Overpaid And Useless: A Profession That Needs To Go Away

Weather forecasters get a pretty bad rap for their accuracy.

However, this post isn’t about ripping on weather forecasters.  In fact, quite the opposite.  I bring them up so that I can compare them to another group of individuals whose profession  should really be brought into question.

You see, meteorologists often get blamed whenever a forecast is wrong.  If it rains on a day when sun was predicted, they get called out for a ruined picnic or day at the beach.  Clouds instead of the predicted sun can put a big damper on an outdoor activity.  The list goes on.

As I’ve gotten more interested in weather and looking at things, I’ve actually become a lot more tolerant of meteorologists.  If you look at what they do, it’s in fact pretty amazing that they get it right as often as they do.   They look at weather as it stands, then look at things that are happening hundreds, if not thousands, of miles away, and make predictions on what’s going to happen hours, and even days, down the road.  There are many things that can change, each with potential impact on what actually happens.  If you’re on the East coast and reading this, consider that your forecast for what’s supposed to happen is based on weather that hasn’t even hit land all the way across the continent.

What If There Were No More Forecasts?

So, what does this have to do with another profession that is pretty much useless?  I’m getting there.  Stick with me as I stay with the weather forecaster example for just a bit longer.

Imagine, for a second, that meteorologists stopped forecasting the weather.  What if all they did was talk about what already happened?  Think about tuning into the 5:00 news and having the four minutes dedicated to the meteorologist telling you what happened.  The Weather Channel would just talk about the last few days.  Online weather sites and apps would give up to the minute information about weather that already happened.

It sounds pretty useless, doesn’t it.

You’re right.

So, why do Wall Street analysts get to do exactly that?

Reporting News From Yesterday And Beyond

mb-201402wallstThere are a lot of Wall Street analysts out there, and from what I’ve been told, they get paid a lot of money to do what they do.  Which is to come up with snazzy reports with lots of important sounding language that rehashes information that, for the most part, has already been released and is well known.

Where do I sign up?

Upgrades and Downgrades On Yesterday’s News

I’ve noticed a troublesome pattern over the past several years as I track stocks I own or stocks that interest me.  The upgrade and downgrades that accompany reports seem to come out after big news has been announced, and therefore, after the stock market has already moved the stock in response to that news.

Citi, for example, released poor earnings.  The day of the earnings report, twelve analysts released reports that downgraded the stock, after it lost a few percent in early trading.  Wow, really big leap on that one.

In other words, they effectively said “And yesterday’s weather was..”

Do you know how many analysts downgraded Citi leading up to the reports?

Not a one.

Recently Ford has been under a lot of pressure.  A poor earnings reports, reduced guidance for 2014 sales, and a monthly sales report sent the stock on a slow slide.  After it slid for about six weeks, losing nearly 20% of its value, an analyst downgraded the stock, citing risk from the very items which had already been reported as threats to the stock price.

You don’t say.

Where do I sign up?

The Lost Value Of This Profession

Now, it seems to me, that these recommendations and analysis would have been more useful to investors before the report.

Some would argue that the data isn’t there.  Maybe that’s true, but I know that at many rating agencies, there are analysts dedicated exclusively to one company.  All day, every day, their job is to understand what’s going on.  At one company.  So while the company may not (and shouldn’t) release data to that analyst, if they’re not able to get some sense of what the company is doing and how they’re performing, and the challenges or opportunities that go into a report, what value is there in that job?

I’m thinking very little if any at all.

But, these analysts get paid a lot of money.  Probably a lot more than meteorologists. They get recruited from the best business schools.  They are held in high prestige.   Their information gets printed in glossy reports that get sent out all over the place.

But for what?

So they can release a report after the company in question releases theirs to say the same thing and guide investors to do what they’ve already done in the time between the actual drivers and the report being released.

Where do I sign up?

Once Upon A Time

I’m wondering if there was once value in this profession.  Before the internet when news releases were sparse and data wasn’t available and digested within moments of a company announcement, maybe these reports held value.  Back then, a report released hours or days after an earnings announcement may have held value if the market was slower to respond and there were days available to price in a driving factor.

But, that window doesn’t exist anymore.  Earnings, guidance, profits, sales, whatever the drivers are, those bits of data are processed and priced into stock prices in a matter of seconds.

Thanks But No Thanks

At this point, I take analyst recommendations at face value.  What that personally means is that for about every recommendation I see, it’s too little, too late, and it doesn’t tell me anything that has not already been reported.

If you ask me, I’d just as soon they disappear altogether.  And, if you’re used to reading them and wonder what else you could do, here’s a suggestion.

Go look up the weather forecast.  You might actually get some useful information.

Two Seconds And Why High Frequency Trading Always Wins

Two seconds.  It probably took the average reader two seconds to read this.  Not much can happen in two seconds, right?


