The sophisticated investor

I have had some real thought-provoking meetings over the years and have consolidated some of them into the following story.  To make a better story let say our potential clients name is Bob. (Name not changed to protect the innocent, that’s one of the real names and he’s not innocent).  

He made clear that he’s a research guy, always does his homework and knows what he’s doing.   He believes the way to riches is to follow the “trends”.   He goes along with conventional wisdom and doesn’t buck the trend.  He doesn’t like to take risk and says he’s a moderate investor.   Bob starts out our meeting by telling me how the system is out to get the little guy. 

He asks me if I remember the tech stocks in the 90’s and says “It was all rigged, a total conspiracy. You remember all the tech stock pumping and dumping that went on?  Wall Street was saying how great this “new business model” was, while at the same time sending internal emails around saying what junk the stuff was”. Bob says “I was maxed out on margin (like I was supposed to be) when they pulled the rug on me.”  At this point I’m just listening, not offering any thoughts or advice.  Bob goes on to say “My broker was a jerk; I kept getting these margin calls and had to sell just when I should have been buying. Well I finally fired him and took what I had left and started researching my next opportunity”.

“The next big trend was Real Estate; I wanted to actually feel what I owned. No more high flying stocks for me. Charts of single family homes have always gone up, year after year, housing doesn’t go down. The market in Florida was the hottest so I bought three homes in Tampa; actually they were condos, (converted apartments) with the idea of selling in a few years when they appreciated”. I thought to myself…Oh; this is going to turn out bad.

 Bob said “The finance company gave me a low interest rate because I put 20% down and did a balloon mortgage. The broker said I’d never see the balloon because I could refinance before the rate increase took effect. He also said I would be able to recoup the 20% down payment during a refinancing, using a cash-out option, because those condos were sure to continue appreciating at 15% per year. That was in 2005.”

We all know what happened next…

“By 2009, I was so underwater that I turned those houses back to the bank. They had a term for it in those days, it was called jingle mail and I put the keys in an envelope and mailed it to the bank.   I lost my down payment plus the money I put into the condos. The appraisers said the houses were worth $250,000 each when I bought them. Those crooked bankers! They should all be in jail. The entire financial system is rigged against the little guy. It’s such a rip-off.”

 OK so I’m thinking, life can’t get much worse for poor Bob so maybe I can make a suggestion here. I say “Bob have you ever considered”…but he interrupts me and says “Screw it. In 2011, I converted all my money into gold. It’s obvious the global financial system is in ruin. Central banks are printing money like confetti, government spending is out of control, we have political gridlock like we’ve never seen before, don’t even get me started on Europe, and who knows what Japan is doing with their currency.  It’s a race to the bottom, and the only asset that is going to hold its value is gold.” And life just got worse for Bob.

“I got in at $1810 per ounce. That was high, I know, but the Fed is killing me. Their manipulation of interest rates to stimulate the economy is pushing unemployment lower, pumping up stock prices, and artificially forcing up consumer confidence. That’s slamming gold prices down. They should abolish the Fed. They’re a bunch of idiots!”

Here’s where I saw my opening and said “Have you ever considered index funds? You would have done really well since 1999 if you owned a diversified portfolio of low-cost stock and bond index funds and just rebalanced them.” And what was his response? 

 “Diversification is for people that don’t know where to invest, so they just buy lots of stuff hoping to get lucky, and Index funds are for people who don’t know anything about investing, but thanks for the suggestion.” Then he said, “Can you believe the huge bond bubble we’re in? Even Warren Buffet is avoiding bonds. I’m currently researching some triple-leveraged Treasury bond ETF’s put out by Goldman Sachs that short the market…”

Bob and I do not work together.  He’s looking for a much more sophisticated advisor.

I do agree with a lot of what the Bobs of the world are saying.  In short if you play with Wall Street you will lose, the game is rigged against the small investor. We have seen over and over where Wall Street has made huge bets, only to pass the loss on to their customers, and pay themselves huge bonuses. As an individual investor you are not going to beat Goldman Sachs, JP Morgan, Citi Group or any of the too big to fail Banks/brokerage firms/gambling houses. Not only should you not play with these crooks, in my opinion, you should never do business with them at all. If our government cannot reign in the terror spread by our TBTF banking system then it becomes necessary for us as individuals to vote with our feet! If you believe the fees at BOA are ridiculous, then don’t do business with them!  Find a local community bank that knows how to deliver value to you, not just take from you.

To invest without Wall Street is not as hard as you might think. Simply look for investment funds with very low cost. I like to stay below .2 for an expense ratio. You will find more and more low cost funds are available as many in the investment community are fed up with high cost low return investing, pushed by Wall Street. You find these funds at Vanguard, and Fidelity, some Exchange Traded Funds from iShares, to just name a few, there are more out there.

Academics overwhelmingly agree that the best way to invest is though a diversified portfolio of low cost index funds that match the performance of the global financial markets. Virtually every unbiased study on the subject comes to the same conclusion – buy and re balance a basket of low cost index funds. The evidence is irrefutable.

When investors realize these facts, the truth about Wall Street becomes clear, and a path to better investing becomes apparent.  Bob needs to do some more research.


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