One Question You Should Ask Before Making Any Investment
July 13, 2020
Investing for Beginners Can Feel Daunting… Until You Ask This One Question
Every so often, I get an “investing for beginners” question that goes like this:
“Rob, it seems like everyone in the financial industry wants to push lousy products with ridiculously high fees. How can I tell the legitimate advisors apart from the scumbags?”
Interesting question, eh? It’s a problem I have pondered myself quite a bit, actually.
If you spend any time in the investment business, you’ll learn the aim of the game: move the cash from the client’s pocket into your own pocket.
Wall Street amounts to a depraved and debaucherous money pit that consists of society’s pimps, thieves, hacks, hustlers, also-rans, cranks, crooks, con-men, opportunists, and operators. And there’s a downside.
Heck, even ol’ El Roberto has fallen for the industry’s tricks at one time or another. But over the years, one simple question has allowed me to sidestep bad deals.
And while you can find exceptions, asking this one thing before trusting anybody has probably saved me thousands of dollars over my career.
Does this person eat their own cooking?
In other words, does the person selling me on an investment opportunity put their own money in that product? Do they follow their own advice?
After all, if the investment is any good, then it should be good enough for this individual to buy as well.
I mean, think about it. Would you trust a chef who didn’t eat their own food? Would you buy a Ford from a salesman who drove a Honda?
Unfortunately, few people on Wall Street actually buy the products they pitch. They know they’re peddling financial turds dressed up in bows and ribbons, and sanitized with a lot of “Febreze” spray.
But you can sniff out these crummy products simply by asking what your advisor buys himself. In my own dealings, this practice has saved my butt time and time again.
For example:
- I once met the CEO of a junior uranium mining company at an investment conference. He didn’t own a single share of the company he managed. Surprise, surprise, the stock lost 95% of its value over the next few years.
- A financial advisor recently pitched me a series of mutual funds with management expense ratios north of four percent (plus the normal assortment of extra fees, loads, and commissions). I asked the representative what she owned. She candidly admitted to only investing in low-cost Vanguard index funds.
- At a cocktail reception (back in the time before COVID-19), a gentleman from a very large bank pitched me the benefits of buying whole life insurance policies as an investment tool. He, however, only buys much cheaper term life insurance.
Once you understand this concept, you can cut through most of Wall Street’s hogwash.
Take the YouTuber with videos like “Penny Stock Investing for Beginners.” Do they actually make money from flipping shares? Or do they really earn a living from ad revenue?
Thousands of retirees recently lost their life savings investing in the UBS ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN (NYSEARCA:MORL). I would be shocked if any UBS Group AG (NYSE:UBS) executive ever invested a penny of their own money in this fund.
Alternatively, this question has also revealed some unexpected opportunities.
Some of the best-performing stocks I’ve highlighted in my Retirement Riches newsletter have high levels of insider ownership. Because the managers of these companies have skin in the game, it’s no surprise to see that their fellow shareholders have done well, too.
Of course, you can find exceptions. No rule works 100% of the time.
But in the vast, vast majority of cases, this simple question will allow you to separate good advisors and investment opportunities from the duds, riff-raff, and outright scams on Wall Street.
