The 5 Essentials of Smart Investing: With Lou Melone of Budd, Melone & Company
An Interview With Jason Hartman
Don’t Confuse Speculating with Investing. The public views the stock market- driven by the media/advertisers’ relentless push to “sell” something- as buying and selling individual stocks daily/weekly. By doing so, they falsely believe they are investing…but couldn’t be further from the truth (which is probable why most investors don’t get the returns they should, get discouraged and never invest again…more on this below). Why? Nobody knows where a company’s stock will be in the short-run, which I would describe as under three-to-five years. Although, there’s no shortage of so-called “experts” that will prognosticate they know, but the reality is…they’re providing a best guess.
As a part of my series about the The 5 Essentials of Smart Investing, I had the pleasure of interviewing Lou Melone, Managing Director at Budd, Melone & Company. Lou has championed a personalized, rigorous approach to financial planning and a strong commitment to a fiduciary standard of care. With Lou’s guidance, Budd, Melone & Company is devoted to continuing to provide high-quality planning advice on their leading proprietary technology platform. Lou began his career with Dean Witter which evolved into Morgan Stanley. He then moved his practice to Smith Barney before forming Budd, Melone & Co., LLC, A Registered Investment Advisory Firm. Lou is an 8-time winner of 5 Star Wealth Planner Award* awarded by Hour Detroit Magazine and Forbes which is given to top 7% of wealth planners in South East Michigan.
Thank you for doing this with us! Our readers would like to learn a bit more about you. Can you tell us the “backstory” about what brought you to the finance industry?
The short answer is; my passion for business, finance and coaching. I’ve been running businesses since I was 18 years old and have always had an interest in the number’s side of how they work. Finally, I’ve been active in the sport of hockey for quite a while and from this have found they (coaching players or families on finance) have many similarities.
Can you share with our readers the most interesting or amusing story that occured to you in your career so far?
I recall when I was a newbie in the business and working for a well-known brokerage firm and we were bought by what was known as a “white shoe” firm. We were told how their research analyst were only for the elite investor, so naturally (and naively) I figured they were going to dramatically help with investment recommendations for clients. Unfortunately, over the next 12–16 months I noticed something interesting, their recommendations or mutual funds they ran were no better (performance) than anyone else on Wall Street.
Can you share the lesson or take away you took out of that story?
Nobody has a crystal ball…nobody. Secondly, don’t be fooled by the “voice behind the curtain.” Yes, this is a Wizard of Oz reference.
Are you working on any exciting new projects now?
Not necessarily any new projects, but more of the rapid integration of technology into the lives of our clients’ families.
How do you think that will help people?
It simplifies the complexities that come with their financial lives. The easier they are able to grasp the concepts (visually), the more educated/active they become in future decisions. In addition, we’ve found by having a plan it helps remove the anxieties attached with those uncertainties.
Ok. Thanks for all that. Let’s now jump to the main core of our interview. According to this report in Fortune, nearly two-thirds of Americans can’t pass a basic test of financial literacy. In your opinion or experience what is the cause of these unfortunate numbers?
Simply- Lack of Interest. Why? Numbers are boring, so basically-what doesn’t peak society’s interest doesn’t improve us. As proof, look at our ranking in the world in math scores, which most reports rate the US around 30th in the world. Not very impressive for a country that tends to dominate as a world power in financial areas.
If you had the power to make a change, what 3 things would you recommend to improve these numbers?
Many would point to a better education system, however improving financial education for Americans has shown that it doesn’t work…or at least how it’s currently being implemented. Quite frankly, I don’t have a solution. My experience shows that it improves later in life when there is a direct reward/risk attached to it. I guess you can call it the “pain/pleasure” effect as investors quickly become focused on the numbers when it relates to them personally. Especially the fear of losing something…science (behavioral) tells us that we feel the pain of financial loss twice as much as the pleasure of a financial gain.
