many investors were hurt by the recent burst of the tech bubble. Billions of dollars were erased from investments over a relatively short period of time.

Shortly after the burst of the tech bubble, I bumped into an old acquaintance at a social event. He had a self-satisfied smirk on his face. He asked: “Ted, how have you made out with the recent debacle in the stock market? Did you have much money in equities?”

I was embarrassed to tell this man about the extent of my losses in tech stocks. Then he quickly told me how well he had done. “You see,” he told me, “I had my money in preferred stocks of large-cap companies [large, publicly traded corporations], as well as bonds.”

Now, here is a very wealthy individual who certainly has the wherewithal to invest in equities. Because he owned a controlling interest in several very large and very profitable enterprises, he could suffer substantial losses without a change to his lifestyle.

However, he didn’t take the risk. If he had wanted to be somewhat conservative, he could have put his money in mutual funds that invest only in S&P 500 companies. However, because he wanted to be very conservative, even that modest risk was too much for him.

He and his advisers decided to keep his substantial wealth as safe as possible, while giving him good financial returns over the years. He was not unlike some possessors of “old money” who keep their funds in U.S. government bonds and municipal bonds.

Gentlemen Prefer Bonds

This conversation brought to mind something I read a few years back. Apparently, during the Great Depression that hit this country hard in the 1930s, some formerly wealthy people who lost their money overnight were jumping out of windows on Wall Street.

During that time, an enterprising young reporter happened to spot a member of the “old money class.” He asked this gentleman, “How did you make out in the stock-market crash?” The man replied, “Very well.”

The somewhat confused reporter then asked, “How can that be?” The reply was, “You see, young man, gentlemen prefer bonds!”

I don’t mean to suggest that everyone should get out of the equity markets. That would not be a wise decision for many investors, not to mention our economy. I’m just saying that for those of us who have become risk averse, it might be appropriate to give boring bonds and plain preferred stocks another look.

With this type of investment, you can be all but guaranteed a steady flow of income which, if left to compound, will create quite a nest egg. You can tell your broker the level of risk with which you feel most comfortable. Your broker can then give you some alternative investment proposals to consider.

Allow Competition for Your Money

I recently had a sum of money that I wanted to invest. I e-mailed five brokers/investment advisers I know. I told each of them upfront that I was sending out a similar request for proposal to four of their colleagues, and that I would choose the one who made the most sense to me. Perhaps, some of them were not pleased with this approach, but at least I was open with them.

Each of the five people sent me a response. Two of the brokers’ responses were so lean and poorly prepared that I dismissed them out of hand. I think that they were relying on the reputation of the large companies for which they worked to clinch this deal. They seemed to think that since they were working for such well-known concerns, I would be duly impressed and blithely release my funds to them.

The investment package that I chose was thoroughly and logically prepared, and easy to read. It showed the history of the funds that the broker recommended and why she thought that these funds fit my investment profile. It also showed great details of each fund and how each had performed during up and down markets. The range in which the funds traded over a good number of years was clearly listed. Finally, the returns of each of the funds were calculated, and a chart was prepared showing how much the investments would be worth today had I invested it in them ten years ago.

Why Not Rely on a Broker?

In this case, each of the five people to whom I sent a request was experienced and working for a reputable firm. Instead of having each of them compete against their colleagues, why didn’t I just trust to their judgments and follow the advice of the one with whom I’ve had the most experience?

The answer is that history shows that the so called “experts” are not right enough of the time. Let me explain.

Have you heard of The Wall Street Journal’s contest called “Darts vs. Experts?” Even if you have, let me refresh your recollection. The Journal has sponsored contests between so-called expert stock pickers and people who would merely throw darts at stock tables. Unfortunately, the experts’ performance has been quite lackluster against random choices “picked” by inanimate darts.

Who Are the Experts?

I guess one could justifiably ask, “Who are these experts?” The fact is, there are very few of them around. Warren Buffet comes to mind when I think of a true stock-market expert. However, he’s an exception.

To further make my point, I would urge you to read a book entitled The Money Game by Adam Smith (a pseudonym). This book brilliantly explains the dynamics going on behind the scenes in stock markets and why it’s so difficult for the small guy to reap the benefits that the “in crowd” enjoys.

It’s a real eye opener. It reminded me that no matter how much research most serious investors do, they can always be blindsided by forces beyond their control — insiders who are working for their own benefit and not yours.

What’s the Solution?

The solution, as I see it, is to have as much information as possible about prospective investments. Keep in mind that you have to be aware of all the dynamics that can affect your investment.

If you’ve been pleased with your investment advice to date, by all means, stick with your source. If not, consider other avenues — alternative approaches. They might just work for you! Good Luck!

A disclaimer: I am not an investment adviser. I’ve lost my share money on the market too!


Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which deals in bringing small-cap companies public. He also is a frequent speaker on the subject of financial advice for small businesses as well as the IPO process. He can be contacted at [email protected].


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