Education for the retail investor

March 21, 2011
| By Pete Daly |
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Investing is a piece of cake — other than the uncertainty about a stock’s future and the ever-present danger of those who routinely scam even financially savvy people.

There is help for the individual who wants to reduce the uncertainty and avoid the scammers. One source is BetterInvesting, a nonprofit, nationwide, volunteer-based organization headquartered in Madison Heights that claims to have helped more than 5 million people become better, more informed investors since 1951. It is aimed at the “retail investors” who want to manage their own portfolios over the long term, and it is of particular interest to members of the many investment clubs all across the country.

“We are what you call ‘retail investors’ because we are the little guys,” said Jane Johnson of Holland, a member of an investment club and a volunteer for BetterInvesting for 10 years

“We make our own decisions. We are not the people who manage funds or are responsible for investing pension money. We are people who take responsibility for our own financial futures.”

BetterInvesting has a systematic process for evaluating stocks, and a national publication, BetterInvesting Magazine, “full of all kinds of interesting information every month,” said Johnson.

The organization and its chapters “never, ever recommend a particular stock or specific financial instrument,” said Johnson, and BetterInvesting is not an advocate for the investment industry. It’s simply about education.

Johnson is a member of the board of the BetterInvesting Western Michigan Chapter, which has about 700 members from Kalamazoo and southwest Michigan north to Muskegon and Grand Rapids.

During the recession, many retail investors “lost faith and just gave up,” she said. “They got very frightened of the market because it hit them personally.” Over the last few years, membership in the BetterInvesting Western Michigan Chapter dropped by about half.

“Now the economy is starting to turn and the retail investor who has been out of (the stock market) for so long is starting to think about putting money back into the market again,” said Johnson. So BetterInvesting is gearing up to educate, with classes, online seminars and other online resources.

Johnson belongs to a model investing club in Grand Rapids, where each member invests $25 per month. It is operated as a legal partnership, and the members put much time into research before agreeing to buy or sell a stock. Over the past year, their pooled investments have increased 23 percent, reflecting the overall improvement in the stock market.

Companies with publicly traded stocks are required to register with the SEC “and every quarter, they are required to report what they have done,” said Johnson, who added, “Just because a stock is registered doesn’t mean it’s a good investment.”

SEC filings contain crucial data that should be carefully studied and weighed when evaluating a stock. The stock selection guide developed by BetterInvesting is built on a foundation of common sense applied to diligent homework — plus one other ingredient: discipline.

“You have to have the discipline not to get emotional about it,” Johnson said.

“The problem is, you could fall in love with a company. But what do you know about their management? Their debt? Maybe they have a good idea but how easily can others copy it and do it cheaper?” There are “clever ways” a company can make its numbers look better, “like buying back their stock,” she said. That reduces the amount of shares, which makes the earnings-per-share number bigger.

There are many new alternative energy companies offering stock to the public: “Some may be terrific investments and some may be disasters,” said Johnson. “The trouble with new companies is, we don’t have enough history with them to know — five years’ worth of numbers — to know if their management is lucky or good.”

“Buying is an emotional decision. That’s why you have to check out all this stuff until all the numbers look right. You don’t let yourself give in to your emotions — to buy this stock that you think is so cool — because it may not be so cool if you look into it in more depth,” said Johnson.

“What you are doing (as an investor in the stock market) is forecasting the future, but there are intelligent forecasts and there are seat-of-the-pants forecasts. Most people do it that way. The name of the game is discipline,” she said.

Another important part of investor education is how to avoid the scams. Johnson and another member of BetterInvesting recently made a presentation to the Holland Rotary on “Outsmarting Investment Fraud,” and they will repeat it this spring.

Among the latest victims of investment scams in West Michigan was the Mona Shores school district in Norton Shores, which lost almost $4 million last fall after it gave the money to a Southfield financial advisor to invest. The individual is currently awaiting trial in federal court on several counts of defrauding clients, to the tune of an estimated $10 million.

“In this case, it was well-meaning treasurers who were hoodwinked,” said Johnson.

Many more cases involve individuals duped by shady investment schemes, and many experts believe most of those are never reported. “The problem is that a large number of people who get cheated and lose a great deal of money never report it to anyone because they’re ashamed. They’re embarrassed,” said Johnson.

FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States, and its mission is to protect American investors by making sure the securities industry operates fairly and honestly. FINRA has worked with the AARP on studies of investment fraud and has come up with statistics that tend to bust stereotypes.

Johnson said many people assume the typical fraud victim is the proverbial little old lady who lives alone and has little education. Not so, she said. In reality, according to FINRA, the typical victim is an educated male between the ages of 55 and 65 who is financially literate and has a history of making all of his own investment decisions.

A DVD produced by AARP and FINRA features an experienced stockbroker from Atlanta who was conned into investing $40,000 in unregistered shares in oil and gas wells. He lost it all.

People considered at high risk are those who rely more than average on their friends, family and co-workers for investment advice, according to Johnson. About 80 percent of people approached by someone trying to sell them investments “fail to check the credentials of the financial professionals who are calling them.”

“Some people just put letters after their name and they don’t mean anything. Or they took a half-day course instead of studying for three years and having to pass a mountain of exams,” said Johnson. There are online databases for checking those professional designations.

About one-fourth of seniors have attended at least one investment seminar in the last three years, and a third of those “were contacted after the seminar about buying investment products, and many felt pressured to invest,” said Johnson.

She mentioned the notoriety of “pump-and-dump” schemes that have burned a lot of people. The SEC website says pump-and-dump involves touting a stock (typically, microcap companies) through false and misleading statements. After pumping up the stock, the fraudsters make huge profits by selling or “dumping” their shares on the market, where the gullible buy them — soon to be left with stock plummeting in price. It is a scheme that often involves the Internet, with readers urged to buy immediately before the price goes down.

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