Would you like to cut through all the Wall Street bull and know the right way to invest your money? There’s so many people out there telling you they know what’s best, from the financial media to whoever’s playing on the hot trend of the moment. But who really has it right?
Leland Faust is an author, speaker and a triathlete–and he's also the founder of CSI Capital Management, where he used to supervise over 1.5 billion in assets for 30 years. He's been named a Barron's Top 100 Mutual Fund Manager, and was more recently named as a Top 100 Independent Investment Advisor. His new book is A Capitalist's Lament, which unmasks the Wall Street firms as entities that mislead us, overcharge us, and often expose us to too much risk. I really encourage anyone who's interested in not just their own money but literally the future of America to read this book.
I recently interviewed Leland Faust to get his advice on how to invest smartly. (The transcript below has been edited lightly for space and clarity.)
Kevin Kruse: To stay on top of my money, should I be watching CNBC in the morning and Jim Cramer at night?
Leland Faust: Absolutely not. The people who you really would want to listen to aren't on TV because they refuse to be involved in the hype. The people there don't have any particular benefit to provide you. There they are for ratings, and to sell our services or to sell our advertising. I know it sounds difficult to understand, but their suggestions have proven over and over again not to be helpful when you just compare them to the indexes.
Kramer is a great example. For a number of years, he was promoting the former baseball player Lenny Dykstra as one of the best financial people in America. This was just, to me, absurd. Dykstra was a baseball player who admitted in an interview that he never read anything because he was worried about his eyesight. Kramer claimed Dykstra was one of the best in Wall Street; then, Dykstra himself went bankrupt a couple years later.
That's kind of an extreme case, but you still get that everywhere. Hedge fund managers make literally a billion a year, get on and name their 2 favorite stocks, and then they tank. It's just a matter of nobody checking up on them–so they can get away with this.
My advice, sort of funny but I'm also being serious. Watch the comedy channel, not the financial media. It's more entertaining and it will save you money.
Kruse: What about all the stock tips I get from friends and colleagues?
Faust: When the market's up people are more interested, for obvious reasons. But again, the touts have been proven over and over again not to work in the long run. If it were so easy, everybody would do it. The knowledge is out there. There's no proprietary knowledge. There's not somebody who says, “Well, I know something of everybody else's.” Anybody that says that, run for the exit. It’s reasonably clear that all these exotic type investments are either gambling that doesn't work in the long run or sometimes they're trends that were there for a while and as soon as they change, it's not good and prior record unfortunately doesn't mean anything.
Twice, a mutual fund manager was named the Manager of the Decade in the 1990s. Well, the next 5 years, his mutual fund literally was 857 out of 858 funds. What does that tell you? What worked in one time period didn't work in another and he couldn't adjust. Or you get a hedge fund guy who one year beats the market and makes literally a billion dollars and the next year his fund goes down 47%.
Kruse: Let's say I'm a young professional just starting out in my career and saving 10% of my income? Where should I be saving that money?
Faust: Something like that, I would certainly want to have it in a very small group of index funds. You're not going to beat the market by trying to get somebody who you could outperform and you want the safety of the diversification.
You might want to pick just 3 or 4 index funds and including–strange but true, even for young people–part of your money in a low risk bond fund and then part in a stock fund or 2. And leave it at that when you're starting out. It's very unappealing for cocktail party conversation but it's really the way to go, and it's going to outperform most things over time.
You want to be safe, you want to be diversified, you want to be in high quality investments and let your nest egg grow that way.
Kruse: What if I’ve got some assets built up, and it's time to find a financial advisor, how do I know if I've got a good one?
Faust: Well, that's certainly a very difficult question. There are certain things that you can do to largely increase the chances of that.
The first thing–and I think this is absolutely key–is that you only want to be working with a so called fiduciary. That's a legal term, but fiduciary means someone who by law is required to put your interests first. It's client first, no excuses. There's no conflicts of interests, et cetera.
How do you find out if they're a fiduciary? You ask them–and you get them to put it in writing. Just a simple one-sentence letter. I am a fiduciary, and they sign it. If they won't, then it's time to go elsewhere. You don't want to be dealing with the brokerage community and salesmen. I know that every broker is not necessarily a bad person, I'm not saying that. But they have a conflict of interest and you just don't want that.
The second thing I would tell people is look to see if someone tells you they know what's going to happen as opposed to they have a thought. You want someone who has a balanced approach. Yes, times are good and therefore we think the market may go up and here's why, but we're a little bit concerned about that. That's the kind of advice you want to get, or the person you want to get advice from. Not “The market is going up, we know it,” or, “This sector is going up, we know it.” Because nobody knows that. Strange but true, you want somebody who's less sure about the future, not more.
The third thing is, you want people, in my view, who only use the old fashioned investments. Stocks, bonds, real estate investment trusts, mutual funds that have those things. You don't want to be involved in short selling and options and derivatives in hedge funds. Those kinds of things.
Kruse: You're saying that a lot of planners or advisors out there, if they’re not actually fiduciaries, they don’t actually work for you. Who do they work for?
Faust: Well, they work for the firms that employ them and themselves. They can sell you a higher cost product. It's perfectly legal for them to do that. Yeah, you don't want someone who's selling you a mutual fund that's going to cost you 5% to get into or has a disguised 5% load that you pay in installments over time. Things like that. You think you're getting something that doesn't have any commission, and it does.
I don't care how good your intentions are, if you make your living by selling products with commissions, what are you going to do? I mean, so it's not necessarily these are bad people, but they're in a bad system. Yes, they may say they're a financial planner. They may say they're an advisor, but are they getting paid for the specific investment that they put you into? If the answer to that is yes, then you don't want to have them advising you, because they can't exercise good judgement.
Kruse: When it comes to investing it there one specific thing you can suggest our listeners do today?
Faust: I would say make sure that you are investing and not gambling, and I have to define the difference here. Investing, you want to own a proverbial piece of the rock. Gambling means you're just betting with somebody else. Whatever you win, he loses or vice versa. In an investment situation, both parties should get what they want.
The gambling is what I would certainly stay away from. Don't do short sales. Don't do options. Make sure you don’t do hedge funds. Don't do derivatives. You want to be investing, because that's what pays off in the long term.
Click here to listen to the full interview with Leland Faust.