It turns out that two seconds can make all the difference in the world in the financial markets.  Enough to make (or lose) a fortune, as it turns out.

Economic Reports

OLYMPUS DIGITAL CAMERAOne of the big drivers of the stock market are economic reports that come out at various periodic times.  Weekly jobs reports, manufacturing data, consumer data, unemployment rates, and a whole host of other things are key drivers of the market.

Long story short, what will happen is that the market will guess at what the data will be.  Say they expect unemployment to go from 8.0% to 7.8%.  The actual number will often drive the market.  Though other factors are at play, if the number came in at 7.6%, it’s a good bet that the market will rally, whereas if it were to come in unchanged at 8.0%, the market would sell off.

Seems pretty straightforward, and at first glance it seems like you can trade with that data.  But, in many cases that assumption would be off.  It’d be off by two seconds, to be exact.

Early Access

See, some economic reports are now available for delivery in advance of the release to the general market.

Two seconds before the release, to be exact.

Yes, if the report is set to be released at 10:00 AM, you can pay to have it made available to you at 9:59 and 58 seconds.

Hardly seems like a big deal, does it?  But, as it turns out, two seconds can be a lifetime when it comes to computers and high frequency trading.

In two seconds, a computer can receive the report, open the report, scan the report, parse out any pre-determined words or phrases, determine if the report is favorable or unfavorable, put in orders, and have the orders executed.

This can and does take place all within the space of two seconds.

That means that anybody that doesn’t have that advantage (meaning every individual investor out there) is always going to be too late.  You can have an order at the go, hear ‘positive’ at 10:00 and 2 seconds, hit ‘Execute Trade’, and you’re still going to have missed out.  Not only will the computers have ‘heard’ the data already, they’ll already have acted on it.  You’ll be behind the eight ball.

Every single time.

I’ve long been critical of high frequency trading, and the impact that computers have had on the market.  Proponents of high frequency trading argue that the benefits are there for the market.  By making their trades quickly and trading even to make a penny per share, they are offering liquidity to the market, meaning that the exchanges can match up buyers and sellers very quickly.

That’s all fine, but when you consider that, on a basic level, every transaction has one winner and one loser, it becomes pretty apparent that the high frequency traders rarely lose.

Meaning someone else does.  And, guess who that someone often is?  You.  Me.  Whoever.


I don’t think high frequency trading should drive individual investors away from the market.  There’s no reason for this practice to cause complete mistrust in the market, but it should set expectations.

Don’t expect to beat the market.  You can’t (at least not on a regular basis).  You can still grow your investments, just don’t think you can be the hotshot that beats the market.

Don’t expect to beat the computers.  Even without the two second head start, the computers can still generate trades based on real time data that will beat you.  They scan the newswires.  They process the data.  They make their trades, both buying and selling, all before you can finish reading the same headline that they’re using.  Meaning, if Ford announced that they doubled earning projections, go try to put in a trade, whether it be during market hours or during pre-market trading.  You’re going to find the price already reflects that.  The big money has already been made.

By the computers.

Readers, what are your thoughts on high frequency trading?  Is the two second advantage fair or should it be regulated away?  (Personally, I don’t think it would even make a difference)

Are You Doing The Right Thing The Wrong Way?

For years, I’ve undertaken a strategy to make sure that I was getting enough water.

For years, I was doing it the wrong way.

At work, I have a cup that I keep at my desk that gets filled from a container that I keep in the fridge.  I like cold water, so I pour water from the container in the fridge into my cup, then fill the other container and allow it cool off.  Both containers held about 2.5 cups of water, so if I drank three containers worth per day, I was getting a good intake of water.

mb-201309waterThis seemed to be working, until one day I realized that I was going about the right idea (staying hydrated) the wrong way.

What was wrong?

What I was doing was drinking a majority of the water in the morning.  I’d often be done with all three fill-ups by the time I finished lunch.

I had always heard that your body adapted to how you drank water and just figured that timing didn’t matter.  But, one day when I stopped to think about it, I realized that there were clues that I was not drinking water the right way:

  1. I was going to the bathroom too much in the morning – The old rule is that what comes in must come out, so when I looked at the number of times I was getting up for quick bathroom breaks, I realized it was too much
  2. I was getting up in the middle of the night – This is what really clued me in. I realized that I was waking up in the middle of the night to go to the bathroom, at least once, often twice.  When I looked at it further, I realized that I was drinking at least a cup or two of water in the evening, presumably because all the water I drank in the morning had already been processed, and my body wanted more.

Once I realized this, I changed my habits.  I still drink the same amount of water during the day, but I spread it out, so that by lunch, I’m only about 50-60% of the way through the three fill-ups, and I’m drinking water until I leave for the day.

