Valuation-Informed Indexing #141
by Rob Bennett
I received a telephone call from a stockbroker a few months ago.
What does value investing really mean? Q1 2021 hedge fund letters, conferences and more Some investors might argue value investing means buying stocks trading at a discount to net asset value or book value. This is the sort of value investing Benjamin Graham pioneered in the early 1920s and 1930s. Other investors might argue value Read More
I’ve never used the services of a stockbroker. In ordinary circumstances I wouldn’t stay on the phone long enough for one to make a pitch. This case was a little different and I stayed on long enough to come to feel some sympathy for the voice on the other end of the line.
This fellow was calling from the brokerage firm that my dad used when I was a boy. I remember getting phone calls for my dad those many years ago. When the fellow used a name that brought back those memories, it softened my heart just enough for me to listen to what he had to say for a few minutes.
I don’t think stocks are worth buying at today’s prices. And, even if I did, I invest in index funds. So I don’t need the services of a broker. And even if I decided that I wanted to buy individual stocks, I wouldn’t use a broker’s advice to choose them. So there was zero chance that I was going to take advantage of the services that this fellow was offering. But I decided to hear him out, feeling that perhaps one of us or even both of us would learn something from the exchange.
I learned something.
I exited the exchange feeling sympathy for the guy.
To explain why, I probably need to first note my general attitude toward people who try to make money from me by trying to obtain a commission by selling me stuff. I generally don’t like this sort of thing. I never used the services of a travel agent to arrange a vacation. In my two purchases of homes, I used a real-estate agent for one of them and avoided doing so in the purchase of the other. I think real estate agents are overpaid for the services they offer. But I think they provide value. I am not enthusiastic about their involvement. But I am not hostile towards them.
I have had good experiences with used-car salesmen. They are generally as sleazy as people make them out to be. On the surface. But they do follow a certain code of honor. My experience has been that, if you work hard for a deal, a used-car salesman will honor his word. You just have to tune out a lot of baloney and come to the dealership armed with enough information to know how to put up a good fight. Used-car salesmen might not be people of the highest possible integrity. They are trying to make a buck. But they are not monsters. They work hard. They add something of value to the world.
I think this is true of stock brokers. They are not for me. But there are lots of people who want someone to hold their hand when they are thinking of what stocks to buy. Brokers play a useful role in such circumstances. The reason they are still around is that the market is telling us that a good percentage of the people who buy stocks want them around.
I thought that I would just tell this fellow straight out why I would not be making use of his services. I explained that I was a big believer in the research of Robert Shiller and that I thought that stocks have been selling at excessive prices going back to 1996. I pointed out that there was little chance that he was going to persuade me to buy stocks given how many years of my life I had devoted to study of these issues and how strongly my views are held.
He tried the usual arguments that people trying to sell you stocks use to do so, saw that he was getting nowhere with me, and gave up. Before he quite gave up, though, a bit of defensiveness entered his voice. What I said about Shiller was hitting home with him on some level of consciousness. He wasn’t going to give up his belief that stocks are always a good investment choice. He couldn’t afford to give serious consideration to that heresy. But I believe that my message got through just a bit for just a moment or two.
He told me that he had helped a lot of people by persuading them to buy stocks despite their reservations. I had the feeling that he was trying to persuade himself as much as he was trying to persuade me. I pointed out gently that the people he thought he had helped might end up being hurt if Shiller’s prediction that valuations will fall at least 50 percent before we come to the end of this bear market come true.
I heard a flash of anger in response to that one. Just a little. It was really a flash of hurt. I had hit a nerve. He gave a quick response and then hung up the phone.
The guy is just another guy with a job to do. He wants to believe that his work has value. We all do. I think lots of people in The Stock-Selling Industry would feel better about themselves if they didn’t have to sell stocks all the time. People need better investment advice and we need to come up with better ways to supply it to them than to instruct brokers that they must be pushing stocks even at times when they are wildly overpriced.
People think I’m a dreamer. I don’t think so. I think that paradigms that once made sense can come to be revealed in time as not making sense. Brokers serve a role by making their clients feel comfortable enough about stocks to buy them. But they hurt both clients when they hold back from warning their clients how dangerous stocks are when they are selling at high prices. And in the long run they hurt their own industry by failing to do so.
Conventional selling practices become conventional for a reason. So I think we are always going to have some form of the stock broker. But I believe that there will come a time when brokers will be freed from having to always push stocks. After the next crash, the outcry over the financial devastation caused by the out-of-control bull market will grow so great that people will be looking for alternatives. And, once we begin seriously looking for better ways to do things, we will see that there were better alternatives available to us all along.
Rob Bennett has recorded a podcast titled “Investing News Makes Us Dumb.” His bio is here.