The Hidden Fees of Stock Picking That Will Make You Lose Over 50% of Your Portfolio

The stock market has been very sluggish over the past several weeks: the indexes are near 2017 and 2018 depression levels. The frightening news cycle and frantic financial professionals believe that the stock market can dip even lower. Recent data and the business shutdown are evidence that a larger recession is possible. I believe this recession, or fear of one, is positive for the US economy though. Remember, we have seen signs of life before, in every economic recovery, only to be largely disappointed. Regardless of where the stock market is headed in the short term, remember in the long-term popular stocks will always do well. In two years, the stock market could drop another 30%, but in 20 years, the market will historically provide a 60% or better return.

You are probably aware that studies show that professional investors have trouble outperforming the market through stock picking. But as with any statistical data, be careful around the academic subjects that have selected bias. Most of this data considers professional investors as anyone who can open a fund. Many well connected or trust fund babies like Chelsea Clinton’s husband, Marc Mezvinsky, always underperform the overall market. Pensions and endowment funds received 80 cents back for every 1 dollar of investment from Marc Mezvinsky. Most of these professionals are wealthy enough to utilize their capital or connected well enough to raise money from close networks. Only rarely do these groups of wealthy or connected professionals do the required investment due diligence. Buffet famously said, “Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.”

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Losing out on other opportunities

In that respect are many hidden costs of stock picking. Remember when Real Estate Investment Trusts (REITs) were the best performing industry from 2010 to 2017, the entire industry quickly turned into one of the worst investment opportunities during and after the crash. This is because interest rates remain depressed while there was an oversupply of commercial buildings, primarily buildings such as shopping centers and malls. Malls were a great industry to buy between the 1970s and late 1990s; most developers focus their efforts to build out malls that are quickly becoming empty shells and debt load. So why am I talking about real estate?  If you didn’t know about the real estate information before reading this blog and you were buying REITs, then you are one of these stock pickers that got taken advantage of in the form of hidden fees. 

Nevertheless, too many people consider themselves a stock-picking genius. A majority of people will find themselves intelligent enough to invest, but being smart doesn’t compensate for higher investment returns. Being a business oriented individual or an entrepreneur doesn’t automatically make you a good investor either. Being an investor is a line of work, just like being an attorney. Anyone can be informed about their legal rights, but it doesn’t mean they have the knowledge to utilize this information to defend themselves in court. 

Many individuals lack the dedication to do investment due diligence. Anyone can attain a good, above-average return for a few years in a bullish time. To be clear, I define a stock picker as anyone who can’t explain the commercial enterprise model, can’t read a financial statement, often has short term gains in their portfolio, and a majority of their portfolio doesn’t include long term holdings.

The Hidden Costs of Trading – FIX Flyer
The Investment Hidden Fees

What are the other hidden fees of stock picking? I called it the T&T problems Time & Taxes

  1. The first cost is Time. If you have little knowledge and try to spend time learning, then you are running against the clock against someone that is simply more knowledgeable and prepared. Novice investors spend time picking stocks without ever learning about their investment through due diligence. Studying makes you informative but it’s a long process before you actually become knowledgeable to execute an investment. Being knowledgeable primarily comes from information and experience.
    Everyone on the internet is informed about politics, but not everyone is knowledgeable. If TV ran the news on disciplines like Biology and Chemistry 24/7, like they do political and financial news, we would all feel like we can discuss science topics like we are all Ph.D. certified scientists. I have another upcoming blog that will talk about the difference being informed and knowledgeable. If you keep picking stocks without being knowledgeable, you will underperform the market by 5% or more a year (50% in potential missed gains over 10 years).
  2. The second cost is Tax, if you’re trading in a taxable account. The difference between short-term and long-term capital gains is generally substantial. When trading stocks, it can be tempting to exit positions doing particularly well after only a few months. Doing this frequently results in higher tax costs and it is something I avoid. Capital tax gain taxes are 0% to 20% vs income taxes that can be around 25% to 40% depending on your tax bracket. Think about how much money you will leave on the table if you are paying income taxes on your investment returns. My investment strategy is to target long term positions over short term capital gains. Most people are happy to see short-term profit (but they don’t realize that they pay income taxes on it).
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Time & Taxes

I want to reiterate that it is vital to remember that the average investor seldom realizes the returns they see on the chart of that stock. Both taxes and time can seriously erode performance, especially for high-frequency stock traders in higher tax brackets. A lot of economic research studies show that these and other mistakes made by the ordinary investor can reduce returns by 4% or more a year relative to a stock index (which haven’t included the short-term tax fees). My mission is to give you the best possible after-fee and after-tax returns that matter for your long-term investments.

