“Whenever you find yourself on the side of the majority, it is time to pause and reflect.” – Mark Twain

In a recent survey by Gallup, pollers asked respondents which investments were the best. Real estate was the top pick at 31%, followed by stocks/mutual funds at 25%, gold at 19%, savings accounts and CD’s followed at 15%, and 6% chose bonds[1]. But check out this statistic… if you invested $100 in gold in 1926, it would be worth about $5,455 today[2]. $100 into the average home that year, you’re looking at a value of $2,839 in 2014[3]. Lastly, $100 into the stock market (even with The Great Depression and Great Recession), your money is worth $11,128[4]!

So why does the average investor suck at stocks? Ask your parents what they paid for their home twenty years ago and they can probably recount it to the penny. Then ask them what the DOW traded at that year, probably not a clue. I bet they know how their stocks ended up yesterday though. Therein lies the dilemma, market information is instantaneous and published relentlessly. Home values are evaluated with the timeframe of decades. However, the public is inundated with meaningless short-term stock gains and losses that throw emotions on a whipsaw, resulting in irrational decisions. It’s not a fair comparison of investment vehicles, rather Real Estate makes us smart and Stocks make us stupid.

When doing your homework on past performance, which is not always an indicator of future performance, take into account the entire context. Regarding the study above, I hear regularly from my clients that their parents purchased their home in 1971 for $28,000 and now it’s worth ten times that! Guess what a gallon of gas in 1971 averaged- 36 cents and today- roughly ten times that[5]! What sounds like a great investment may be clouded by the unassuming effects of inflation and timing.

The 3 Legs of The Stool

Any investment is best viewed through 3 revealing lenses. The first leg is most recognizable to the average investor- Asset Allocation. How does this particular investment compliment the overall portfolio? Look at risk tolerances, diversification, what sectors of the market are covered, etc. An old trick advisors use is “The Rule of 100”. Take 100 and subtract your age, that’s the percentage of your portfolio that should be invested in the markets (i.e. a 30-year old investor should have 70% equities and 30% fixed income). However, analysts are now calling it “The Rule of 115”, promoting holding equities longer as people are living longer.

The second leg is commonly overlooked but always felt- Taxes. People save and invest in various vehicles, hoping to hit the right Rate of Return. Rates of return can be meaningless if Uncle Sam has his way. There are ultimately three ways investments can grow- Taxable, Tax-Deferred, or Tax-Free. Each type of account can hold the same underlying investments, but if it’s Non-Qualified, Traditional IRA, or Roth IRA, the account holder can realize totally different “Real Returns”.

The third leg is key, but probably the one most ignored- Liquidity. Liquidity is your ability to gain access to your money. Vehicles have varying levels of liquidity, ranging from cash under the mattress, to cash in the checking account that we have to walk to the bank to get, to cash in the E-Trade Account we have to call and wire to receive, to cash in the equity of our home that we have to refinance in good financial standing with the appropriate interest rate climate to obtain, to cash in the 401(k) we have to wait until 59 ½ to touch without taking a bath. Ben Franklin once said, “If you ever want to know the value of money, go out and try to borrow some.” Again, rates of return go out the window if you cannot finance the various stages of your daily life in an efficient manner.

Who Should I Listen To?

Thus which investments are the right ones? Einstein once stated, “Reality is merely an illusion, albeit a very persistent one.” Reality is crafted by the talking heads; these blabber mouths shape most investors’ decisions.

I blame the talking heads for convincing me Six Flags was a “Strong Buy” in 2007. I could only recall months prior navigating through garbage and broken down coasters with my buddies. My gut called it trash and “experts” called it a hidden gem. I abandoned the age-old investment tenet, “Invest in what you know!” and made my first investment. Less than 2 years later SIX went through bankruptcy and my account was wiped out.

There are only two kinds of talking heads- The lemur with no balls, and the guy at the racetrack. The lemur with no balls easily goes with the overall consensus. Each week his editorial comes out, he casually gives you his current assessment on the economy. Lo and behold this commentator is parroting what all the others say. He hops on the bandwagon, never jeopardizing his job because the outcast can be fired, but not the herd.

