Can a Stockbroker Really add value?
You’re sitting across from a stockbroker. After careful study, he makes the following stock purchase recommendations. As an investor, you’re probably thinking that the stockbroker has some kind of inside information, or information that the masses doesn’t have, that can reap you great rewards.
Unfortunately, that couldn’t be further from the truth.
Most investors believe that stockbrokers scour the NYSE, pinpoint some stocks to investigate, and really dig down into the company and make a recommendation based on their study. But what information can they obtain that everyone else doesn’t know, especially with the free flow of information?
Dan Solin, Senior Vice President of Index Funds Advisors, put it this way:
“I asked him why he believes the broker can pick stocks that will outperform the market. He told me the broker spends all of his time studying the market and this kind of commitment is likely to be fruitful.
I hear that a lot. Here’s the question I always ask: What is he looking for? No one has ever given me an intelligent response. The standard retort is that you should carefully research companies and invest only in those you know and understand. Since wealthy people don’t have the time to do this, they entrust this task to brokers. Brokers do nothing to disabuse them of this flawed belief in their expertise.”
Some stellar company falling on hard times that were recommended by brokers are: Kodak, Lehman Brothers, Washington Mutual, WorldCom, General Motors, CIT Group, Enron, Conseco and many other companies were all once highly touted by the most sophisticated analysts on Wall Street.
Here’s the takeaway:
- Good companies don’t always make good investments;
- Taking the time to learn about a company is no guarantee of achieving stellar returns;
- The risk of owning any individual stock is considerably higher than the risk of owning the index to which it belongs, but the expected return is no greater.
I don’t care how much time your broker (or you) spend studying the markets. You are unlikely to learn anything that will help you improve your returns. Instead of engaging in an exercise likely to enrich your broker at your expense, consider this admonition from Nobel Laureate, Paul A. Samuelson: “… most [stock pickers and market timers] should go out of business — take up plumbing, teach Greek… ”
Here’s another takeaway:
Most brokers recommend stocks that are on the ‘sell’ list of the brokerage firm. Why, because they have a financial interest in getting rid of their inventory. If investors looked at the brokerage firm like an appliance store- trying to get rid of their product so they can make a profit, the investor would be much better off.