The Lowball End Theory of the Global Investment House

August 9th, 2006

August 9, 2006 -

Every wonder why you are reluctant to ask a large investment firm advisor if 20% annual returns are possible without the assumption of enormous risk? The answer is simple. Most big investment firms, through squawk boxes on MSNBC, and through the reinforcement of their portfolio managers and financial consultants have conditioned you to believe that 20% stock returns are not possible without great risk. I’m here to bust that myth and to tell you what you need to know to start earning higher returns in your stock portfolio.

Block and Bridge

Big investment firms don’t want you to ask too many questions to their financial consultants so they train all of their financial consultants to teach you investment myths that discourage you from asking hard-hitting questions. And if this method of prevention doesn’t work, most financial consultants are trained by their big firms to be virtual public relations experts in the technique known as block and bridge. Just listen to any political press conference and you will see this technique employed dozens of times within a half hour. Well-trained journalists will hone in on this technique immediately and find ways around it but the average person investing with a big investment firm may have much more difficulty handling this technique. In fact, I would argue that fear and confusion are among the top commodities that financial consultants of large investment institutions sell.

Financial consultants make you fear being out of the stock market at the wrong time by telling you that if you missed the best 90 days in the stock market from 1963 to 1993 versus being fully invested, that your average annual return over that 30 year period would drop dramatically from 11.83% to 3.28% (Source: University of Michigan). They utilize this fear to sell you on the concept of Modern Portfolio Theory and diversification.

Why Do Investment Firms Employ Outdated Concepts to Manage Your Portfolio?

Investment firms use outdated concepts of Modern Portfolio Theory and diversification to undercut your expectations of performance from your stock portfolio. Modern portfolio theory and diversification are also known as the lowest common denominator theory. They are the easiest concepts to teach thousands of financial consultants, and these concepts maximize the revenue of big investment houses. What the concepts don’t do is maximize the returns of your stock portfolio. But isn’t it in the best interest of big investment firms to maximize their client’s stock returns, you may ask?

Absolutely not.

Teaching thousands of financial consultants more productive strategies of investing takes more time, and more time spent by financial consultants trying to maximize clients’ returns will ultimately decrease the firm’s bottom line. Furthermore, only a very small percent of the financial consultants they hire would be capable of grasping the concepts of more creative strategies, thus creating high percentages of failures. Consequently, it is a much safer business decision for these firms to stick with lowest common denominator strategies that will maximize the firm’s revenues and profits.

Realize that financial consultants are also trained “block and bridge” experts. What’s this? Blocking is the technique of acknowledging a tough question, while bridging is a technique used to avoid a tough question to make an irrelevant point. For example, if you asked your financial consultant, “I’ve heard that some people earned 20% in their portfolio this year, but I only earned 3%. Why is that?”

When a financial consultant uses the block technique, he or she would answer, “I acknowledge the fact that you may be concerned about only earning 3% this year when other people earned 20%.”

Then using the bridge technique, he or she then would say, “But the issue here is risk. When we met, you told me that your objectives were growth over a ten year horizon and you told me that you had an average risk tolerance. My strategy is the best and safest for you given those parameters.”

Notice that the question of why people earned 20% was absolutely avoided, and in such a manner that you probably didn’t even realize it.

To summarize, if you understand that most investment mantras you hear from financial consultants are merely marketing myths designed to close the deal, you can learn to ask hard-hitting questions that will improve the performance of your stock portfolio.

Hey J.S. by the time I read “block and bridge” I knew what my paragraph for Kaeho’s Corner was going to be about. In martial arts there are linear art forms like Tae Kwon Do and Karate and circular art forms like Aikido and Gung Fu. I used to train in linear art forms until one day I thought better to avoid then to get hit. I mean what does getting hit prove if you can avoid the strike instead? In fact Northern Shaolim Gung Fu has a credo, “Avoid before check, check before injure, injure before maim, maim before kill. For all life is precious.” In fact, even though this credo is in direct opposition to every man’s testosterone-filled ego, my first martial arts instructor taught us that because we had the ability to hurt most people that it was our duty to be a man and walk away from all confrontations if possible. Yes, his definition of being a man was to be mature enough to walk away from a confrontation, even if it was psychologically insulting to do so, instead of physically hurting another human being that was being offensive to you, if possible (now that’s what I call a real sensei in the truest form of the word). Of course, he stated if you truly felt physically threatened, then snap the other person like a twig, but only if you truly sensed elevated levels of danger. But then again, any time we learned a kill technique, only the highest ranking students were privy to this information and we formed a closed circle so that the lower ranking students could not see what we were being taught. So responsibility was always of the utmost importance.

In investing,financial consultants also avoid before checking. They don’t check on what is the best thing to do for your portfolio and then they avoid your questions as to why your portfolio is not gaining more money. Only avoid and check in this case is negative. So if your financial consultant seems to be playing the “avoid” game with you, you must come back strong and “check”.

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