BA on Assignment

August 17, 2011

S&P Who? S&P What?

Financial Crisis

A few years ago, I wrote an account of my experience with an investment firm. At the beginning of August, I had the great pleasure to speak to the debate over the economy and in that post, I referenced the role investment firms were attempting to play in the discussion. I called the greater lot of them in-credible. They’re credibility has now again become a topic for discussion thanks to Standard & Poor’s. Now, EVERYONE is rightfully calling them in-credible.

Before I jump into the details regarding Standard & Poor’s, I want to post what I wrote about one firm a few years back:

I’ve always had this fascination with business news. I know. But, only at the end of my television career was I able to realize that fascination on a full-time basis. And I must say, I did begin to develop a strong sense of The Street, in no time flat. Which begged the question, who are these market analysts/experts and why do they think they have the MARKET cornered on street knowledge? They’re just guessing like the rest of us, so, what gives? Enter a recent experience I had that, 1) reminded me to revisit that question and 2) tested the validity of a popular cliche’.

His name was Seth. Seth is a financial adviser for Charles Schwab. I recently opened a brokerage account and naturally, had some questions before making any investments. After speaking with several Charles Schwab employees, I was not so convinced they knew more than I did about the stock game, so, I continued up the ladder of knowledge, eventually getting to… Seth. Left Seth a message. Seth called back. After a minute or two going back and forth about whether my new account could function as I intended it to function with Seth avoiding saying YES or NO, I decided to move on to the real meat of the conversation – the mutual fund. I asked Seth about several mutual funds to which he said, “Well, now, you’re asking about two different things. One is an index fund and the other is a fully managed fund – they’re like apples and oranges.” No they’re not. It’s a mutual fund Seth. Last time I checked, a mutual fund was a mutual fund. Whether a person is keeping track of it for me or not doesn’t change the fact that it’s a mutual fund. And apples and oranges are both fruit. So I said to Seth, “There is no reason I can’t look at the characteristics of each fund, weight the options and decide which one works best for me – managed or not.” It’s called thinking outside the box, Seth. But, i’ve had this experience with other financial types. Had Seth focused on outlining the few things that differ between index and fully managed funds, like the cost factor, we may have had a bit more to talk about.

The same should be the case for apples and oranges. What are the characteristics of apples and oranges? Let’s see, they both grow on trees… they both have a peel… both have seeds… both packed full of vitamin c… you can make juice from both… so what’s so different about them? One’s red, one’s orange. Wouldn’t apples to chicken be a more drastic comparison? Or oranges to crackers?

The point is this: the stock market is not brain surgery. In an attempt to give himself some value, Seth has been groomed to try to turn his profession into something only few can figure out. But, in reality, the markets are such that, any intelligent person who spends consistent time following them can get the patterns and become an expert. This does not take long. Brain surgery on the other hand; please spend years – YEARS honing that skill. And practice on ground beef or something.

So, I am no more informed about the best option for a mutual fund with Charles Schwab now than I was before I talked to Seth. Point proven. But, I did successfully put into question a long standing cliche’. Now, the next time someone tries to throw you off with the apples vs. oranges bit, pause, then say, “It’s all just fruit.”

Now, I’ve had my Schwab account for a number of years now and have been happy with it. Haven’t talked with Seth again – could be why I remain happy. I’m gonna blame that bad advice/experience on SETH. I can only hope he has a better understanding of what clients need to hear and how to explain a mutual fund.

I use this experience as an example that the proportion of good advice you can get from The Street in relation to the bad advice could be as high as 50/50. Learn as much as you can before you seek advice and always get a second opinion. Now that i’ve said that, here’s why…

Standard & Poor’s is a joke. There was a time when they were above reproach. But, in the last few years, they’ve just made some judgment calls that remain questionable. Now, its one thing to make a call about downgrading a private business, but, they’ve downgraded a number of cities in the U.S. and also a few countries. I think that’s where it starts to get sticky. Not sure about there rationale, but, my thought is that they just wanted to stand out more? Well, they’re standing out alright…

Moody’s reconfirmed the U.S. AAA credit rating and so did Fitch. 2 out of 3 is a majority. I’ve seen numerous pundits, government officials, investment experts, etc. condemn the downgrade and none of the aforementioned confirm or cosign it.

Worse than that is the non-relevant hit the U.S. downgrade has taken on consumer confidence. Fine, when consumers see the people in the pit on the floor of the stock exchange being frantic and the Dow Jones fluctuates so violently the way it has, they think our economy is tanking. Actually, what you see is a lot of activity contained in a bubble. When it goes up and down the way it is, they call it a market correction. What they’re doing affects us less than you think – it’s the consumer mindset that takes the hit, not their portfolio. So, what you’re seeing is a market correction on a market correction’s market correction. ?!%&&%$. Yes, that’s what I said…

The traders on the floor do the same thing everyday, but, because the spotlight has been shined on the U.S. credit rating, the people in the bubble are moving things around differently. In actuality, most of that trading is in individual stocks – most people’s 401K’s contain mutual funds as well as individual stocks from their company. Back to the mutual funds…

Mutual funds were designed to be diversified. If 1 or 2 stocks in the fund take a hit, you have the others to balance them until they rebound. That’s the point. And, they were designed to hold over time, not to sell everyday. What you see those people doing is day-trading, which, is the complete opposite of what the average consumer is doing. So, with or without Standard & Poor’s, they’re doing the same thing today as they were doing 2 weeks ago. Like I said in my post about the debate over the economy – IGNORE THEM! By the time we get past Labor Day, your 401K or mutual fund will be back on the rebound. Mine already is. Just like 2 years ago when they took a hit, mine has already recovered all of it’s losses – i’m sure yours has too. IGNORE THEM!

Remember, the investment community are the ones who caused this mess that we’re all still trying to clean up. Don’t let them make a fool out of you again…

Get back out there and buy, buy, buy – even if it’s just a toothbrush – buy something. And be consistent, even if it’s small things. Our economy doesn’t run if consumers aren’t buying anything. That’s a fact. Be more worried about that than the BS you hear from investment firms. Carpe Diem!!!!!!!!