Seeker-Sucker
Uncertainty is something that frightens us. We seek assurance and knowledge of the future to reduce the uncertainty in our life and future. We seek out Prophets, soothsayers, fortune tellers and even politicians offering hope and change. We consult and listen to brokers, bank relationship managers, and fund managers looking for some shortcut to investment success and to get the best outcome for our investment or for peace of mind about investing. We also want to identify the fastest, easiest and safest way to get rich. We believe that there is such a way.
On the other hand, the financial Industry try to meet this need of ours by trying to predict the future. The more financial predictions they make, the more business they do and the more commissions they get. As result, “the brokers began adding the business of prophecy to the business of brokerage.”
On the other hand, the financial Industry try to meet this need of ours by trying to predict the future. The more financial predictions they make, the more business they do and the more commissions they get. As result, “the brokers began adding the business of prophecy to the business of brokerage.”
In this quest, we often also turn to various sources of so-called expert for information. A very common source will be the popular financial media: magazines, newspapers, books, TV, radio, and the internet.
Unfortunately, the media is designed to “sell” newspapers, books, magazines, advertising time, and investment products—not to help us make good investing decisions. Researchers found correlation between mutual fund recommendations and past advertising in three personal finance publications. Positive mentions in these financial publication increase fund inflows by as much as 7% to 10%.
Do Ads Influence Editors?
Advertising and Bias in the Financial Media
Jonathan Reuter and Eric Zitzewitz
First Draft: October 2003
Current Draft: October 2004
We find that mutual fund recommendations are correlated with past advertising in three personal finance publications but not in two national newspapers. Our tests control for numerous fund characteristics, total advertising expenditures, and past mentions. While positive mentions significantly increase fund inflows, they do not successfully predict returns Overall, positive mentions in personal finance magazines and Consumer Reports are associated with an economically significant 7-10 percent increase in fund size over the next 12 months, while a positive mention in the New York Times is associated with a 15 percent increase.
The market is unpredictable, and yet so many people - financial analysts, brokers, mutual fund managers, pension fund managers, hedge fund managers, newsletter editors, market commentators on TV, bank and insurance sales personnel - make so much money by making predictions. It is also known that if someone is waxing poetic about a certain stock in chatrooms or blogs, that person could well be paid to do it.
The investment advice and management industry is mammoth. The total revenues are well over $200 billion per year in the United States alone. A percentage of investors' assets provides the entire financial support for this industry. In 2004, the average cash take-home pay for each of the top 25 hedge fund managers was $251 million. It comes straight out of the investors' accounts. (Source: "The Big Investment Lie" by Michael Edesess).
Simply, the financial experts become oracles often with the customers' inclination and even enthusiastic cooperation. We always think someone else has the answers. That's how Bernie Madoff stole money from his investors. Madoff ‘s victims are not ignorant people. They are very smart and successful in their own fields. However they are fools when it comes to investing. They believe either that they are smart enough to beat the market, or someone else is. It's how scam artists make their living.
We must always bear in mind that these advisers have their own self interest which will come before us. Quoting John Rothchild, Author, a Fool and his Money, Financial Columnist, Time Magazine:
“The investor’s need to believe somebody is matched by the financial advisor’s need to make a nice living. If one of them has to be disappointed, it’s bound to be the former.”
Con artists are only interested in people who they can turned around to believe in them without question, and who they can manipulated to believe in their illusions. They don't merely seek out the greedy or the weak or the stupid. They seek out the needy - someone who has an unfulfilled desire. No one is immune. Many wealthy people are vain, and to them, appearing to be a high-roller is very important and as a result take unnecessary risk with their money.
You can be forgiven if you sometimes confused financial experts as con artists. When trying to make a sale, it is not uncommon for the bank sales personnel to tell us that many of his clients has invested in the products and or that he is also invested and engaged in leveraging. There is also the possibility of him give us assurance of profitability and low risk. The more aggressive ones may even actively encourage leverage by 5 times the amount invested in a product saying that the yield from the investment product is higher than the present interest rates which will remain low. It sounds like a free lunch. What he failed to tell is that whatever the result, it will be amplified by five times. If the value of the investment product dropped by 20%, the total amount invested will be wipe out. Investors are encouraged to leverage simply to earn more commission for the financial experts or sales personnel.
