Intelligent Investor Chapter 10 Summary: The Investor and His Advisers


The Investor and His Advisers

  • Expect average/standard results from advisers.
  • Variety of advisers - friends/relatives(not suggested), local banker/lawyer/accountant, brokerage firm, investment banking house, financial service/periodical, investment counselor.

Investment counsel and Trust Services of Banks

  • Conservative and primarily want to protect your principal with modest returns- probably not investing more than 10% in securities other than that of leading companies plus Govt bonds.
  • Deal only with investors with huge assets (millions).

Financial Services:

  • Sends uniform bulletins with info as company prospects, security market prospects and behavior, advice.
  • Inquiry department deals with questions.
  • Fee less than investment counselors.
  • Forecasting using technical methods(not suggested). Hedging using Delphic phrasing that adjusts itself whatever the future brings.
  • Moody/S&P compile voluminous statistical data that form the basis for security analysis.As they have to cater to all types of investors, it's not reliable. But they provide some authority in this field compared to inexperienced client.
  • Their view goes as when the new term prospects are good, stock should be bought no matter what the price is. So intelligent investor should not base his decisions on these recommendations. View this just as information and suggestions.

Advice from Brokerage Houses:

  • Largest volume of information and advice comes from stockbrokers.
  • Statistical/analytical department of brokerage house takes questions and offers advice.
  • They execute orders, but also supposedly encourage any speculation as it's good for their business.
  • Customer brokers/account executives/registered representatives all need to pass a test of knowledge and character. But it's difficult for them to be not speculative when they can get commissions.
  • Financial analyst/Security analyst is someone who studies the securities in detail, develops careful comparisons and forms an expert opinion of safety or  attractiveness or intrinsic value of stocks/bonds. CFA certified analysts clear exam on security analysis and portfolio management. Unapproachable except for few elites. Instead regional analyst can be consulted.

Dealing with brokerage houses:

  • Bankruptcy in many stock exchange firms made the exchanges to impose stricter rules. Usually bankrupt owing to some major reasons - because of huge volume of business, it couldn't be handled and major capital of brokerage houses was handled by few partners who were highly speculative and failed to protect the money.
  • Deal only with a reputable broker.

Investment bankers:

  • They are the one who undertake originating, underwriting and selling new issues. A number of brokerage houses also take part in underwriting groups and even issuing smaller ones in full bull swing.
  • Bond issues sold to banks and insurance companies will have knowledgeable buyers, but in case of stocks, an inexperienced individual can be misguided(Internet IPOs in 2000s). Many such issues of poor quality with high prices were rolled out.

Summary:

  • If you are prepared to pay fee, choose well established investment counsel, investment department of a large trust company, supervisory service of leading stock exchange houses. This should get average results. Be wary of anyone who claims to get you spectacular results.
  • If you are defensive investor, tell repetitively about your policy to the advisor. If you are aggressive, you would work alongside them by question their advice and asking for detailed explanation.

Commentary:

  • You can take help when you have experience of more than 40% losses in 2000, if you struggle to make the ends meet, if there's poor/no diversification, if there's been a major change in your life like self employed,ailing parents, kids college etc.
  • Trust then verify. Do a thorough research about the advisor, Google, reach out to financial institutes etc for their history. Check if they actually care to help, if they understand fundamental principles, if they had good education, training and experience. Question them.
  • Mutually planned out comprehensive financial plan, investment policy statement, asset allocation plan should be done by you and the advisor.
~

See Intelligent Investor Summary for other chapters summary.

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