Thursday, August 26, 2010

Madoff Behind Bars

I watched the new CNBC special on Bernie Madoff last night.  Make no mistake - he's a criminal and he probably deserves a harsher punishment than the cushy federal prison where he's currently incarcerated.  But, what amazed me the most was the incredible naivete of the investors that were ripped off by his Ponzi scheme.

Your broker's recommendation
When did anyone ever think that a 1% per month return with virtually no volatility was a realistic possibility in the real world of capital market behavior?  It isn't.  It never was.  It never will be.  What was absolutely amazing to me was watching a woman who had been a stock broker tell how she and her family (who invested with Madoff at her suggestion) lost everything.  Don't get me wrong - I'm sorry that it happened to them.  But, she should have known better! 

If Madoff and company had tried to convince me or my firm that they could deliver this kind of return without volatility, we would have known in an instant that it was a fraud.  How could someone with many years of experience in the brokerage industry not see that?  I'll tell you how.  They don't have a clue about how capital markets really work.  They are product pushing salesmen (and women).  They know so little that they can't even protect themselves.  Do you trust their advice?  Don't.

Wednesday, August 18, 2010

Money Matters

Here is absolute proof that the individual investor will believe almost anything.  In fact, a good story usually sells a lot better than the truth.

Trust me.  I'm a CFP!
In the Dallas area, the weekends on AM talk radio are filled with infomercials for everything from vitamin supplements to home repair services to annuities and market timing.  And, the king of the financial product sales infomercials is a guy named Ken Moraif.  His "Money Matters" (isn't that an original name) show is on half a dozen AM stations every weekend.  It features goofy sound effects, lots of repeated simplistic "advice", an invitation to attend his seminar about every five minutes, and illegal endorsements from his clients.  Apparently, you can get away with blatantly breaking FINRA and SEC rules if you have a disclaimer before and after your radio show that says that it's not really advice and it's only for entertainment purposes.  It reminds me of the late night TV ads that promise that a pill will make you lose weight without exercise but the fine print is only flashed on the screen for about three seconds.

Mr. Moraif claims that he has a secret formula that allows him to tell his clients when to get in and when to get out of the stock market.  Oh, and his 20 some-odd years as a CFP qualify him to make that call.  Despite the fact that every academic study contradicts this method, it's a siren song to the unsophisticated.  And, it has made Ken a fortune.  Is it plausible?  Not even close.  Does he ever present any data to document the performance of this secret system?  Of course not.  But, the great unwashed, in search of return without risk (it doesn't exist) and lured by the promise of delicious chocolate chip cookies, keep heading to the seminars in droves.

Friday, August 13, 2010

Which president had this to say about taxes?

Hint - it wasn't me!
The final and best means of strengthening demand among consumers and business is to reduce the burden on private income and the deterrents to private initiative which are imposed by our present tax system; and this administration pledged itself last summer to an across-the-board, top-to-bottom cut in personal and corporate income taxes...

I am not talking about a "quickie" or a temporary tax cut, which would be more appropriate if a recession were imminent. Nor am I talking about giving the economy a mere shot in the arm, to ease some temporary complaint. I am talking about the accumulated evidence… that our present tax system… exerts too heavy a drag on growth in peace time; that it siphons out of the private economy too large a share of personal and business purchasing power; that it reduces the financial incentives for personal effort, investment, and risk-taking.

In short, to increase demand and lift the economy, the Federal Government's most useful role is not to rush into a program of excessive increases in public expenditures, but to expand the incentives and opportunities for private expenditures. Corporate tax rates must also be cut to increase incentives and the availability of investment capital.
For all these reasons, next year's tax bill should reduce personal as well as corporate income taxes, for those in the lower brackets, who are certain to spend their additional take-home pay, and for those in the middle and upper brackets, who can thereby be encouraged to undertake additional efforts and enabled to invest more capital.

