In last week’s column I referred to a computer glitch that led to incorrect pricing on a widely held investment, and the potential for investors to react too swiftly without properly evaluating the situation. After feedback from some readers I decided to give more details on what actually happened, as the cause of the glitch brings up a concern investors should be aware of.
Occasionally, investors may receive solicitations from individuals who are interested in buying one of their investments. Just as you might receive a letter in the mail offering to buy your house for cash, you may also receive offers to buy items held in your investment portfolio. Although most people are naturally suspicious of unsolicited cash offers for their home, there is nothing illegal or inherently wrong with a legitimate offer to buy something that you own. Each party is free to negotiate a deal or walk away.
When similar types of offers are made to investors, great care should be taken to evaluate them. Some offers may be in the best interests of the investor while others may include an offer price well below what the investment is actually worth. The latter usually comes on very official looking letterhead and sometimes they are confused as having come from a known or trusted source. It may also include a negative portrayal of the investment to encourage acceptance of the offer.
Though unsolicited buyout offers for various investments are common, and can be a legitimate business tool, they sadly may also be an attempt to take advantage of an unsuspecting investor. In cases where the offer is below, or far below current market value, the offeror may simply be fishing for someone who might accept or sign the offer without properly reviewing it.
The computer glitch of which I spoke last week occurred when an individual somewhere accepted such an offer at a price far below the then current asset value of the investment. A computer picked up the transaction and assumed the price had dropped dramatically and thus changed the price across the board. There was a moment of panic I am sure, until it was realized what had happened and the price was corrected.
The world is full of people who would love to separate you from your money. Sometimes they use outright fraud and at other times they hide among legitimate business practices to avoid detection. Sending you an offer in the mail to buy one of your investments at below market value may be deceptive but if done according to regulations, it is completely legal. For your own protection you should thoroughly research any offer and never sign anything until you are satisfied it is in your best interests. If you have a financial advisor, always speak to them directly before signing anything, even if it appears to have come from them.
This week a computer glitch at another national firm resulted in an incorrectly low price on a largely held investment. The first reaction by many could have been to panic. I asked my office to get on the phone and do some old fashioned research before jumping to any decisions. We determined the price change was without merit and so we waited patiently until the word came back that it was a computer error. Afterwards we talked about how simple computer errors like this could be disastrous to investors if they have become wholly dependent on computers.
I recently completed my annually required flight training. With modern technology, flying an airplane is not particular difficult after you get the hang of it, consequently much of our training centers around what to do when the computers fail.
My flight instructor had me put on a hood to prevent me from seeing outside the airplane, then he initiated a full electrical failure. I had no instruments left except a compass, an attitude indicator and an altimeter. Then he told me to land at the Albuquerque airport. I had no way of knowing where I was or where I was going, and I was having to maintain the plane in steady flight without all my wonderful technology. I was able to land safely by having Air Traffic Control give me carefull verbal instructions to the end of the runway while tracking me on radar.
Investors have almost unlimited tools today. The apps with their allocation algorithms seem to be endless. Many investors and even advisors have subsequently turned much of their decision making over to technology. This has been a wonderful benefit to investors just as so-called glass panels have been great for pilots. But if investors are no longer able to make decisions without these tools, then I feel they are just as much at risk as a pilot who cannot fly without a computer.
I had a grandpa who was a very successful investor. He had a book of stocks that was mailed to him every month and most of his research was done with that little book. Every time I visited he would pull out that book and we would talk about different companies and how to value them. He died before computers and cell phones yet he was better at investing than most people I know today.
Every pilot knows that technology sometimes fails. It fails in the investing world as well. Being unprepared to take over when it fails, or being unable to determine if it is working correctly in the first place, puts an investor at risk.
Many investment accounts are becoming automated. If you are not staying current in your personal investing skills, computer glitches like the one that happened this week could wreak havoc on your portfolio. Like a good pilot, always be prepared, or make sure you have an advisor who is prepared, to take over lest a computer crash result in a personal crash that could be much worse.
The ancient and wise king Solomon famously lamented that there is nothing new under the sun. Obviously he never owned a cell phone. In our modern world we have become obsessed with that which is new.
Recently I was reviewing some of the modern airplane technologies and found myself dreaming about how I would love to have some of the new gear. After spending about 20 minutes lost in my dreams of a better system, I remembered that the current technology in my airplane was installed a mere 4 years ago, and at the time it was “state of the art.” Yet here I was dreaming of replacing it with the next new thing. The truth is, the new tech was not substantially different from what I already had, but it was a bit prettier.
We seem to face the same emotional challenge with our cell phones, or other gadgets. As soon as the next version is announced with all of its “gotta have” new features, suddenly whatever we currently own no longer satisfies our needs. How many teens have last year’s dream game console sitting in a pile with all the prior years’ models? How many boxes of functioning cell phones sit in our closets? Constant technological advancements have made us a wasteful society.
I visited with a friend who sells real estate and he commented how modern home buyers are so much different than ones of the past he used to work with. “Everyone now wants a new home,” he said.
Oddly this same behavior is exhibited by some investors. Some fail to recognize that “new” or “different” does not always mean better, yet we have become a bit of a disposable society and this expensive attitude has crept into many areas of our lives.
