Dear Wall Street: “You’re Fired”

Bear Market, Investing Strategies, Undervalued Stocks

The recent stock market crash shows how Wall Street is not looking out for individual investors. The analysts and marketing departments on the Street don’t care about the small guy. The big financial firms focus on gathering assets on which they earn fees. Here are a few items about the Wall Street crowd that I find disturbing.

  • The massive recommendation use of exchange-traded funds (ETFs) and index funds in 401(k) and other individual retirement plan accounts. The use of index funds assumes other traders are buying and selling for price discovery in the securities markets. If everyone is using index funds, who is making the price discovery?
  • Unfortunately, it seems that computer algorithms are in charge of price discovery. Modern computer-driven trading all seems to be trend following. The result is that stock prices get pushed way too far in one direction. Recently share prices of quality companies were sold down 70%, 80%, even 90%, most by computer-driven selling programs. This trading is bad for investors, but the stock exchanges don’t care because they make money from the trading volume.
  • Companies no longer announce stock splits to keep shares affordable for the average investor. In the ’80s and ’90s, Walmart (WMT) announced a stock split every time the stock price hit $60. Someone who bought 100 shares in 1980 owned 4,000 shares by the end of the 1990s. Walmart produced investing millionaires over that period. Now Jeff Bezos gets the ego trip of a $2,000 stock price, which is too costly of a share value for a lot of investors.

Have you noticed how the full range of financial services firms want you to do everything through an app or website? Sometimes it is hard to find a phone number so that you can call and try to connect to a live person. Then when you call, a computer answering system isn’t smart enough to send you to the right live person.

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I have another peeve about the Wall Street establishment. The analysts and big Wall Street firms put out lots of predictions about the future of different investments. However, they never provide any follow up to report on the accuracy of their forecasts in contrast to my Dividend Hunter newsletter in which I constantly provide updates on our “picks” to subscribers.

I think these examples illustrate how you shouldn’t be counting on the Wall Street firms and analysts to provide investment advice that works for you as an individual investor. You need a guide to develop your plan that matches your goals and risk tolerance. Be advised, chasing hot stocks is not a plan!

Unless you have a financial advisor that puts together a portfolio tailored for you, you will likely be in charge of your investments. By suited for you, I mean you own individual stocks, preferred shares, precious metals, and selected ETFs. It does not mean a portfolio that consists entirely of ETFs and index funds.

I developed my Dividend Hunter strategy as an alternative to trying to time the swings of the stock market. The basis is that it is easier to build a predictable income stream than it is to time the market and hope that capital gains will be there when you need them.

For example, we’ve recently carved out a whole new sub-portfolo to deal with the current bear market. It’s comprised completely of preferred shares. We get the stable high yields and for those currently trading under par, we get the benefit of the share price increase when the market recovers.

As I mentioned recently when selecting preferred stocks, the primary focus is whether the issuing company will stay in business. A good indicator is that some level of common stock dividend continues.

Recently, RLJ Lodging Trust (RLJ), cut the common shares dividend from $0.33 down to a penny. That one cent dividend tells you the 10% yield on the RLJ Lodging Trust Preferred A (RLD.PA) is secure.