Be smart about bear and bull cycles, David Scranton's book advises
Westbrook financial adviser David J. Scranton tells the tale of a colleague whose company encouraged him to take out a crystal ball as a sales tool when meeting with clients, put it on the table and declare it broken before plastering on a big smile and declaring "nobody can predict the market."
Scranton, who has spent the past decade or so preaching the gospel of conservative investing and just published a book titled "Financial Insanity," says nothing could be further from the truth.
It's true that no one can predict intermittent market cycles or the performance of a single stock, he said, but larger so-called secular bull and bear markets are easy to spot, running from 15 to 20 years and corresponding largely with people overvaluing or undervaluing firms based on the ratio between stock prices and companies' earnings per share.
"There's still a lot of life to it," Scranton said of the market downturn. "We probably have 10 years to go."
Price-to-earnings ratios are in the mid-teens on major stock exchanges, versus the 30s and 40s seen at the height of the bull market. But ratios will have to be reduced to single digits before a full market recovery is justified, he said.
In the meantime, Scranton is happy to stay on the risky-investment sidelines, eschewing equities in favor of more conservative financial instruments, such as corporate bonds and preferred stocks that feature tantalizing dividends. And it's paid off - for him and his clients - during one of the worst periods in history for the stock market, when the average investment has lost money (not accounting for dividends) in the past dozen years.
The idea, he said, is basically to tread water during down market cycles, taking modest gains, before jumping back into riskier stocks once the "blood on the streets" has subsided.
"Back in the 1990s, when I started talking about this, people thought I was insane," Scranton said.
But Scranton's idea of "making money the old-fashioned way" has since gained a gaggle of adherents, and he claims to have signed on more than 100 financial professionals to attend educational seminars in Fort Lauderdale, Fla., where he teaches them how to implement his business model. Members of what he calls the Advisors' Academy get a tutorial on conservative financial instruments that provide relatively safe, predictable gains of 4 to 7 percent year after year.
"Building a smart financial plan that works year after year is a lot like building that championship sports franchise," Scranton said in his book. "Know when to reach for the stars but make sure you always ... protect your downside, because if the base erodes, it takes a long time to rebuild."
Scranton said he wrote his book out of frustration that his message hasn't reached enough investors.
Many people continue to invest with blinders on, he said, unaware that Wall Street's business model encourages brokers to be overly optimistic to increase the bottom line of their companies at the expense of their clients.
Advisers aren't purposely deceiving clients, he said, but are simply following the lead of companies that have an inherent conflict of interest, because their leaders' priority is enhancing shareholder value rather than improving the fortunes of their clients.
Scranton said advisers at big Wall Street firms like to focus on shorter cycles that allow them to drink the Kool-Aid of sell-sell-sell that enhances their companies' bottom lines. Such short-sighted optimism, however, doesn't account for the larger secular movement of prices heading largely in a downward direction, he said.
Rather than look at the market as a 12-year loss, these advisers focus on the past three years, which have been relatively good, he said.
Applying what he likes to think of as a more common-sense approach, Scranton said he prefers throwing Wall Street rules of thumb out the window, such as the idea that "buy and hold" is a good idea, even when markets are under performing. Holding onto a losing stock for 12 years doesn't make sense to Scranton, when investments can make money safely over the same period.
Similarly, Scranton dislikes the "Rule of 100" that encourages people to keep a certain percentage of investments in stock depending on their age. The idea is to subtract one's age from 100 to determine the percentage of their assets that should be invested in risky equities, so a 55-year-old should be investing 45 percent of his savings in stocks.
"I don't like putting clients in a box," he said. "Forget about the boxes."
Anyone saving for retirement now should think first about safety, he said, because losing 50 percent of your investment in the next few years will require a 100 percent increase in value just to break even. He wouldn't put a huge chunk of 401k money into the stock market now, even if a client was 30 years old.
"Even a 30-year-old doesn't want zero growth for 10 years," he said. "Save as much as you can as early as you can, and try to stay away from debt."
WHAT: "Financial Insanity: How to Keep Wall Street's Cancer from Spreading to Your Portfolio"
AUTHOR: David J. Scranton, in collaboration with M.G. Crisci