Host and managing editor Betsy Karetnick accompanied Arthur Levitt, the recently retired Securities & Exchange Commission Chairman, on a visit to the home of Elaine Florio, Director of the Columbus Citizens Foundation in New York City. Florio is a viewer of THAT MONEY SHOW who was chosen, after an exhaustive search, to be the sole student in Arthur Levitt's Master Class. Levitt instructed Florio in how to evaluate investments (and investment advisors) and how to structure a portfolio.
Levitt, who led the SEC charge against Internet stock fraud during his eight years at the head of the federal agency responsible for policing Wall Street, was a top retail stock broker and later chairman of the American Stock Exchange before entering public service. Levitt is also well known as a champion of individual investors -- and for passing Regulation Fair Disclosure -- requiring companies on the stock exchange to disseminate financial information publicly, and not just to specific analysts at brokerages.
Elaine Florio is a fledgling investor who holds several mutual fuunds and, in the last year, has started selecting a few individual stocks. To get this class started, Betsy Karetnick probed Elaine as to what one thing she would most like to ask Levitt. Following is an excerpt of their discussion:
FLORIO: I would like to learn how to research stocks on my own. Cutting right to the chase, what's happening (in the markets) today?
LEVITT: That's a great question. The first way I'd approach this, if I were you, is ask yourself what kind of investor you are. Are you an investor that's interested in growth, which involves some risk? Or are you an investor that worries about where the stock is that you've purchased, in which case you want Security and income? And a frequent mistake made by investors is they don't understand their own tolerance for risk.
FLORIO: I'm willing to take risk. I'm comfortable with putting it aside and not worrying about it.
THAT MONEY SHOW's host and managing editor Betsy Karetnick cut into the conversation, asking Levitt, "Now the next step, of course, since we have you, is, How to figure out which stock?"
LEVITT: Well, there are some tools out there that many investors don't know about that can be very helpful to you. The SEC has a Web site, http://www.sec.gov, and on that Web site there's something called the EDGAR Section. You can pull up reports on any of the companies that you're interested in. There's a 10-K report, then there's the 10-Q, a company's quarterly financial statement, and the 8-K, documenting unusual company incidents. I'd also suggest looking at a company's annual report. Reading the local media, THE WALL STREET JOURNAL, BARRONS, FORBES -- any one of a number of publications that are out there, to give you ideas.
In her hour with Arthur Levitt, Elaine was surprised to find out that, had she done her homework, she would have learned that Xerox, a stock she currently holds, is being investigated by the SEC for accounting irregularities.
LEVITT: Now, you purchased Xerox at $28 (per share) and it's now selling for $9. What does your broker say about that? Why is it selling for $9?
FLORIO: I don't think I asked him why it was selling for $9. But recently when I spoke to him to ask him about some other stocks, I said to him, "What happened, and what should I do?" He basically said, "Hold, hold tight."
LEVITT: But why hold tight? The question to ask him then is, "You know, if I came to you today with the same amount of money, would Xerox be the place you'd want me to put it?" If the answer is yes, okay. If the answer is no, sell it.
One of the most common mistakes that I've seen customers make is hoping the market will come back. And I know your feeling; if you get back to the level that you got in, you'd probably sell the day it gets to that point. But you've lost the money already. It's gone. Market judgement is a question of selecting alternatives, determining what your risk tolerance is, and having asset allocation. In other words, not everything in a high-risk, high-growth stock; not everything, for someone of your age, in a low-growth, low-risk stock, but a balanced portfolio. But the key to all of this is asking the question, "Why?"
Why this mutual fund? Why that stock? Why not that bond? Should I hold? Should I sell? Whose interests are being served by this decision? Yours? Your funds? Or mine? You're vulnerable. Like all investors, if you're not an informed investor, you're a naked investor. You're placing yourself at the mercy of someone else who will control your financial destiny. And you're too smart for that.
FLORIO: I don't want that. Definitely not.
LEVITT: So I'm just trying to give you some clues -- a few things to look for. Do you know how your investments did for the last year versus how the market as a whole did? The legitimate question to ask your broker is, "Are you giving me the best rates offered by your firm?" And if not, "What would I have to do to get those rates?" And then you have to ask yourself, "Could I get a lower rate by going to a discount broker if I am prepared to do my own homework?" As we are talking, your stocks are working for you or against you. And you must make the basic judgement, "If I had the money in hand today, would I buy Xerox? Would I buy Fidelity Fund?" If the answer is "No," sell it. You should be an intellectual investor, not an emotional investor. Your investments should be made on your own analysis.
Some tips from Arthur Levitt:
- KNOW YOUR RISK TOLERANCE
"A frequent mistake made by investors is they don't understand their own tolerance for risk," Levitt says.
- DO YOUR HOMEWORK
"The Securities and Exchange Commission has a web site, http://www.sec.gov, and on that web site there's something called the EDGAR section ... You can pull up reports on any of the companies that you're interested in." Those reports include:
- 10-K -- "Really the most revealing ... it gives the history of the company ... prospects ... competition";
- 10-Q -- A quarterly financial statement;
- 8-K -- "Unusual incidents [which] would be useful to glance at to pick up warning signs."
- CHOOSE THE RIGHT BROKER
"Under no circumstances would you pick an advisor that you haven't sat down with, looked in the eye, and said, 'What's in this for you? What's in this for me? How do I know that your interest and mine coincide?'"
- ASK YOUR FINANCIAL ADVISOR QUESTIONS
"The mistake that most investors make is that they don't question what comes to them. ... If you're not an informed investor, you're a naked investor," says Levitt.
- KNOW HOW YOUR BROKER IS PAID
Levitt prefers a fixed fee to the traditional commission-on-trade structure. "I was a commissioned broker," he says. "But I can tell you that my customers and all customers would be better served by a fee structure."
- BEWARE OF TOO MANY PRESS RELEASES
"A company that absolutely peppers you with press releases and pro forma earnings -- what are they pushing? What are they trying to hide? I'd be careful of that."
- CHANGING AUDITORS
"That's a danger sign. If a company has changed auditors, why have they changed auditors? See whether the auditor has given them a qualified audit."