The Buckingham Report

Two seemingly unrelated items converged in our consciousness recently and we couldn’t help but notice the similarities. First, you probably saw the news about the Laguna Beach landslide. Eighteen homes in our fine beachside community slid down a hill. Happily, none of our employees nor our office was affected. The media portrayed the homes as multi-million dollar estates. In fact, most (but not all) of them were modest middle class homes on what has turned out to be very expensive real estate. While one was an extravagant 6,500 square foot mansion, the rest likely would have been “tear-downs” were they to change hands. Alas, these homes were built on a hillside that was kept in place with a retaining wall and the recent heavy rains apparently, and unknowingly, undermined the weak foundation.

The second of the two seemingly unrelated items arrived in the mail. It was a solicitation for a high priced investment newsletter. We won’t mention the names involved, but we feel compelled to mention the “pitch.” Our view is, like the Laguna Beach homes, the entire premise to this newsletter and the solicitation are built on a weak and terribly suspect foundation.

The core premise is that this newsletter seeks to “Double Your Money Every Year…” We didn’t add the underlined emphasis; that is from the original. Now, we’ve seen some investors double their money in the occasional year…heck, we’ve even done it on several occasions, the most recent of which occurred in my Buckingham Portfolio in 2003. But to do so every year is, well, a fantastically unreal expectation. For starters, even with a modest initial investment a doubling of capital every year will lead to an investor acquiring the entire world’s wealth in a reasonable lifetime. A $100,000 initial investment becomes $102 million in 10 years; $104 billion in 20 years and $107 trillion in a mere 30 years.

Of course, these are pre-tax dollars…unless they are in an IRA or other tax deferred account. Imagine an investor accumulating $107 trillion in their IRA account! For those that want to rule the entire world’s wealth, the $100,000 becomes $109 quadrillion in 40 years. And, of course, you’d double that again in the 41^st year!! But maybe $100,000 is beyond your initial capability. Fear not, start just two years earlier with $25,000 and all of the above is still possible.

Clearly, advice that will “Double Your Money Every Year” must be quite expensive to obtain. It is…$479 a year. Unless you act now…and then it is only $379. Yes, you save $100 at the beginning of your quest to become a quadrillion-aire!!

So just how does this newsletter propose to “Double Your Money Every Year?” The secret is active trading and achieving monthly returns of 6%. Ideally each position will return a quick profit of 10% to 25% but the solicitation acknowledges that there will the occasional loser and hence the mere 6% monthly return. The offer explains that 6% per month annualizes at 101%. Why didn’t we think of this? It’s all so easy when you simply seek quick 10% to 25% profits, combine with the occasional loser and achieve a 100% annual return. What were we thinking?

Well, we were, and are, thinking that maybe a solid foundation is important. Maybe a realistic approach to investing is important. Maybe a consistent methodology and philosophy is important. Maybe an understanding of the past and an understanding of basic arithmetic are important. In short, maybe an experienced, professional approach is required to build a sound foundation.

Of course, lest we be accused of throwing stones in glass houses, we concede that our marketing material shouts about our long-term returns as well. However, we have actually produced long-term appreciation in Al Frank’s TPS Portfolio of more than 20% per annum over the past 28 years. That doesn’t make you a quadrillion-aire, but it ain’t chopped liver. In fact, Mark Hulbert of the Hulbert Financial Digest has said in the past that 20% annualized returns are about the best that anyone can hope to obtain over the long-term. Caveat emptor to anyone buying a publication that professes to do better!

Part of the problem faced by investors is the cacophony of seemingly random and conflicting investment advice, news and opinion that bombards them daily. Watch CNBC and hear from a variety of “experts” (including from time to time yours truly); read the Wall Street Journal, Money Magazine and a host of other financial press and get information about stocks, funds, the economy, interest rates etc.; receive a newsletter (or newsletter solicitation) and learn how to make a quadrillion dollars before you retire. Then there’s all manner of investment styles: momentum, value, growth, income, hedged investments etc. And let’s not forget the spectrum of individual opportunities from stocks, funds, hedge funds, real estate, commodities etc. Then there’s the issue of doing all this yourself or hiring a professional. The cacophony will advise investors to trade actively…to hold long term…to buy value…to buy growth…to invest in momentum stocks…to buy real estate…to go short…to get into a hedge fund…to invest only with a professional…to do it yourself. What’s an investor to do?

We are not the arbiter of what’s right and what’s wrong. We do prefer our value based style and methodology, but we acknowledge that it’s not the only way. Our point is that whatever your style or methodology it must be built on a solid foundation. Rapidly changing styles and active trading with the expectation of a 100% return every year is anything but a solid foundation. I am afraid that many of these sorts of portfolios will end up on the same slippery slope as those on that Laguna hillside!

---------------------------------------------------------------------------------------------------------------

The information contained herein is believed to be reliable. However, such information has not been verified by us and we do not make any representations as to its accuracy or completeness. Neither the information, nor any opinion expressed, shall be construed to be or constitute an offer to sell or a solicitation of an offer to buy any securities. Opinions expressed are those of John Buckingham, which are subject to change and are not intended to be a forecast of future events, a guarantee of future results, nor investment advice.

Past performance is no guarantee of future results. Therefore, you should not assume that the future performance of any specific investment or investment strategy will be profitable or equal to corresponding past performance levels.

About Al Frank Asset Management
Al Frank Asset Management, Inc. (AFAMI) is an Investment Adviser, registered with the Securities & Exchange Commission and notice filed with the State of California; is editor of The Prudent Speculator (TPS) newsletter, editor and publisher of the The Prudent Speculator TechValue Report (TVR) newsletter, and is the Investment Adviser to two value oriented no-load proprietary mutual funds.