This spreads out my water intake, and keeps me hydrated longer.  After making this conscious switch, I realized that I was getting up a lot less in the middle of the night because I didn’t drink as much water in the evening.

There you have it, an example of doing the right thing, but doing it the wrong way.

This happens with money more than you think.

Since this is a personal finance blog, let’s take a look at how this principle can be applied to money.  It’s easier than you think.  Just look at some of these tenets of good personal finance, and let’s think about how a good idea could be executed poorly:

  • Budgeting – Creating a budget is a great idea as it allows you to track and allocate your money, but if you don’t track things properly, you miss certain categories, or you allocate funds improperly, you could come out no further ahead than before you started budgeting.
  • Investing – It’s pretty much a standard that as you’re working, you should be investing money for retirement.  This is a great idea overall, but if you invest the wrong way (not checking the fees of your investments, not having a proper asset allocation, taking too much risk, or taking too little risk), you could be disappointed in your returns.
  • Saving – Whether it be for an emergency fund, a home improvement, or a dream vacation, saving money is always good, right?  Well, not if you don’t look at it in the big picture.  If you’re stashing money aside but only paying the minimums on your credit card balance, you could be doing more harm than good.
  • I’m sure that the list goes on….

So why do we get ourselves in these situations?

Some of the potential mistakes I outlined above seem like no brainers, just like it probably seems obvious to many readers that drinking a ton of water for a few hours of the day and not drinking much after isn’t the best idea, but it’s not always that easy.  Why do we do these things?

  • Mis-information – As I noted above, I had read somewhere that your body would adjust to your water intake.  There’s a good chance I read that out of context or maybe from a source that was just flying off the cuff, but I took at as truth and planted the seed in my mind that allowed it to be truth.  If someone you know gives you a piece of money advice that worked for them, you may accept it as truth, even if it’s not the best idea for you.
  • Habit – Once you start doing something and keep doing it, the process becomes habit.  That can work in your favor as you try to establish an exercise routine, but if you get in a bad money habit, it can work against you.  It may seem perfectly normal to spend $200 on dining out a month simply because you’ve done it for so long, but if you’re busting your budget and can’t figure out why, there’s a good chance that you have a habit or two that you’re not considering that could be affected.

And how do you get out?

If you’re doing a good thing the wrong way, chances are the fix may not be obvious.

  • Don’t give up – If your budget isn’t working, it’s very tempting to just quit the process, figuring that it’s not working anyways, so why bother?  Don’t give up.
  • Look for the root cause – In the case of my water intake, the problem that I wanted to solve (getting up in the middle of the night too much) led to the discovery that I was drinking water incorrectly, and it took going back a few layers to really identify the problem.  Chances are your budget isn’t the problem, but a spending habit within your budget.  You have to be willing to dive a little bit deeper.
  • Ask for help – There are people out there willing to help.  If you can’t figure out why you can’t get your investments working the right way for you, then it could be time to ask for help.  Ask around to someone you trust if they can help or give you a referral.
  • Think outside your comfort zone – Many people would never think about hiring an investment professional because they think they can do it themselves or are unwilling to spend the money.  What they might need to realize is that the cost can be made up quickly if a problem is solved.  A $200 fee for an adviser seems high, but if you increase your returns by $1,000 as a result, then suddenly it turned into a pretty good investment, didn’t it?

Finding out that you’re doing something good, but doing it incorrectly, can be an enlightening experience, but it’s worthwhile to fix and chances are will make a big difference in your life.  For me, fixing my hydration process has resulted in much better and more restful sleep.

Readers, what are your experiences (money or otherwise) with doing something right, but doing it wrong?

Is It Time To Switch To Roth IRA Contributions

Currently, I contribute all of my retirement contributions via my employer’s 401(k) plan.  I don’t quite max it out yet, though I’m working toward that goal.  However, I’m giving serious consideration to ceasing contributions, and instead contributing to my Roth IRA instead.  Here are a few considerations:

No Match

Right now, my employer doesn’t match anything, so there’s no discernable benefit to contributing even a penny to that plan as far as that goes.  They did a nice match for awhile, but cut it at the height of the recession, and all signs point to a continuation of the ‘no match’ policy.

Tax Considerations

One of the big reasons I’m thinking of switching is because of the eventual tax considerations involved between the two.  According to today’s rules, I’ll eventually have to pay income tax on my 401(k) withdrawls, but not so on the Roth IRA contributions.  Assuming that this policy holds true for the monies in the accounts, I think it would be good to have a balance between the two.

Contribution Amount

mb-money201308Because the 401(k) is pre-tax, whereas the Roth IRA would be post-tax, the up front effect would be that I’d be contributing less.  If I suspended contributions to the 401(k), I would take the resulting difference in my paycheck and contribute that toward the Roth IRA, so the net effect would be zero in terms of my ‘net pay’, though a $400 contribution today could be a $300 contribution tomorrow.