When is a Career More Important Than A Relationship? 5 Difficult Scenarios to Help You Decide!

Many ambitious professionals are faced with pressure to pass up their careers, change location, or postpone their career goals to be in a relationship. How do you decide between a relationship or career? Is it possible to have it both ways?

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Scenario 1 – Career goals that are not convenient for staying together

1. One person has to give up their career. Whoever possesses the best possibility to reach their dream career should be the one pursuing it, and the other partner should support their career and dream. If the career opportunities are conflicting with each other’s locality forces, then one partner has to prepare to sacrifice their time. It is difficult enough for a successful professional to keep a constant relationship. He or she will need to make sure that there is a level of commitment to grow the relationship.

2. If both careers have the same probability of success, then you still have to sacrifice your career or leave the relationship.

  • Some people assume that they can sacrifice their career now and still accomplish it later. But, in reality, rarely is this method practical because your partner’s career has to continue developing. If you choose to sacrifice your career for your partner’s, don’t optimistically assume that you can always go after your career later. Make sure you understand how your decisions will affect your future.

Scenario 2 – Career opportunities are placed in different regions.

Decide who has a better probability of being successful in their career and the other partner should provide support.

Scenario 3 – You have a great career to pursue, but your partner doesn’t enjoy a long-distance relationship

If you possess a lofty goal, then you simply have to choose: your partner or your career? You can try convincing your partner to support you, but most of the time your partner has already made up their feelings towards your actions. Because of this, for you to try to change their mind will often be ineffective. Then it might seem like the relationship is going well in the short run, but then, over the long term, your partner’s internal feelings will surface and the relationship could easily end.

Scenario 4 – Conflicting living preference

1. This usually comes into mind when you are seriously committed to making your relationship into a marriage. Living in an area that is generally the most beneficial part of your relationship as a whole. Establish a pro/con list and choose the best situation. If there is still a dilemma, you might have to take some time out and consider what is truly important to you, it’s either the relationship or career. Friends and loved ones can also assist you in making this imperative decision.

2. Some couples do not pick their home state, rather both parties are normally neutral and go along with a state they both didn’t really like, but moved there anyway because they want to make it fair. That’s one of the worst things you can do, but it’s better if a couple can resolve to live in one of their home states because at least one person, can receive the benefit of being with family and friends.

3. When you ask your partner to move to your country/state, you should not give reasons like family and friends because that is selfish. It’s obvious that one individual in the relationship is going to have to give up their comfort zone…

Locality decisions should be based on the following: how convenient life will be, career opportunities, affordability, and raising a family. If proximity to your family and friends are important, then negotiate that with your partner. Overall, consider a living situation that can provide the best opportunity to develop a solid, long lasting relationship.

Scenario 5 – You have dreams and goals while the other is content and prevents you from achieving your dreams

The distressing thing about this scenario is that most of the time people give up their dreams to be with someone who doesn’t have any goals or dreams. If someone loves or cares for you, they should not hold you back on your goals. Relationships should be an inspiring and uplifting experience.

Simply, get out of any relationship that is halting you from progressing in your career. You could say ‘I love them and I’m willing to give up my career to just be with them.’ BUT FOR WHAT? IS IT NOT POSSIBLE to have a relationship and pursue your career? A relationship is inspirational. Does it sound inspirational to exchange a dream for a relationship that desires you to become mediocre?

Conclusion – Happiness is very subjective. Whatever you are choosing, remember that sacrifice is a large part of any relationship. Relationships can be powerful when you are with the right partner. Do not sacrifice your career for someone who would not be willing to provide it back to you.

**I will think of more Scenarios, stay tuned….

***FEEL FREE TO COMMENT BELOW, GIVE ADVICE, ADD OR CRITICIZE ANYTHING AND EVERYTHING. I WOULD LIKE TO HEAR YOUR PERSPECTIVE. I’M ALWAYS WILLING TO LEARN SOMETHING NEW. THANKS!!!

What Kobe Bryant taught me as an investor: The Work

On January 26, 2019, Sunday afternoon, I had a luncheon with a prospective client. My phone was in my jacket, but I could hear it vibrating throughout the meeting. I was wondering, what was the urgency of all these messages all about? I checked my messages an hour later and I found out the missed messages were about Kobe Bryant’s death.

