“Buy value not market trends.” Sir John Templeton

During the market crash, nearly all of the people who were wiped out had bought into investment schemes promising ridiculous performance.  The investors gave their money to money managers they didn’t know, who were investing it in ways they didn’t understand, hoping to get lucky and strike it rich.  They based their decision on promises of easy wealth.  By the time they found out the promises were fake it was too late.  The performance charts were worthless.  Their portfolios devastated.

In contrast were the reputable managers who were open about what they do.  Their performance was in line with overall market trends slightly outperforming over long periods.   One of the telling factors, though, they invest in their own strategies.  Some managers refer to it as “eating their own cooking.”  There is even an investment analysis company that analyzes managers to see if they are investing alongside their clients.   This is added to other criteria to show if they are acting responsibly.  They call it their “stewardship grade.”

When the market imploded most everyone went down.  By early 2009 there was nowhere to hide.  But the managers who invest their own money with their client’s generally held up better.  And in the recovery their portfolios have done well.  As one manager stated, “We have our family’s net worth invested alongside our clients so we are extremely careful how we invest.”  In clear waters and storms they’re on the bridge watching the ship.  I like that.

The bible says, “He who walks with the wise grows wise, but a companion of fools suffers harm.” (Proverbs 13:20, NIV)

In investing, as in life, who you hang out with will make a huge difference.  I’ve said for years, “I never knowingly do business with crooks no matter what they promise.  Because sooner or later they’ll figure out a way to get you.”

And if you don’t know you better find out first.  Because eventually, you will find out.

Often people in their desperation to get ahead financially chase after promises of extraordinary performance.  They give their money to whoever promises the most without ever checking their credentials or history.  All they look at is their last 12 month performance chart.  They hand over their life savings to someone they wouldn’t loan $100 to.  Then they’re amazed when the whole thing blows up and they find out the adviser or manager was incompetent or worse.

Who of us haven’t been tempted by this?  Their stories are compelling.

So how can you protect yourself?  This is critically important.

The bad news?  You can’t totally.  The good news?  You can greatly increase your odds.

First, work with people you know or are referred to you by someone you trust. Get to know that person before you give them your money.  Ask questions.

What’s their philosophy of investing?  What’s their personal life like?  Do they live a life style you are comfortable with?  Do they treat people with care and respect?  How about their family?  How is their relationship with their spouse and kids?  What organizations are they involved in outside of work?

Their philosophy of life and investing will have more to do with your long term success than their short term performance claims will.

Second, find out if the investment manager and the adviser “eat their own cooking.”

Do they invest in what they propose to invest you in?  If not ask why.  After all their research, why would they not want to invest in it?  If it’s great for you why isn’t it great for them?  Sometimes there are legitimate personal reasons.  But understand those ahead of time.

I like money managers who have their own personal financial future aligned with mine.  I like being on the boat together.  They’re a lot more careful investing.  In the long run that will have a lot to do with how you come out financially.

Third, be skeptical of people who only talk about performance.

If they shy away from talking about their personal life or their own investments be careful.  If they keep steering the conversation back to their full color historical performance chart ask yourself why.  You want to work with someone you can relate to.  It doesn’t mean you’ll necessarily be best friends but you should have a relationship.  Ultimately their character will guide their decisions regarding your investments.  Make sure of what that character is.  Working only with people of integrity and competence sets you up to have success.

Who are you walking with?  Do you really know?  Shouldn’t you make sure?

Let me know what you find out.

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Based on “16 Rules for Investment Success” by Sir John Templeton.

Important Disclosures:

Douglas Armey, the LPL Financial adviser associated with this website, practices in Fresno, California and may discuss and/or transact business only with residents of the following states:  California, Idaho and Oregon.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results.

Securities offered through LPL Financial, Member FINRA/SIPC.  Member of Securities Investor Protection Corporation (SIPC).  For an explanatory brochure please visit www.sipc.org.          www.finra.org