Today we're talking with Patrick Pappano, author of Owning Main Street: A Beginner’s Guide to the Stock Market
FQ: I wonder if you can tell readers a bit about the personal transformation you made from going from sales engineer to the financial community? What was it that affected you to the point where you felt the need to expand the financial knowledge of the layman and write this book?
PAPPANO: In engineering sales, it is all about doing good with the right product – the product is the key. In financial services, I soon learned that there is no product, just a well-rehearsed “value proposition” designed to inspire confidence in prospects with assets on which to charge fees if you can make them a client. This was a no-go for me. But gradually, I began to see an opening in the mist, where there is a product but one so simple that you didn’t need a professional, which is why Wall Street doesn’t talk about it – just invest in the iconic companies that are right out in plain sight. I had to tell all those people who were too small for Wall Street accounts that they could do it better themselves. This was the Wizard of Oz all over again.
FQ: Everyone asks, of course, about the economic crash we sustained back in 2008 and what advice for the future a financial professional would give to them? Can you comment on where you see the economy heading in the future? And what, if any particular item, you would stand behind in regards to people building their nest-eggs cautiously, yet successfully?
PAPPANO: If Chicken Little is right and the sky is falling, then we will need many people with scaffolding to keep the sky propped up. Those jobs haven’t materialized however because nobody believes the sky will be falling, so those jobs go missing. In the world of Wall Street it is believed however that the financial sky will be falling and we have an entire industry devoted to this fantasy. The global population of 7 billion people will have a requirement for goods and services that will continue indefinitely, it can’t be stopped. I challenge anybody to tell me how goods and services can be produced to meet global demand without economic activity. Even in war there is, if anything, increased economic activity. Economic activity is bedrock. Stock Market sentiment is vapor. My advice is to divert periodic savings to buy the individual common stocks that make up the Dow 30 and then go fishing or whatever floats your boat.
FQ: You comment in your Foreword that there are so many financial products that they have an almost dizzying effect on people. Most people get frustrated just filing taxes, so jumping into the buying and selling of financial products becomes even more difficult for them to imagine. Do you feel that an investment professional IS good for these purposes instead of walking down the Wall Street path with no support?
PAPPANO: Finding a truly helpful Financial Advisor is very difficult because they all work on commission and if they don’t sell something, they don’t get paid. This means little time to learn products and most time spent selling. Given this landscape, anything can happen from very good to well, very bad. My advice is to reduce expectations and remain very skeptical. It is unfortunate, but that is the way it is.
FQ: I have to commend you for saying that when you first began this career, you truly had no idea of the vast knowledge it would take to aide people with their financial success. Do you feel that being a layman and LISTENING to the people helped you more than any textbooks or on-the-job training you received?
PAPPANO: The brokers were generally short on product knowledge and long on sales techniques and also forecasting market moves for their clients; for example don’t buy on price rise alone, look for volume. But most brokers are voracious readers and it is in reading where most product knowledge comes from, hence the proliferation of “research-reports.”
FQ: The healthcare debate in this country is now at an all-time high. Is there any advice you could/would give to readers (small businesses) out there in regards to staying ahead of inflation by utilizing investments? As well as how they can best manage to sign-on for the national healthcare without losing employees, cutting back hours, etc., by using the investment world?
PAPPANO: There is a perception that there are “magic” formulas for portfolio management, a little of XYZ and some ABC, etc. I believe an optimal portfolio strategy will more or less mimic the S&P 500 Total Return index. The investing entity must keep a portion in cash and this will be a drag. But a portion in a mid and small cap index fund like (IWR) IShares Russel Midcap or (RSCO) SPDR Russell Small Cap will make up for the drag, producing an aggregate return close to the S&P 500 index. As soon as you get fancy and start moving away from the basics and into more esoteric companies or funds, chasing returns, then you get into trouble, like one good year followed by three bad ones. And remember, the S&P 500 is the aggregate return Wall Street got for their clients in spite of all the chatter. The S&P 500 is the mean of all returns.
FQ: With all the brokers being purchased over the last decade (i.e.; having A.G.E. taken over by Wachovia and then Wells Fargo; as well as Lynch becoming an asset of Bank of America), do you feel there is a certain investment company that earns an A+ for prospective investors? Or will they all end up becoming nothing more than a ‘limb’ of a banking institution?
PAPPANO: Financial Advisors are not employees but entrepreneurs using an investment company’s platform and identity for a fee based on assets under management. So having a good financial services experience is really down to having an effective individual advisor and the influence of the particular broker/dealer firm that individual is with has little to no effect. Performance is not watched at all, only fees. But there is a vigorous counter-lawsuit activity: mail, email and calls are screened.
FQ: A great many people debate about investing in mutual funds and bonds instead of heading straight to the stocks so they can basically hope for that one good ‘poker hand’ at the casino table. Do you feel that this book will allow them to better understand the concept that the tortoise CAN beat the hare, if they go the more moderate, slow route to making money?
PAPPANO: If you are invested in the stock market, you are afloat in a sea of risks, the biggest one being “company” risk, over let’s say country risk, sector risk, currency risk, inflation risk, etc. If you are invested in two stocks instead of one, you have reduced company risk by 50%. Investing in twenty stocks reduces company risk to 5% each position. So if a company goes out, you are off 5% from the aggregate return of the other nineteen. This is tolerable. Most mutual funds have well over 100 positions and the S&P 500 index has 500 positions. Even someone who has never had a stock market account can look at a list of 100 or 500 stocks and pick out twenty that are just more prominent companies because they are better companies. Those twenty stocks will outperform the S&P 500 because the S&P 500 is a mean value of 500 stocks, 250 of which lagged overall performance. When you buy a fund of 100 or 500 positions you are muting returns for a level of risk management that is not needed – it is not only belt & suspenders, it is also refraining from the activity that prompted the belt & suspenders in the first place. But, mutual funds are the default investment vehicle for most Americans. A better result may be obtained by investing in 20 or so discrete common stocks of the most prominent S&P 500 members: Exxon-Mobil, Procter & Gamble, Johnson&Johnson, Intel, etc.