One of my friends sent me a breaking news article snapshot, and I supposed it was fake. I thought social media was jumping to conclusions. I checked various social media websites and popular news outlets, but I came across the same inevitable truth. I wanted to feel like Kobe was still present, so I kept watching replays, replays, and more replays of Kobe.

I was in disbelief the entire day and wished that some other news would report that it was merely a minor accident. It was heartbreaking to learn that his daughter died in the helicopter crash with him. I could not imagine what it would feel like to live through a devastating helicopter accident like Kobe’s family did. Kobe inspired me so much, and I will miss him dearly. Everyone can relate to Kobe because he was authentic. There was no denying Kobe’s passion, and the way he lived his life was inspirational.

Who Was Kobe Bryant?

Kobe Bryant was the youngest 17-year-old out of high school entering professional NBA basketball. Early in his career, Bryant was not given many chances to play even though he was a better player than most of his teammates. When he had a chance to play consistently, the NBA fans saw flashes of his swag and talent. As Kobe Bryant’s career progressed, it was undeniable that he was destined for greatness. 

18 years ago, in 2002, I was fortunate enough to witnessed an NBA match between Kobe Bryant and Michael Jordan. It was my first time going to an NBA game. It was a home game in Washington, DC; the Wizards led by Michael Jordan vs the Lakers led by Kobe Bryant.

The game was very close, but the Wizards edged the win over the Lakers in the final few seconds. In this game, MJ told Kobe he could ‘wear those shoes, but never fulfill them.’ Michael Jordan’s critique irritated Kobe so much that he stopped communicating with his team for two weeks. In the next game against the Wizards, the Lakers won with Kobe’s vengeance of 55 points.

Michael Jordan VS Kobe Bryant – 2002.11.08

There were many similar stories about Kobe’s vengeance game, where he always found ways to pull ahead and improve his skills. Kobe’s work ethic and pursuit of wisdom and knowledge resulted in 5 NBA championships and a long list of legendary achievements. 

Discipline & Work ethics 
Kobe Bryant’s work ethics are legendary. The best highlights of his career were not on ESPN; it was on early mornings and dark nights when Kobe would practice more than anyone else. Kobe was always the first and last player in and out of the gym. Kobe strictly follows an exercise regime. When he was injured, he found ways to practice, like working on his weakness or using his other uninjured hand. There were no off seasons for Bryant; his summer workouts have traditionally been exactly as intense as the regular seasons. Working hard, both on-the-court and off-the-court, was a consistent effort. Kobe Bryant lived and showed what perseverance and hard work means.

Talent can only take one’s profession so far in their career. For instance, most starting players in the NBA have the potential to score 20 points per game and some have scored a 20-point game, but most players cannot consistently perform at that high of a level every night. Just as most investors will have some years of beating the marketplace in their lifetime, but most investors cannot consistently beat the market average over a lifetime. The few that can consistently perform at a high level have shared one trait: hard work.

Bryant believes he should work hard as if he never possessed any talent. Why does Kobe Bryant work so hard? “To think of me as a person that’s overachieved, that would mean a lot to me. That means I put a lot of work in and squeezed every ounce of juice out of this orange that I could.”

Hard work is about commitment and there are no substitutes for hard work.

Blackberry (BB) had all the resources to compete against Apple (AAPL), but it has been truncated by a lack of innovation and it is no longer relevant in the phone industry. Blackberry attempted to recapture its market share with a rushed, unfinished smartphone… Blackberry simply did not put in enough R&D nor provided the engineering team enough time to deliver the promised features. Apple won already; Blackberry could never rival the same hours of commitment.

Actively Seeking Wisdom and Knowledge

Kobe was resourceful to leverage every tool to make him a better basketball player. Kobe watched soccer and realized soccer players had a unique freedom of movement. He noticed that soccer players used more ankle torque than basketball players, but they suffered less or the same probability of ankle injuries. Kobe started researching information to improve his signature shoe. He requested Nike to remove a few millimeters off the shoe’s sole to deliver better traction and incorporate the soccer shoe’s advantages. The new signature shoes resulted in a low top that features structural ankle support, improved traction, and response time.

Bryant would cold call basketball players and business leaders to learn about their success. He studied how animal predators would attack a pray to incorporate movements into his jump shots and studied psychology to mentally mess with his opponents. Kobe would study players’ weaknesses and studied the referee’s foul calls. Some would describe Kobe’s behavior as erratic, but champions in the same pedigree would view this obsession as very normal and even useful. 

