An excellent investment advisor produces far greater profits and lower drawdowns than an average investment advisor. Average investment advisors rely on service, counseling and handholding to keep clients happy. The smart ones seek better advisors. The “services” average advisors provide are not worth even a fraction as much as the additional wealth an excellent advisor produces for his clients.
An advisor’s lasting value to a client is the degree that he reliably protects and grows a client’s wealth.
Average Investment Advisors vs Excellent Investment Advisors
There are substantial differences between average advisors and excellent advisors:
- Average advisors accept and regard investment losses, even very large losses, as a natural and inevitable part of investing.
Excellent advisors view serious losses as a significant impediment to both their and their clients’ goals and strive to mitigate the risks of loss with the most reliable technology available. - Average advisors do not see themselves as the root cause of the losses. They blame the market, unanticipated economic or political events or even bad luck for the losses.
Excellent advisors believe losses stem from their own professional inadequacies. They assiduously and diligently strive for professional-improvement. - Average advisors are more driven by self-interest than by their legal and moral responsibility to safeguard their clients’ assets against large losses.
Excellent advisors believe their fiduciary duty is to protect their clients’ assets, not merely invest them. - Average advisors are satisfied with producing average investment results.
Excellent advisors are driven to outperform all other advisors. They strive to produce gains similar to James Simons, Ph.D., whose Medallion Fund delivered annual returns of over 60% for over 30 years without a single down year. They believe second place is just the highest-ranked loser. - When clients fire average advisors for losing too much of their money, they don’t change their methods of investing. They just get new clients.
Excellent advisors use their record of stellar investment performance to both attract new clients and retain their existing clients. - Average advisors rely on their “professional experience and judgement” to select stocks for their clients. They rely on Wall Street’s largest firms for their investment ideas.
Excellent advisors use the most reliable, advanced technology to quantify the statistical probability and magnitude of stocks’ future price movements. They use data science to remove all bias from their investment decision making. - Average advisors completely ignore fundamental risks as well as valuation and market risks. Their only definition of risk is beta, i.e., price volatility.
Excellent advisors define risk as the difference between what you pay for a stock and its minimum value. (More on this in a future article) - Average advisors believe that investors should be fully invested in Wall Street products at all times. They are willing to invest all their clients’ capital at the worst possible times. They invest indiscriminately, ignoring risks.
Excellent investors measure both market risk and stock risk to avoid investing the majority of their clients’ capital at the worst possible times, when the market is most overvalued. They believe they can assess market risk rationally and reliably. Prudent investors, with a higher priority on safeguarding capital, would rather miss current opportunities, with long term goal of buying when stocks are most favorably priced, after major declines. - Average advisors’ core value proposition is performing as well as the S&P 500 index. They never mention their duty or their ability to avoid substantial losses.
Excellent advisors are unconcerned about the performance of the index and are completely focused on capital growth and preservation through a complete market cycle. - Average advisors subscribe to Morningstar, Standard and Poor’s, Bloomberg and rely on reports and recommendations from the largest investment banks.
Excellent advisors use data exclusively derived from corporate filings with the Securities Exchange Commission. - Average advisors are anxious to expound on their asset allocation and diversification strategies and share their “insights” and opinions on the meaning of current macro-economic and political stories in the media. These stories serve as effective smokescreens and substitutes for more relevant and substantive discussions on the methods they use to attempt to select stocks that rise meaningfully. Ask an average advisor for their investment performance statistics, or those of their primary investment research sources.
Excellent advisors regard discussions of current events as largely irrelevant. They instead focus on evaluating data, research and studies on subjects that are critical to investment performance. - Average advisors do not have reliable methods to determine when to sell a security. Ask them what changes in the income statement, balance sheet or statement of cash flows would prompt them to sell your shares of NVIDIA, Microsoft, or any of their largest mutual fund or ETF holdings.
Excellent advisors seek to invest in companies with 5+ year track records of building financial durability and tangible shareholder wealth. They review computer-generated reports daily to identify weaknesses in their current holdings and superior stocks to replace them. - Average advisors do not consistently read the quarterly financial statements of the companies their clients own, believing it to be impossible. They re-evaluate their holdings only sporadically, relying on news articles and the “Buy and Hold” mantra to cover their butts. Imagine doctors telling their patients, “You seem fine; your X-rays don’t matter.” Financial statements are like X-rays of the financial health of a company.
Excellent advisors rely on advanced computer systems to identify and quantitatively evaluate any changes in a company’s financial health and adjust their investment strategies accordingly. They know all newly-published financial statements must be evaluated as quickly as possible because some changes require immediate action to protect capital. By staying on top of this important due diligence, they are never caught by surprise by unfavorable news. Knowledge is power. Investment success requires both knowledge and action. - Average advisors should never be trusted. Their goal is to keep your capital fully invested, regardless of risks, so they can collect their fees with a minimum of work. They cannot explain any details of their stock selections’ financial history.
Excellent advisors understand that trust must be earned by acting as a trustworthy steward. They keep extensive records of their investment performance and can share documentation explaining the reasoning behind any of their decisions. Excellent advisors are happy to share their methods for reducing, avoiding and preventing losses, which is the foundation of investment excellence.
An excellent investment advisor can explain precisely why stock prices rise, fall or stagnate:
NVIDIA – Select Financial Metrics – 4/1/00 to 4/3/12
| Date | Price | Revenue | Net Income |
| 4/1/2000 | $3.52 | $374 million | $41 million |
| 4/3/2012 | $3.77 | $4.0 billion | $581 million |
| Change | +7% | +968% | +1,317% |
NVIDIA – Select Financial Metrics – 4/3/12 to 3/24/24
| Date | Price | Revenue | Net Income |
| 4/3/2012 | $3.77 | $4.0 billion | $581 million |
| 3/24/2024 | $950.02 | $60.9 billion | $29.8 billion |
| Change | +25,099% | +1,424% | +5,021% |
The above tables depict NVIDIA’s price, revenues and net income during each of two separate 12-year periods. In both periods, NVIDIA’s revenues and net income both rose significantly. But from 2000 to 2012, its price only increased 7%, while from 2012 to 2024 its price grew 250 times higher.
Investors who bought and held NVIDIA from 2012 to 2024 would have been thrilled with the stock’s performance. But investors who bought and held NVIDIA from 2000 to 2012 would have been very disappointed. Excellent investment advisors understand the difference between the two periods and can explain why investors in 2012 did so much better than those in 2000.
Since we know that the greatest investor in history, James Simons, Ph.D., produced 66% on average for 30+ years without a single loss, we now know it’s possible. This is inspiring. We have no doubt that someone will break his record. We are working on it!
If you are a fiduciary or a registered investment advisor and you seek to become an exceptional investment advisor, call us.
For more information, call Ray.
(203) 254-0000