Smart Money

A Psychologist's Guide to Overcoming Self-Defeating Patterns in Stock Market Investing

Stanley H. Teitelbaum Ph.D.

• Publisher: Page Publishing, Inc.
• Year: 2021
• ISBN:
  9781662439087
• Topic: Commerce
• Subtopic: Actions

In Smart Money, Dr. Teitelbaum conveys how to identify and overcome our emotional roadblocks that interfere with successful investing, and he explores ways for people to develop greater trust in their ability to navigate their own investment decisions and to reduce their reliance on financial advisors. We all have personality issues that can become impediments to successful investing in the stock market and lead us into pitfalls, like buying high and selling low, following the herd, and searching for the next guru.

Dr. Teitelbaum explains how addressing and overcoming our personal obstacles and implementing a set of guidelines such as distinguishing luck from skill, leaving your ego out of investment decisions, recognizing the value of self-discipline, avoiding self-deception, taming your inner con man and inner critic, and tuning out the media "noise" will enable investors to achieve a greater degree of success.

Praise for Smart Money

"In this painstakingly researched and well-written book, the clinical psychologist Stan Teitelbaum has applied his craft to something all investors know too well—our emotions, and human foibles often diminish our portfolio results. He takes you through countless cases of common mistakes using markets and the heroes of the past. As you read it, you will personally identify with some of his examples and find yourself saying, "That's me!" As a result, you are likely to learn some important money-management lessons along the way."

Byron Wien, vice chairman of Blackstone Private Wealth Solutions Group

"Stanley Teitelbaum's disciplined approach to investing is a wise path for individual investors to build wealth over time. His understanding of the stock market's volatility, its cyclicality, its inherent risks, and its history of performance informs that approach. Dr. Teitelbaum illustrates clearly how our own behavior and our very human impulses often lie at the bottom of our disappointing investment results and how recognizing and controlling our behavior can lead to successful investing."

Al Messina, managing director, Silvercrest Asset Management Group

"This is quite an engaging book about psychological perceptions of risk and its relation to stock investing. It should appeal to both financial types and a general audience."

Edward N. Wolff, professor of economics, New York University

Chapter 9

The Client-Financial Advisor Relationship

Past performance is not only not predictive of the future, but at least in speculative markets, predictive of quite the opposite.

—John Bogle, Don’t Count on It

Most investors consider themselves as unskilled in investing know-how, so they gravitate toward FAs, who then fail them. Finding a successful FA who consistently beats the overall stock market is a monumental challenge, and the fees, commissions, and hidden costs associated with FA management of your account over time become wealth-destroying.

In seeking an FA, most clients operate in a bubble of wish fulfillment, and in taking on a new client, most FAs are deficient in spelling out realistic expectations. In this paradigm, the FA fails to inform and/or to educate the clients about appropriate expectations, and the client proceeds to maintain irrational expectations.

FAs initially introduce risk-tolerance questionnaires in attempting to determine how to best serve the client, but these are often unreliable to the extent that most investors have not developed clear investment goals, and their self-defeating overoptimism or excessive fearfulness leads them to overestimate or underestimate their appropriate level of risk tolerance.

As a result, many FAs operate without accurate knowledge regarding their clients’ real objectives. For example, when talking about risk, it is not uncommon for a client to describe himself as conservative, but what he really wants is an FA who will supply a big hit. Additionally, the FA neglects to inform the client about the potential long-term financial disadvantages of working with an FA. For example, in a fee-based model, the typical 1% annual charge for managing the account is generally dismissed by the client as insignificant but can add up to a huge amount over many years. Consequently, the client-FA mission to create a successful professional relationship and profitable portfolio returns, based on a realistic understanding of all the client-and-FA parameters, may have a fragile foundation.

The FA’s investment advice and suggestions primarily are informed by their firm’s research analysts whose buy-and-sell recommendations are often made late in the game. Most analysts almost never suggest a sell because they do not want to jeopardize their access to the companies they are following and their relationship with the officers within those companies. Furthermore, their mutual fund selections come from a universe of funds that fail to beat the market 75% of the time.

Active mutual funds are led by fund managers who attempt to beat the market, in contrast to passive investing, which merely replicates a market benchmark or sector; but the record shows that the vast majority of active fund managers fail to achieve their goal; and among those that do, they usually fail to do so on a continuous basis. Mutual fund performance during the dot-com bubble at the beginning of the twenty-first century dramatically illustrates the powerful impact of the reversion to the mean rubber-band effect. As the dot-com bubble imploded, these darlings of the last three years became the debacles of the next three years. The colossal early gains accompanied by investor mania was followed by devastating wealth-destroying losses and investor despair. The total return for a group of ten high-flying technology funds over the six-year roller-coaster ride was an average of 1.5% per annum.

Investors and their FAs are very prone to select mutual funds based primarily on past performance, which ...