Nick Dewhirst says the art of selling is when clients sell the investment products you originally sold to them
So ingrained is the file-and-forget mentality towards investment that many advisers will automatically think the art of selling is all about how to sell an investment product to a client. Every successful IFA already knows that.
No, this is about when clients should sell investment products that you sold to them previously. Few IFAs know that. Testimony to this is provided by portfolios littered with the winners of the last decade, for most have become this decade's flops.
Even if the product turns out to be a long-term winner, there are significant setbacks, as the performance of the FT All Share index shows in the table. There have been 10 intermediate declines of over 15% over the period shown
Why do so many investment advisers encourage their clients to accumulate portfolios of flops? In all sincerity, that is not what the average honest adviser intended when, full of enthusiasm, they promoted the latest investment fashion pushed by the marketing departments of the hottest fund management houses.
I suggest there are four main reasons for holding flops:
1. Fear. If I recommend an alternative investment and get this one wrong as well, the client will crucify me for ripping them off for commission twice, when they have already lost half their money on the first investment.
2. Guilt. It is not fair that I collect 5% commission while the client loses 50% of their money through poor investment performance, so I will deny myself a second commission.
3. Hope. We acted on the best advice. The loser was someone else's idea. Indeed it was probably the client's idea. It is simpler to pretend that it did not happen/was not my responsibility and so on. Let's just invest new money somewhere else ' after all there is no commission in discussing the past.
4. Ignorance. I religiously read the views of the investment gurus and saw how their opinion regarding the shape of the setback changed from V to U to W to L. Each time it seemed too late to do anything. If only they had say straightaway that L = Loser, never going up again.
Arguments 5, 6, 7 and 8 are all made more acceptable by a free pardon from the fund manager.
'Dear Sir, While disappointed by the recent performance of the market, our fund manager remains confident about the long term potential of his fund. Thanks to his good judgement the fund has performed less badly that its benchmark. Hold.'
Well, they would say that, wouldn't they?
So who can we rely on to tell us when to sell? Should we rely on the investment banks whose analysts and strategists are paraded regularly by the media?
While clearly expert, are they objective? Sadly not.
• During the last decade a survey of aggregated bottom-up earnings estimates proved to be a staggering 8% too optimistic in predicting growth every year (GS Global Economics Papers No. 62, May 2001).
• Similarly a survey of nearly 28,000 US analysts' recommendations by First Call / Thomson Financial in May 2001 showed that nearly 70% were Buys while less than 1% were Sells.
Recent press comment illustrates the pressures on investment banks. In Japan, the authorities are reviewing negative broker's research that came out at a delicate time in negotiations about a major bank. In Singapore, Goldman Sachs was forced to make a public apology about its remarks concerning one of their local banks. In the US, analysts have become scapegoats for the crash. Here the Financial Times ran an editorial titled 'Shoot the Analysts.'
If one can't rely on the independence of these experts, the alternatives are to work it out for oneself, or to invest in a range of print or electronic subscription services. Neither alternative is without cost. One costs time. The other costs money. However investment advisers should be the first to know that there is no such thing as a free lunch.
Nevertheless here are two free tips. The first is that there are suitable mechanical Buy and Sell systems that work most of the time in most markets. To work, such systems must fulfil several criteria:
• They should generate a small number of big decisions, otherwise they are only suitable for traders.
• They should have long track records, preferably going back a quarter of a century to cover different market environments ' bull and bear markets, inflation and disinflation.
• They should have been tested in different markets, because there are differences between Anglo-Saxon countries, continental Europe, or Japan, or Emerging Markets.
A good example of such a mechanical system is the Coppock Indicator, which bases decisions on a time-weighted rate of change for a stock market index. Edwin Coppock consulted religious leaders who advised him that bereavement takes about a year and applied this to market timing since World War II in the US.
As there is no single mechanical rule that works consistently, ideally one should combine a range of indicators. That is what leading independent strategists such as Zweig and Gazarelli do on Wall Street. Investors RouteMap performs a similar task for global markets.
The second tip is that the time to sell is when one learns that one's reason for buying no longer applies. That statement needs amplification.
First, this comment is based on one's reason for buying, not for holding, since all investments are alternatives to each other. The point is that one should not be holding investments about which one now only has mixed feelings, when one could use the funds to re-invest in something about which one is positive.
The second comment is that perfect knowledge cannot be taken for granted. It may take time for advisers to understand what is happening in the markets, but one should still sell. First, others may take even longer to understand that the game has changed, so the investment could still fall further in value. Second, even if the bad news is already discounted in the markets, this merely means the market will go sideways until the next development, and the odds are equally balanced between that being positive or negative.
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