On the other hand you have the guy at the racetrack. Ever notice your one pal at the water cooler who can’t wait to tell you his story at the track Sunday, he called the 50-1 Longshot in the Exacta and nailed it! What a friggin genius! Please disregard the absurd gambling debt he’s meanwhile racked up. The guy at the racetrack is the financial guru looking for a big break. Each week in his modest column he makes a bold prediction no one else would think of. Life goes on and his column maintains an audience of 10 viewers. Then all of a sudden, WAMMY, the markets go soaring and flying and exploding from the most unthinkable source, and he called it! The oracle who saw it coming, crown this man immediately. He was the middle schooler launching 30-foot 3-Pointers in tryouts, knowing no one would care if he missed them, it was the impossible shot, but if it landed he would be a hero.

These talk show hosts are making career decisions like anyone else… the lemur may be content in his job and not wanting to stir the pot, while the guy at the racetrack is still starving for his fifteen minutes of fame.

The accountability people assume for the media’s financial authorities is nonexistent. When the meteorologist misses the blizzard of the century, we might face the unfortunate walk home without our snow gloves. When Cramer blows the stock tip of the week, it could cost millions of dollars in fans’ portfolios. How do they discipline these experts/entertainers? Depends on their viewer ratings.

At the end of the day the media is in the business of attracting an audience. Standing the test of time, sex sells. At the same time, the media is kept in business by advertisers. Read the pages of Money Magazine, notice the commercials on Squawk Box; don’t think organizations are ready to neglect those who keep the lights on. I’ve been told a thousand times that my articles won’t show up in the papers until I purchase at least a yearlong advertising campaign.

Joe Wuebben, Senior Editor of Muscle and Fitness, mentioned in a recent editorial how similar fitness and financial planning are, discussing how the best advice is always boring, and almost common sense. Be a consistent saver vs. workout four times a week, don’t max out the credit cards vs. go easy on the sweets, and address every body part vs. plan comprehensively. However, the magazine cover that grabs readers’ attention is Get Shredded This Month or Double Your Money in the New Year! Please resist the temptation, success lacks shortcuts.

The Contrarian Investor

The other mistake I made outside of not following my intuition with Six Flags, was following the crowd. Warren Buffet, a legendary contrarian, has made a career on finding treasure in other’s trash, and trashing what other’s call treasure. Good investing takes a lot of knowledge and patience, but also guts. It’s never easy to pour your hard earned dollars into what the masses have coined as worthless. But savvy investors spot the diamond in the rough, they call it a discount.

Look no further than the famous cover story from Businessweek in 1979, “The Death of Equities”. At the same time, Buffett strongly disagreed and happily stated that uncertainty is always the friend of the buyer. He went on with other nonbelievers to make a killing in the soaring markets of the next two decades. That famous story was published by one of the oldest and most reputable business publications standing. Forecasts can tell you a lot regarding the forecaster, but ultimately they are nothing more than opinions. And you know what they say about opinions.

Lastly, when you have a stock or fund in mind, do not ignore the Gambler’s Fallacy. Have you ever played the casino game of roulette? It’s the one with numbers, Red and Black, and usually surrounded by hot chicks and young guys. There is the dude who puts $20 on red and says it’s due to hit; they spin the little ball around andddd… BLACK! “Ah darn, what are the chances that will hit again, red’s way overdue.” Another $20 goes down on red, spin the ball anddd… BLACK! And so this cold streak will go on until the poor bastard has tapped out his pile. This, my friends, is “The Gambler’s Fallacy”. As inconceivable as it seems, black may hit fifty straight times, and the next time the fella in the tuxedo spins his little ball, it has just as good a shot of coming up again.

Investing is one of the cornerstones of Financial Planning, but never confuse it for Financial Planning. Few have made their fortunes in the markets alone; it can help your cause, but don’t think it’s a get rich quick scheme. Hard work and economical thinking still the pave the way.

[1] “American Again Say Real Estate is Best Long-Term Investment”, Gallup.com- 2015

[2] www.wallstreetjournal.com – 01/19/2016

[3] “US Existing Home Sales Median Prices”, www.ycharts.com – 2014

[4] Measuringworth.com, DJIA 01/01/1926-01/01/2016

[5] 2014 Average