Your Investments

Do you want a piggyback ride?

By AARON KATSMAN
August 12, 2010 00:04
3 minute read.
Aaron Katsman

Aaron Katsman 58. (photo credit: Courtesy)

 
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My soon-to-be six-year-old daughter loves to jump on my back, throw her hands around my neck and beg me to give her a ride. In fact, she actually thinks the best part is to assume riding position while I am bending over tying my shoes, and I am no Mary Lou Retton when it comes to flexibility. When we think of the term “piggybacking‚” the first image that we conjure up is this type of frolicking with children.

Well, for investors, whether they realize it or not, they tend to “piggyback” investments all the time. When a client calls a financial adviser wanting a “hot” stock pick, for some reason they think they are getting some kind of original, never-been-thought-of idea that is special just to their adviser.

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Usually, it just doesn’t work this way. Most, if not all, investment representatives and advisers do some kind of piggybacking of investment ideas. Whether it’s reading about an analyst recommendation on a certain stock, or hearing a hot pick on CNBC or even around the water cooler, very few investors actually come up with their own ideas. Rather, they hear or read something and use that as a source of idea generation; then they research the stock and decide whether to pull the trigger.

While some investors may be disappointed to hear this – they actually expect the adviser to provide them with some kind of esoteric, never-heard-of Internet company that operates out of Ghana and is going to quadruple over the next year – for most investors the name of the game is simply to make money on their investments, and they expect their adviser to provide them with value. After all, isn’t that what you pay an adviser for?

INDEX INVESTING?
There is a lot of noise in the media about the advantages of index investing. Index investing is basically a passive strategy where you invest in a well-known market index such as the S&P 500 and just leave your money there. The theory says that since most investors can’t outperform the market, you might as well forget trying and just link yourself to the market.

While this strategy has made its champions a ton of money, it has left investors holding the bag. As I have mentioned previously, we are in the midst of the “lost decade of investing.” The US major-market indices are at the same level they were 10 years ago.

This means followers of this strategy have the same amount of money as they had a decade ago.

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Of course, factor in inflation and you have probably lost about a third of the value of your investment.

Great strategy!

PIGGYBACK THE GURUS
While the “indexers” will say most investors can’t beat the market, the dirty little secret is that there are some well-known investment managers who have continued to outperform the broad market for more than 20 years. In his new book Tradestream Your Way to Profits: Building a Killer Portfolio in the Age of Social Media, Zack Miller explains to investors how they can tap the power of the Internet and mimic, or piggyback, famous investors such as Peter Lynch, Bill Ackman, Warren Buffett and Joel Greenblatt, all of whom have put up staggering investment returns.

While access to these investors used to be limited, Miller writes how now, thanks to the Internet and social media, investors are able to own the very same investments as these pros own. Just as in other disciplines, the Internet has succeeded in democratizing the investing field – and for investors that could lead to profits. Keep in mind that their past performance is no indication of their strategies’ future performance.

STICK TO A STRATEGY
A word to the wise: If you are going to implement a piggybacking approach to your portfolio, you need to have the discipline to stick to a certain strategy. For investors, constantly changing investment strategies is a recipe for disaster. Even the gurus themselves say their specific strategy will underperform for a year or two over the long run.

CASH IN
Speak with an investment professional to learn how you can start piggybacking these famous investors and start adding value to your portfolio.

aaron@lighthousecapital.co.il

Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people open investment accounts in the US.

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