In a twist on this topic an older couple was in my office when the husband’s phone rang. He promptly pulled out his cellular flip phone and silenced the call. Judging my thoughts by the grin on my face the man said, “Hey, it’s a phone and it works.” This experience got me thinking about the level of waste we have become accustomed to.
I am not suggesting we shouldn’t enjoy nice new things, but am more reflecting on whether this tendency has gotten a little out of control. People come to a financial advisor largely for help with investing. In short, they want to protect and increase their wealth. It doesn’t take long for an advisor to learn that making a lot of money does no good if basic principles of resource management are not understood and practiced. Too many fail to recognize that one of the first and fastest steps to increasing your personal wealth is to reduce your level of personal waste; to manage better what you already have. Only then will we have the wisdom to determine if that “new thing under the sun” is something we need to spend our resources on.
I sat on my porch one day and looked over at the lights and noticed they were covered in spider webs. I grumbled to myself about those dumb spiders and how I would need to clean those webs off yet again. Then I promptly forgot about it.
A few nights later I was sitting on my porch looking out at the beautiful city and noticed the normal activity of bugs swirling around the porch lights. Suddenly a light went on in my own head, as I came to two realizations. The spiders were certainly not dumb at all. Even though lights are not part of their natural habitat, they had learned that they did a great job of attracting dinner. The second thing I learned was that nature had not been so kind to the insects who, after almost 200 years have still not learned that flying into lightbulbs rarely ends well for them. This brought me to the very unscientific conclusion that spiders are much smarter than insects.
I considered, from an investor point of view, what are some of the lightbulbs out there that might attract investors and that could be used by ill-meaning financial spiders to trap their next victim? Immediately I remembered a comment a client had just made to me. “Dan, we seniors love free food.” And so it is that free food does a great job of attracting retirees. There is nothing inherently wrong with offering food as a legitimate advertising tool, but investors would be wise to be aware of the potential for spiders to be spinning webs in the vicinity of any free meal.
Clubs and other affinity organizations attract a lot of good people, and successful people, but are also known to be places where financial spiders may hang out. They act like a part of the group, appearing to have honorable intentions, while quietly spinning webs to trap unsuspecting victims. It is sad but true that many frauds are perpetrated by those who have worked themselves in to a position of trust.
The next thing that came to mind oddly was church, of all places. Many good people are attracted to church and they view themselves, and others who attend, as being honorable and trustworthy. This natural sense of trust has occasionally also attracted a few spiders. I say this carefully so as not to offend, but it is well known that ill-meaning people sometimes take advantage of the inherent trust that exists among church members.
If you read the regular fraud reports from the State Division of Securities you will find that after all these years of investor education, the financial spiders continue to attract victims to their webs. Let’s learn a lesson from real spiders and always be on the lookout for their creepy financial counterparts. There is nothing wrong with going towards the light, but anything good that attracts people can also be used by unscrupulous spiders who are just looking for their next meal.
Launa and I recently watched an old movie classic, Frequency. In this movie the main player finds a way to communicate with his friend who is living 30 years earlier. Among the advice he gives his friend of the past is to remember one word, “Yahoo.” The friend is confused but as the movie ends, this same friend has become very wealthy and is shown driving a car whose license plate reads “I Yahoo.” Of course the irony of the movie was that just as it was being released in early 2000, Yahoo’s high flying stock was crashing down with the dot.com bubble collapse. Too bad the guy from the future didn’t alert his friend of when to sell.
When you consider the great stock disasters of the past, names like Worldcom, Enron, Lehman Brothers and Washington Mutual come to mind. We make fun of these companies today, but often forget that each was once an icon in their field. Worldcom was a huge success until antitrust law investigations exposed one of the biggest corporate frauds in history. Lehman Brothers was respected and considered by some too big to fail, just before their demise brought the financial world to its knees. Washington Mutual became the biggest bank failure in history after being one of the nation’s most successful banks. And finally Enron, the iconic symbol of corruption and failure, was named by Fortune magazine, not once but several times, "America's most innovative company.”
So what company do you own in your portfolio that you feel is too big to fail? Could such a company even exist? One mistake investors make is to own too much of a single company. This can be especially true if you own a significant amount of stock in the company you get your paycheck or your pension from. One of the great tragedies of the Enron failure was that so many of its employees and pensioners had large portions of their retirement also tied up in the company stock. I run into this same situation with retirees quite regularly, which can result in the classic case of having too many eggs in one basket, and experience teaches us that there is no one corporate basket too big to fail.
As we study stock market history we find many examples of failures of once great companies. These should remind us that no matter how good it may look today, be very cautious about having too much of your retirement dependent upon a single company. Remember that historic corporate failures usually became historic because the thought of failure was so out of the question at the time.
Look at your portfolio and carefully consider every position. Ask yourself a simple question. What would happen to me if this single company were to fail? If the answer to that question scares you, I would consider reducing the position regardless of how much I loved the company.
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
Member www.finra.org / www.sipc.org , a Registered Investment Advisor. Wyson Financial, 375 E Riverside Dr, St. George, UT 84790
This communication is strictly intended for individuals residing in the states of AZ,CA,CO,DC,FL,ID,IL,KS,KY,MA,MI,MN,MO,MT,NE,NM,NV,OH,OR,PA,SD,TN,TX,UT,VA,WA,WY. No offers may be made or accepted from any resident outside these states due to various state regulations and registration requirements regarding investment products and services.