Many successful people have an obsession about their work, it’s a very common trait that is found in leaders, business professionals, and investors. The Walmart business model is built on low prices and efficiency. Sam Walton soaked up wisdom from everybody he could — from competitors to Walmart’s entry-level associates. Walton leveraged every opportunity to make the stores and products more cost-effective. Elon Musk was months away from bankruptcy and he spent months sleeping in the Tesla factory to turn around the company. Warren Buffett went through 10,000 pages of Moody’s manual to acquaint himself with every single public company. Once he found a few suitable investments, he would study everything he possibly could about these companies and invest accordingly.
https://www.amazon.com/Mamba-Mentality-How-Play/dp/0374201234

Champions are constantly improving and getting better skills. In a world of sports, championships are determined by a fraction of a second, one snap, one turnover, or other marginal variables.

In the world of investment, marginal variables are going to determine million dollars of earnings or a path towards bankruptcy.

Kobe Bryant’s dedication to basketball is inspirational. He influenced people and shared his wisdom. Bryant’s Mamba mentality is to work hard and live up to your potential.

Kobe believes he should always work hard as if he never possessed any talent.

How to invest in stocks for beginners: Begin investing within 30 days

There are two ways to invest in the stock market. The first way is to invest in getting the average market return of 7%, just following the S&P 500. The second way is to invest in individual stocks to outperform the S&P 500 index.
***If you have specific inquiries or anything in my post that I can help clarify, please feel free to comment or email me (TomNguyen@agarwoodcapital.com).

1. Decide if you want to put in the time to beat the stock market average returns (Week 1)

Passive investing- The goal of passive investing is to achieve average stock market returns. The average return over the last 100 years in the stock market estimates at 7% – 8%. To start passive investing, you want to buy a mutual fund or ETF representing the S&P 500. Robo-advisors or standard investment advisors provide these mutual funds and ETF.

Robo-Advisor Services
  • For Passive investors, you only need to go with low and cheap online services (i.e., Vanguard and Fidelity), Robo-advisors (i.e., Wealthfront and Betterment), or anything that has management costs below 1% of your total asset value.
    • A note about indexes: The S&P 500 represents the largest 500 companies; therefore, it’s often used as a proxy benchmark for the US stock market performance. Other indexes represent niche industries or smaller size samples. For example, the Dow Jones (DJI) isn’t a great representation of the overall stock market because it includes only 30 US companies, so it’s just a small cross-section of the thousands of companies in the market. This is the reason why the S&P 500 is used as the standard benchmark instead of other indexes.

Active investing- The goal of active investing is to pick stocks and beat the stock market average, which is the S&P 500. Active investment requires putting in the time to research and analyze both individual stocks and the overall market. In becoming an active investor (or the DIY approach as I like to call it) you will want to learn key aspects to analyze a stock and strategies to end your year above the stock market average.  

  1. Learning about an industry, company, and competitors
  2. Learning about investment strategies can outperform the average return 
  3. Learning how to read and create financial statements

If becoming an active investor is the path you want, then continue reading.

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2. Start by reading about industries and companies that’re the most familiar to you. (Week 2)

Determine a business industry that is easy for you to comprehend. The easiest industries to learn are from your profession or products you regularly purchase.

For example, an apparel company usually has simple operations. Apparel companies make clothes that offer branding value with unique design distinctions. The apparel industry is a multi-billion-dollar investment opportunity, but it is a very competitive industry. Apparel retailers can offer their goods in physical and/or digital distribution channels: take note of these differences. For example, one of my favorite apparel business is Under Armour. 

At the beginning of your active investment journey, learn general facts, and find interesting tidbits on your chosen business. Ask critical questions because if you don’t have enough confidence in your research, it could cost you your entire life savings. But don’t worry, this should be a fun process! It’s like finding the perfect ingredients for a recipe so that you have an enticing outcome! Read everything you can on the company’s merchandise, management, and business risk. It may be tempting, but for now, let’s hold off on the financial statement. We should uncover the basics about the company first. Once you have learned about the company, the financial results will make much more sense. 