Ok, thank you! Now to the main question of our interview: You are a “finance insider”. If you had to advise your adult child about 5 non intuitive essentials for smart investing what would you say? Can you please give a story or an example for each.
In general, the investing public is hard-wired for investing failure, unless they understand how to combat Human Nature. Their cognitive bias- pushed to extremes by an overflow of information- has made it more difficult to battle for long-term financial freedom. The essential lessons needed for long-term investing success are as follows (this is where the advice comes in):
1. Not Confusing Speculating with Investing.
a. The public views the stock market- driven by the media/advertisers’ relentless push to “sell” something- as buying and selling individual stocks daily/weekly. By doing so, they falsely believe they are investing…but couldn’t be further from the truth (which is probable why most investors don’t get the returns they should, get discouraged and never invest again…more on this below). Why? Nobody knows where a company’s stock will be in the short-run, which I would describe as under three-to-five years. Although, there’s no shortage of so-called “experts” that will prognosticate they know, but the reality is…they’re providing a best guess.
2. Not Behaving yourself out of Long-Term returns.
a. Since human existence, we have been hard-wired with a fight vs. flight mechanism in our brain (the Amygdala). This came in quite handy when we needed to run away from a Saber-Toothed Tiger. Fast forward to today, although there are no tigers chasing us the same physiology still exists and influences how we invest. Behavioral Science tells us this mechanism has attached itself to our investment behavior and the media’s daily fear mongering of how “the next Armageddon is just around the corner.”
Simply stated; you invest and then the media fear mongers (the tiger) influence your behavior and you sell your investments (run from tiger). This cycle is a perfect recipe for investment failure…and is played out every year.
3. Patience
a. Fairly simple…observe society’s attention span and do the opposite. Nuff said.
4. Discipline
a. This is somewhat similar to Patience but adds a bit of behavior to it by having a non-emotional process to keep doing what has always worked…not what is working now. Simply stated: keeping your emotions under control when everyone around you isn’t.
5. Rebalancing
a. A non-emotional long-term approach to investment success. How? Once a year (on the same day/week) sell a portion of what has just done well and add to what has not, this will bring your portfolio back to its long-term asset allocation you set for yourself. For example, back in the 1999 dot.com bubble most investors allowed their winners to run too long; result was that when the market dropped all their gains went with it.
Wow, how boring is that- I almost fell asleep describing it.
What may be noticed in the above characteristics that seem counter-intuitive is…there’s no mention of buying the “Best Performing, Hot stock/bond/fund/precious metal (insert your asset of choice) of the day.” Why? Nobody knows for certain or at least those willing to admit it…and if they say they know- Run Away.
None of us are able to achieve success without some help along the way. Is there a particular person who you are grateful towards who helped get you to where you are?
Yes. And believe it or not, I’ve never actually met or spoken to him. Nick Murray. Nick is what our industry would call the “advisors, advisor.” He has written numerous books and has a monthly newsletter that counsels advisors on how planning advice should be provided. In addition, building and maintaining an ideal financial planning practice.
Can you share a story about that?
The first book I read from him was called, “The Excellent Investment Advisor.” It was one of those Ah-Ha moments. At that point, I’ve been committed to running my practice and providing behavioral advice to those finite number of families who want to come aboard “The Ark of Financial Freedom,” as Nick Murry would say.
Can you please give us your favorite “Life Lesson Quote”?
Talent/Skill can get you to some of the highest levels of your profession, but it’s Character that will keep you there.
Can you share how that was relevant to you in your life?
I believe we’ve all been exposed to these individuals at the highest levels with and without Character.
You are a person of great influence. If you could inspire a movement that would bring the most amount of good to the greatest amount of people, what would that be? You never know what your idea can trigger. :-)
As I’ve mentioned in the past, I’m not sure I’m that big of a thinker…just become educated about your personal finances and the industry that serves it. Which is a nice way of saying, believe nothing of what you hear and half of what you see.
Thank you for the interview. We wish you continued success!