And I am confident that the enactment of the right bill next year will in due course increase our gross national product by several times the amount of taxes actually cut. Profit margins will be improved and both the incentive to invest and the supply of internal funds for investment will be increased. There will be new interest in taking risks, in increasing productivity, in creating new jobs and new products for long-term economic growth.
No, it wasn't Ronald Reagan.  But, that was a good guess.  It was John F. Kennedy - in his 1962 address to the Economic Club of New York.  Today, he would be vehemently opposed to the policies of the current administration and the democratic "leadership".

Rogue's Gallery - Suze Orman

I had breakfast with a friend last weekend and then stopped by the local mega-bookstore.  I always try to avoid going into the "personal finance" area or whatever they call it because it's so disturbing to see whose books are prominently displayed.  But, it's like looking at a bad car wreck.  I had to do it.

Waitress turned financial planner
I wish that I hadn't.  Suze Orman is everywhere.  I know she's a complete joke.  So does everyone who has earned a CFP designation.  But, none of that matters.  Do you know why?  Because Oprah says so.  Yes, Oprah made Suze Orman.  Before that, she was just another commission based annuity salesperson.  She has no credentials.  She has no applicable education.  She gives terrible advice.  Eric Tyson, one of the very few financial journalists with integrity, credentials, and real financial experience has this to say about her:

I have had a bird's eye view of Suze Orman's "career" as a supposed personal finance "guru" because I was based where she was in the San Francisco Bay Area during most of the 1990s. At that time, I worked as a financial advisor who strictly provided advice on an hourly basis.

Orman doesn't make claims to being a rocket scientist and her own website biography states that she was "surprised" to be admitted to the University of Illinois at Urbana-Champaign "...even though I didn't score well on my SATs," she says. She actually says in her biography that it took her seven years to complete her degree because she dropped out of school unable to successfully complete the school's language requirement. According to the University of Illinois, she graduated in August of 1977 (at the age of 26) with a bachelor's degree in social welfare.

Her first job, which she says that she did for six years, was as a waitress. As with Bernie Madoff, for many years, there have been major concerns raised about Suze Orman's representations and stated background which have largely been ignored and kept underground. As far back as 1998, Forbes' columnist William Barrett did a review of Orman's background compared with her claims. Barrett found and documented major misrepresentations and falsehoods about her background. At the time of his column, he exposed the fact that while Orman claimed 18 years of work in the financial services industry, she had in fact only 7 years of experience.

Orman claims to have been operating a small financial planning practice in the San Francisco Bay Area. Actually, she was selling commission-based products and Barrett actually exposed the fact that her own license to sell such products was expired so she wasn't even doing that legally! Barrett told me in a recent interview she was selling single premium deferred annuities to laid off workers. So in addition to grossly misrepresenting her credentials and a thin educational and work background in the financial field, she sold inappropriate products (retirement account money is already tax sheltered) to laid off workers so that she could earn hefty commissions.

Barrett's piece, although in a major national business magazine, didn't get much coverage elsewhere in the media. Mark Veverka with the San Francisco Chronicle covered it and did an investigation and condemning follow up piece which demonstrated that Forbes' Barrett got all his facts correct and that Orman and her publicist did nothing more than spin, stall and obfuscate.

In describing the aftermath of his piece and Veverka's, Barrett recently told me, "Orman laid low for a few months. She stripped down her biography in her books and got out of the business of selling products which got her into trouble."

Orman's earliest books weren't particularly remarkable but she got on Oprah and that's what put her and her books on the map. Like Madoff and with Oprah's endorsement, Orman has successfully used affinity marketing (to women in her case) as her shtick. Oprah and her staff don't have a particularly good track record with regards to checking out authors they put on their program. This NY Times article documented some high profile book author embarrassments for Oprah and there have been many, many others over the years.

Veteran financial reporter Chuck Jaffee has done numerous articles for the Boston Globe, MarketWatch and MSN detailing the inadequacy and shallowness of much of Orman's financial advice. He also said, "...I couldn't help but do a double take when during one of her recent shows on CNBC. In talking about debt, Orman said: ‘One of the books I wrote, I did a whole section on good debt and bad debt. In fact, I was the one who created that terminology, good debt/bad debt in the United States back in 1999.' A quick check of a not-too-complete database found hundreds of stories written throughout the 1990s using the terms good debt and bad debt and describing them roughly in the fashion Suze claims to have originated." Another lie. (I know I was using the term back in 1990 and used it extensively in my best-selling book, Personal Finance for Dummies, which I wrote in 1993 and is now in its 5th edition).

