How to Make a Mint With an Investment Mentor

If you don’t know the first thing about the stock market and how it works, be kind to yourself: Even Warren Buffett had to start somewhere. And if you’re up for trying a book he loves, read “The Intelligent Investor” by Benjamin Graham. First published in 1949, it’s the tome Buffett calls “the best book on investment ever written.” Hmmm: Spend about 13 bucks to buy it, become a billionaire. How’s that for a return on investment?

Then again, you could do what Buffett did, and sit at the feet of the master himself. While the Oracle of Omaha has countless disciples who watch the every move of his Berkshire Hathaway stock (BRK-A, BRK-B), he was in turn a Graham groupie. After reading “Investor,” Buffett went to study under Graham at the Columbia Business School.

So if Buffett needed an investment mentor, it stands to reason that’s a pretty good idea. Trouble is, not everyone buys it—perhaps because, much like taking a long road trip, something about the journey compels the guy in the driver’s seat to think he can make it without asking directions.

“When people get sick they go to a doctor,” says Robert Johnson, president and CEO of The American College of Financial Services in Bryn Mawr, Pa. “When people get in a legal bind, they go to a lawyer. Yet for some reason, people believe that they can navigate the complex financial world without the help of a professional advisor.”

Maybe people want something more: a coach and a guide as opposed to a juggler of digits. At very least, though, individual investors should best be prepared to take a few unwelcome detours. Johnson cites the work of DALBAR, a research firm that performs an annual Quantitative Analysis of Investor Behavior.

And here’s what their 2016 study found, based on 2015 statistics:

• The average solo equity mutual fund investor underperformed the S&P 500 by a margin of close to 4 percent. While the broader market made incremental gains of 1.38 percent, the average equity investor suffered a more-than-incremental loss of 2.28 percent.

• The average fixed income mutual fund investor underperformed the Barclays Aggregate Bond Index, again by a margin of close to 4 percent.

• The 20-year annualized S&P return was 8.19 percent, while the 20-year annualized return for the average equity mutual fund investor was only 4.67 percent—a gap of 3.52 percent.

Why did this happen? And why might 2016 stats yield a pretty similar disparity? Johnson points out that without mentoring, “the typical individual investor does exactly the opposite of Buffett’s prescription to ‘be greedy when others are fearful and be fearful when others are greedy.’”

If by now you’re somewhat convinced that an ounce of mentoring is worth a pound of profit, here are some ways to close your knowledge gaps by opening up to hard-won wisdom.

Wanted: Someone who rides a cycle

A magnificent mentor knows how to keep their cool when typical investors get hot under the collar.

“Psychology and emotions commonly get in the way of doing well in investing,” says Scott M. Sadar, executive vice president of Somerset Wealth Strategies in Portland, Oregon. “It’s not just about the math. People often get nervous and sell stocks at the wrong time. Too often, they don’t stay in the market to ride the elevator back up, either.”

It’s all about relationships

What good is a one-time pep talk if it doesn’t plant a seed to grow over time? The proposition goes both ways. “Focus on your potential relationship with this individual,” Thomas Walsh, Certified Financial Planner and portfolio manager with Palisades Hudson Financial Group’s Atlanta office. “Be thorough and judicious in your selection of a mentor as you are investing a lot of trust in this person. Initial meetings should establish the foundation of a business relationship and create expectations for both parties.”

Some things you can’t learn in a book…

A mentor lives not in the world of the theoretical, but the practical. “Real advice comes from real experience,” says David Bach, author of the New York Times bestseller “The Automatic Millionaire” and director of investor education at AE Wealth Management. “The person who’s giving it to you has ‘been there and done that.’ I’m a huge believer in the power of ‘power mentors,’ people who can coach you and guide you from real life success, failure and recovery. I don’t need a perfect person, I need real experience.”

… and other things you can

Johnson notes that simply reading the writings of prominent investors can work wonders. And guess who’s on top of the list? “The annual letters to shareholders of Berkshire Hathaway, written by the Oracle of Omaha, Warren Buffett, are a terrific place to start,” Johnson says. “Buffett has a gift to present fairly complicated topics in easily understandable language.” Best of all, “These letters are available at no cost on the Internet.” Vanguard Group founder John Bogle also dispenses plenty of knowledge on his blog, and he’s no slouch, either.

Never ignore the bore

Many a magnetic hotshot can’t match a sage who’s methodical—or even plodding. “Slow and steady wins the race,” says Rich Arzaga, founder and CEO of Cornerstone Wealth Management in San Ramon, Calif. “The question becomes, what’s the best way to master slow and steady? Look for people long in experience in the area you choose, and who have managed volatility into the middle 70th percentile. Consider a mentor you can count on more for what they’ve accomplished in this regard rather than what they say, or their new ideas.”

Look at fee-based advisors

Bach notes that such an investment professional is “ideally a fiduciary who, by law, has to be put your best interest first. There are many great advisors out there that can help you.” Yet no matter whom you pick as a guide, don’t force the right fit in the name of simply hanging in there. “Your body gives you warning signs, and your gut usually tells you when something feels off. Listen to that voice.”