Here are some initial questions I might ask about Under Armour:

  • Why is Under Amour (UA) a better investment than its competitors?
  • What makes UA better than other apparel businesses?
    • Does UA have any patents on their clothes and shoes?
  • Who manufactures UA clothes? 
    • Is there a contract or partnership from the manufacturer? 
    • Why was this manufacturer selected?  
  • Who are UA shipping partners?
    • Is UA shipping partner contract?
  • Does UA have its own stores? Why does UA have its own stores?
    • How many stores does UA have?
    • How many retail partnerships do they have? 
  • Did Under Armour ship their apparel from a warehouse, and from which warehouse?
    • How did UA decide to pick this warehouse?
    • Where were the clothes made?
  • Who designs UA’s clothes?
    • What is the designing strategy, do they create athleisure clothes or not? 
    • Who’s the design team leader, how long did they work at the firm? Do they have experience at other firms?

Notice that I did not list any financial or math-related questions. The point of this exercise is to get familiar with the industry and business. As you are learning, there will be more financial jargon and it will get more confusing. Do not be discouraged. If it is confusing, you are learning.

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3. Learn about investment strategies (Week 3)

While there are many investment strategies, the best strategy to get an above-average market return is to buy undervalued companies called value investing.

The value investing strategy provides a strong foundation for an investor to learn about other investment strategies. Value investing is a popular strategy that created many billionaire investors, to name a few, notably Warren Buffet, Seth Klarman, and Bill Ackman.

What exactly is value investing?

Value investing identifies companies with a current market price that is less than their intrinsic worth, which means the stock or company is “undervalued.”   

How do I determine the value of a stock and know if a stock is undervalued?

The discounted cash flow – this method provides the net present value by estimating the company’s future profitability to help determine the company’s values. The discounted cash flow will help provide a range of value to the entire business. 

Another way to find undervalued stocks is by using the valuation ratio. A valuation ratio shows the relationship between a company’s market value or its equity and some fundamental financial metric (e.g., earnings). The point of a valuation ratio shows the price you pay for some stream of earnings, revenue, or cash flow (or other financial metrics).

  • Price/Earnings – The historical average of the S&P 500 index P/E is 15, therefore anything under 15 could be considered undervalued relative to the historical average of the S&P 500 index. 
  • Price/Book – Price is the stock’s current market price. Book value represents what the total asset of the company is worth. So, if the price of a company is worth $100M, and the book value is worth $110M, you will see a P/B= .90 ($100M/$110M).

Not all undervalued stocks are suitable investments. Some companies may reflect undervalued but aren’t performant and stay that way. We call these value traps. A value trap will have a valuation that appears cheap, but it has risks and troubles that will cause the company to continue declining.

Understand why stocks become undervalued

  • Missed expectations and lower guidance: Shares can plunge if the company provides quarterly and annual reports that misses target earnings or provides guidance below Wall Street estimates. 
  • Market crashes and corrections: If the entire market drops, it’s a great time to look for undervalued stocks.
  • Bad news: Just like when a stock misses an analysts’ expectations, bad news can cause a knee-jerk reaction from shareholders, sending shares plunging more than they should.

Cyclical fluctuations: Certain sectors tend to perform better at different stages of the economic cycle. Industries that are out of favor are the right places to look for bargains. Again, not all out of favor sectors will ever return to normal business operations. Think about how often restaurants and the retail industry go out of business.

Tesla stock priced at $200 could be a value stock as Apple is a value stock. Investors underestimated the technology and complexity of Tesla, comparing Tesla to other traditional auto companies. Similarly, it is much like how investors compared Apple’s iPhone to the BlackBerry Rim. Investors underestimated the software, ecosystem, and design of the iPhone initially. If you could buy a $100 bill for $70, wouldn’t you jump at the chance to do so? While value investing is a little more complicated than that, this is the general concept behind finding undervalued stocks that are perfect for your portfolio. Value Investing is not the only investment strategy, but it is the most straightforward and yet the most challenging strategy to master.


4. Learn how to read financial statements and how to create one from scratch (Week 4)

Financial statements will be disconcerting to learn. If math isn’t one of your strongest skills, it will be considerably more difficult. But, most of the investment math is simple algebra. If you cannot interpret a financial statement well, don’t rush to buy stocks. Start a stock account or paper trading account with only the amount that you can afford to lose, but still assert the same spending habits that you would with a larger account. The amount of money you need to buy an individual stock depends on your investment experience and skills. 

How do you know when you are fundamentally ready to invest? 

  • Q: Can you identify seasonality in a financial statement?
  • Q: What happens to cash flow if customers are paying with credit cards instead of cash?
  • Q: How much profit does a company have to pay off its current debt obligations? 
  • Q: Can you teach someone how to read a financial statement