There are many other examples of unethical practices by financial experts to increase their income. One of the more common one will be “churning” – increase frequency in trading of products. And this happen not only stockbrokers but by insurance agents encouraging clients to change their insurance policies at the detriments of the clients.
Another major concern is that some of the financial experts especially bank relationship managers and insurance agents may not even be competence or experienced to take care of your investment. Financial institutions in Singapore are expected to check a customer’s risk profile before selling investment products. But structured products – such as the Mini-bonds and High Notes which burnt a hole in the pockets of hundreds of Singapore investors — can be too complex for both buyer and seller to understand.
Another major concern is that some of the financial experts especially bank relationship managers and insurance agents may not even be competence or experienced to take care of your investment. Financial institutions in Singapore are expected to check a customer’s risk profile before selling investment products. But structured products – such as the Mini-bonds and High Notes which burnt a hole in the pockets of hundreds of Singapore investors — can be too complex for both buyer and seller to understand.
These financial “experts” need to make money FROM the investors. They may be well intentioned and sincerely hope the investor make money from the investment through them. This will further enhance their business. However this is their secondary concern as their primary objective is to make money for themselves and career advancement. What benefit the middlemen very often injures the investors. Whatever happen to the clients’ money, they still make money and are amply rewarded.
I like Fred Schwed’s mocking comments that he rather entrust his money with a crook than a stupid fund manager. While he can try to recover his money from the crook by suing him, the only thing he can extract from the fund manager is an apology.
Where Are the Customers’ Yachts?
By Fred Schwed Jr,
John Wiley & Sons, (1940).
The sad thing is that there can be no legislation against stupidity. I should not care to entrust what I like to think of as “my funds” to a smart crook – or to an honest bonehead. But if I were forced to choose, I would choose the crook. With a writ of replevin and a policeman, I might be able to get back my money from the former, but all there would be for me from the latter would be a heartfelt, even a tearful, apology.
It is common knowledge that some professional see the individual investors are clueless sheep headed for the slaughterhouse:
American Investors Predictably Stupid Losers.
Farrell, P. B.
3 Jun 2010
MarketWatch ,
Yes, investors are "predictably stupid losers," what Vegas croupiers call a mark, a dumb gambler that can be easily conned out of his money.
One reader commented: "I worked at the Bear Sterns ... every word written here is true. Fact is, bankers regard themselves as wolves and the public as prey, and speak about it openly, among themselves." Then he added a sucker punch: "What is extraordinary to me is how willingly the sheep submit to this."
The financial institutions also devised many interesting products that entice us to part with our money. New or “interesting” financial products are all too often to be sold to investors, not to be owned by investors. Many of these financial innovations are clever options strategies. Beware of geeks bearing gifts. Just like a fishing enthusiast ask the shop owner: “ Are these colourful, shinny and attractive lures effective?” The proprietor’s laconic reply – “We don’t sell them lures to fishes.” Moral of story – beware of new or interesting “product” recommended.
Who can we listen to or rely on? If we profess to be ignorant then how are we going to evaluate the competence of others we hope to delegate this responsibility. Unfortunately, as Fred Schwed put it succinctly:
“But thus far in our history there has been little evidence that there exists a demonstrable skill in managing security portfolios.”
Investment has been made complicated so that we need the financial experts. All the technical terms and strategies devised out of theories by academics-turned financial experts - 'regression toward the mean,' efficient frontier,' 'mean-variance analysis,' “portfolio management,” “technical analysis,” and other Nobel Prize-winning theories - all with the predictable effect of overwhelming us the client and luring us to believe that someone has the ability to make us rich with a safe, reliable, get rich fast way in investment. In additional, innovative products like Contract for Difference, Credit Default Swaps, Call and Put Options and many other structured complicated products to encourage us to gamble like in the casino with the odds favoring the institutions who devised and sell them.
The smartest investment strategy is simple and you can easily do it yourself.
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