A Must-Read for Investors and Their Lawyers: Book Explains What to Expect, And What Not to Expect, From Financial Advisers

here are many guides to personal investing, but one in particular stands out. Not that the book contains new theories or offers sophisticated insights, because it does not. And the book is not new. The revised edition was written in 1998. But, in my view, this makes it even more helpful.

The book is a must-read for two reasons. First, readers learn what financial advisers should be doing, and, equally (if not more) important, what financial advisers should not be doing. Investors want to know; and lawyers considering the representation of an investor in securities arbitration want to know it too.

The second reason that this book is a must-read is because its author, Robert Gardiner, is a former chairman and CEO of Dean Witter. In fact, the book is entitled, "The Morgan Stanley Dean Witter Guide To Personal Investing," and the author acknowledges the assistance of numerous Morgan Stanley Dean Witter employees. So any investor (and his or her lawyer) who has or has had an account with Morgan Stanley Dean Witter (now known simply as Morgan Stanley) would be well served to read the book.

What lessons does the book teach? The most important are set forth below.

Role of the Adviser

The book sets forth the role of the financial adviser as being more than someone who merely executes trades in an arms-length business relationship. That is, Gardiner encourages investors to trust a financial adviser and his or her professional advice: "You use a lawyer and an accountant when you need one; you see dentists and doctors rather than treating your own ailments. So why go it alone on investments?"

Gardiner writes that investment advisers will "advise you on selecting and managing a portfolio of investments." He opines: "I am a firm believer in having a trusted broker to serve as an investment adviser as well as to execute investment orders."

Finally, the book suggests that investors find a broker who will monitor their investments. Gardiner says, "He or she needs to review them periodically for continued suitability, instead of just selling you something and disappearing from your life forever."

The Technology Stock Bubble

I found the author's comments on the tech bubble to be very interesting, realizing that so many investors (with accounts at Morgan Stanley Dean Witter and elsewhere) were so heavily invested in technology during the bubble. Gardiner cites an example of a stock, Apple, which had a price to earnings ratio of 150, reflecting a price that was "definitely inflated." He explains that the unreasonable price was due to the fact that investors had climbed on the bandwagon to pay unreasonable prices for stocks that are "fads" and "darlings of the moment." However, he observes: "Ultimately, people figure out that the Emperor is naked, and the boom collapses."

Buy and Hold Philosophy

Short term, active trading definitely is discouraged in The Morgan Stanley Guide to Personal Investing. Gardiner states it succinctly: "Whether you select stocks or a mutual fund, you should be buying securities that you intend to own for a long time."

Indeed, with mutual funds, the book advises investors to evaluate them on the basis of "three years of performance figures at a minimum." With stocks, investors are cautioned "to resist the urge to think too much about the stocks and to trade them, selling them when the market is high and buying them when the market is low." Gardiner believes that "if you start playing those games, you will inevitably lose."

Avoid "High Risk" Strategies

Gardiner is candid in discussing what is "high risk." For example, he targets the use of margin, concluding that investors "had better be able to afford the financial risks associated with this technique."

Likewise, stocks that are "all potential," such as so many Internet stocks, are "inherently much more risky than others." Stocks that are "fallen angels," trading at all time lows due to hard times, may prosper but also may "never re-ascend." The book also cautions against attempting to buy stocks by predicting future events in the short run, such as buying shares of companies considered as possible objects of take-over attempts.

As for options and other derivative investments, Gardiner writes that while a major institution may benefit from them, they "should carry a label that says, 'Don't Try This at Home.'" Elaborating, he observes that: "Options are a terrific way to make money - as long as you're very good at predicting precisely which way particular stocks are going to move in the near future. And we all know how easy that is, right?"

Diversification, Asset Allocation, Monitoring and Rebalancing

Gardiner discusses these concepts with the introductory remark that "you don't just pick investments, you also have to manage them."

The book advises investors not to place all of their money in one stock or in one bond, which is common advice. Investors also are advised not to place all of their money in one asset class, such as in all stocks or in all bonds. A well-balanced portfolio should include both. Additionally, the initial asset allocation must be re-examined at "regular intervals" in order to rebalance as appropriate.

Gardiner emphasizes the need to monitor the performance of the account. There are no "one-decision" investments. To the contrary, Gardiner writes: "You and your broker should think carefully about what you want to invest in, and once you've made the investment, alas, you and your broker have to keep thinking about it: is this still the right investment, or is there another alternative that has become more attractive." That comment made me think about how many brokers did not reevaluate the suitability of technology stocks after the bubble began to burst in Spring, 2000.

In short, the book is a must-read for investors and their lawyers, as well as, I dare say, the many financial advisers at Morgan Stanley and elsewhere whose actions (and inactions) would indicate an unfamiliarity with its lessons.

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James J. Eccleston is a securities attorney, representing investors as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat, Filipowski & Eccleston, and can be reached at 312-621-4400.