Market Effects

The market has performed so well that the difference has probably worked in my favor.  By contributing more, I’ve been able to take advantage of the gains with the extra money involved.  If I were to switch to a Roth IRA, I’d be betting that the massive gains would be tapering off, at least in the short term.  I’m starting to think that the market is ready for a breather, so this would be a good time in my mind.

Automatic Allocations

One thing that I like about the 401(k) is that my money is divided up between funds that I choose which give me a good allocation.  I’d have to discover how to make these allocations on a regular basis.

Transaction Fees

There are currently no up front transaction fees with the 401(k), but depending on what my investment preferences are, I could pay $10 per transaction, as my Roth is currently through Ameritrade.  They do have no-fee funds, but I’d have to do some research to see if they are comparable.  If I were to purchase anything with a transaction fee, I’d have to determine the threshold on when to make transactions.  I wouldn’t want to make a $300 investment every pay period, for example, and pay a $10 fee each time.  That would be a 3.3% investment fee right off the top.  Instead, I’d have to accumulate the cash to a point where it made sense.

Maintenance Fees

I do a regular check to make sure that I’m not involved with funds that charge over a 1% annual maintenance fee as I believe anything above that is too high. I’d have to carefully look at whether the fees and results are comparable with the options available.

More Options

Should I choose, I could invest in individual stocks with my IRA contributions.  Some argue that you should never do that with retirement investments.  I’d have to do research and give some serious weight of the pros and cons.  Right now, it’s an ‘out of sight, out of mind’ thought process.


Right now, my retirement allocation never hits my paycheck.  With the option of having it deposited and more ‘available’, would the temptation exist to defer some of the retirement contributions?  Regularly or even occasionally would be detrimental to the long term goal of a fully funded retirement.  Knowing myself and my financial personality, I believe the risk to be extremely low, but it’s still a factor worth considering.

There It Is

So, there’s the long and short of what I’ve taken into consideration.  I’m curious what you think, readers, and if any of you are in this boat, what you’ve done and how you go there.  Are there any factors I haven’t thought of or mentioned?


Are You Driving Down The Price Of Stocks In Your Own Portfolio?

I posted this link in a recent weekend round-up, but it’s been grating at me so much that I wanted to make sure it didn’t get lost in the shuffle, as I know round-up and weekend posts can get lost in the shuffle.

Long story short, if you have any trading accounts that allow you to trade on margin (where you can trade with more money than you have), you could be implicitly allowing shares you own to be used for short selling.

So, you buy stock XYZ hoping it will go up.  Because you have margin capabilities, your brokerage can willfully borrow your shares to another investor who wants to short that stock, thinking that it will drop in price.  Your shares, in essence, are being used against you!

And the scary part, you have no say in this matter.

Lesson learned: If you have a margin account, you may want to re-consider keeping it open.  Even if you’re not using the ‘margin’ that the brokerage is willing to lend to you, your shares could be used against you.

Pretty sweet news, huh?

When Investing, Do You Invest In What You Use?

There are hundreds of thousands of investment opportunities out there.  From stocks to mutual funds to ETFs to CDs to bonds and many, many other financial instruments, the opportunities are endless.

If you’re making individual investment decisions, one of the things to keep in mind when making investment decisions is the simple question: Do you invest in what you use?

mb-201101appleConsider the following:

  • If you use and love your iPad, iTouch, iPhone, and iPod, do you own any Apple stock?
  • If you use Amazon for most of your online shopping needs, talk about it to all your friends, and blog about it all the time, do you own any of it’s stock?
  • If you’ve been a faithful Netflix customer since 2003, do you have any of their stock?
  • If you just bought a Ford car in the last year or two because you love the cars and believe it’s a solid company, do you own any Ford stock?

Chances are, with just the few companies and products I listed above, you could have made a lot of money had you invested when you fell in love with the company whose products you use everyday.  Apple stock has gone nuts since the introduction of all the products above.  Amazon was one of the first Internet bellwether stocks.  Netflix has gone through the roof over time.  Ford stock has increased many times over since hitting rock bottom over two years ago.  Opening an investment account is easy and the fees to have made these transactions would have been minimal compared to the returns.

I’m not advising that anyone change their investment strategy to running out and buying stock in every single company whose products you buy, but if you truly fall in love with a company, it might at least be worth taking a look, because there’s a chance that many others are about to or have fallen in love with that company to. That can translate into increased sales, increased profitability, and of course, a higher stock price.

It’s an idea to at least put in the back of your mind next time you have an opportunity for investing.

(Disclaimer: I am not a financial adviser nor does this post construe any recommendations on individual stock or strategy, it is for the purpose of entertainment and discussion only).