When you're an investment advisor, your job is to be right. Your clients expect it, you sell your track record off the back of it. It's pretty much your stock in trade.
They should also expect you to be honest and forthcoming about the mistakes, too. The latter is sorely missing in today's financial advice world.
Some financial professionals avoid scrutiny very simply — they choose not to publish their track record at all. It's easy — you can simply selectively highlight those stocks you were right about, and avoid the stinkers.
I'm not talking hypothetically, by the way — when was the last time your broker or financial advisor showed you their full, historical track record? When was the last time he or she said "Here's every recommendation I've ever made — good and bad — and here's the net result"?
They never have? I thought so…
Just like asking how much you'll pay for advice, and what incentives and payments your planner or broker will receive, you should ask them for their track record. And not just that, but how their recommendations have performed, against a benchmark and over time.
Don't be content if they simply highlight one or two big winners. And if they don't 'fess up to some losers, too, you know you're being sold a line. Don't take it!
Regrets, I've had a few
Now, it's easy for me to say all that, but what about me? Shouldn't I follow those same rules? Yes, I should — and I do. Here's a cautionary tale, of an investment decision best not repeated.
Before I do, though, I'll also say that my investment record, running two Motley Fool services, is market-beating since the inception of each service.
Motley Fool Share Advisor, for example, has an average return of a market-thumping 58.4% versus the All Ords' 19.9% (both including dividends).
At least that way, when you read the tale of woe that follows, you'll know it's the exception and not the rule! Now, confession time…
Back in July 2012, I recommended members of Motley Fool Share Advisor buy shares of grocery wholesaler, Metcash (ASX: MTS). If you've been following the business news this week, you might have a sense of how this story plays out, but stick with me.
The share price had just fallen after a profit downgrade. At the time, I wrote "…the company's past record, the industry dynamics and the newly lowered price give us the opportunity to take advantage of the market's mood (and likely over-reaction) to pick up a strong underlying business at an attractive price.".
Not my finest piece of analysis.
The dividend yield was still — at that time — high, and all the company had to do was ride out the bumps, keep the dividend flowing, and eke out a little bit of profit growth, and we'd have a market-beating investment.
Know when to fold 'em
If there was one saving grace in this sorry saga, it's that I didn't compound the error. Once you've bought shares in a company, it's tempting to see it through rose-coloured glasses, or to wait until the share price comes back to the price you paid.
Thankfully, I didn't do either.
In March last year, I recommended our members sell their shares in Metcash. They took a small bath, to be sure — the share price fell from $3.20 to $2.85, but dividends in the meantime limited the loss to about 1.5%.
That saving grace — of selling rather than blindly or stubbornly holding on — means that we at least avoided the subsequent 60% price fall, and a cancelled dividend.
It could have been a very expensive lesson. We recommended a company that seemed too cheap to be true, and with an almost-double digit dividend to boot. The odds seemed stacked firmly in our favour.
But what we — I — got wrong was that I overestimated the company's underlying quality and overestimated its ability to hold its own in the cut-throat grocery industry.
It was a poor decision. Thankfully, it didn't cost much — but it could have. It was a classic value trap — a company that appeared too cheap to be true… and was!
Truth prevails
We all wish we could be right every time. Our portfolios would be healthier — as would our egos. But I have no problem saying 'I was wrong' when circumstances require it.
I try to be wrong as little as possible, of course, but it's an occupational hazard when you don't have a crystal ball.
The important thing as an investor is to be able to acknowledge and learn from your mistakes. And if you're looking for someone to help you invest, you need to find someone who will candidly admit to theirs, too. Everything else is just salesmanship.