A final and important point relates to Orman's financial ties with companies that she recommends. A number of readers expressed concern to me that Orman has appeared in commercials and advertising for a specific long-term care insurance and credit reports (among others) and asked if I thought this was a conflict of interest. Jaffe also documents her having been in bed with Lending Tree. These relationships are clearly a conflict of interest - how can she objectively review and recommend products and services in the financial services industry if she's receiving fees from those same companies?

Thursday, August 12, 2010

Financial salesmen have a built-in conflict of interest with you, their client

Do you really think that your "advisor" has only your best interest in mind?  Not if he works on commission, which about 95% do.  If he works for a brokerage firm (Merrill Lynch, UBS, Wells Fargo, JPM/Chase, Wachovia, Raymond James, Edward Jones, etc, etc), he's a salesman working on commission.  Ditto for the insurance based companies like Ameriprise, AXA, and others.  Oh, and don't be fooled by the "fee-based" advisor moniker.  That just means that you're paying him a fee and a commission. 

"Oh, my advisor is independent."  If he has a broker-dealer affiliation, that doesn't matter at all.

These salesmen are, at least under the current system, held to a standard of "suitability" by FINRA.  That simply means that they are required to sell  you a product that is, according to a very broad definition, suitable for you.  It doesn't mean that it's the best performing product, the least expensive, or any good at all.  What it usually means is that it's the product that pays the broker the highest commission or the "flavor of the week" that his firm is pushing (and he's probably eligible to win a trip to Maui if he sells the most in his branch).  It doesn't take a rocket scientist to figure out that this is not the best business model for the client (although it has historically been a great one for the salesman... oops, I mean "advisor").

Is there an alternative to this mess?  Yes!  And, you should know about it.  It's called the Fee-only Registered Investment Advisor (RIA).  No, not "fee-based".  That's the brokerage industry's term that is designed to be similar enough to confuse you.  Fee-only RIAs are required to put your best interest first and their compensation method completely eliminates any conflict of interest.  All fees are paid directly to the advisor by the client and are clearly disclosed.  There is no incentive for this type of advisor under this compensation structure to do anything that is not in your best interest.  You can find them, but you'll have to look because they are only about 5% of the advisors out there.

Oh, and don't be misled by designations.  Being a CFP (yeah, CFP board, I left off the registered trademark logo!) or a CFA or a CLU or an XYZ doesn't matter if the advisor is  working on commissions. 

But, will it sell?

I have a really good friend that works for one of those big brokerage firms that spends millions on TV commercials.  You know them - they have three initials and recently got busted for having a bunch of offshore clients that were evading taxes (and they immediately rolled over and gave up the names to the IRS - so much for the vaunted secrecy of those Swiss accounts - but, I digress).  He's a smart guy.  He teaches CFP courses at the university level.  We used to argue about active versus passive management until he finally gave up because, well, he was wrong.  He now admits it.

But... and it's a BIG but, he says that he will continue to offer his clients actively managed portfolios because he does not believe that any client will pay him to construct and maintain a portfolio based on strategic asset allocation and passive asset class exposure even though he knows it's the right way to invest and it's how he invests his own money!

You see, the big brokers think you're too ignorant to know that they are selling you a lie.  They think you don't know enough to appreciate what really works.  And, you know what?  For the most part, they're right.  But, it's not because you're stupid.  It's because you are horribly misinformed and fed a constant diet of marketing hype.  Active management is expensive.  It makes lots of money for the peddlers.  Passive management works a lot better, but it's inexpensive.  Oh, were you under the impression that your broker has your best interest in mind and would never recommend what pays him more?

The debate about active versus passive is over and passive wins, hands down

I'm not going to waste much time on this subject.  Suffice it to say that, if you have half a brain, you've already figured this one out.  If not, let me make it perfectly clear to you.  There is not a shred of reliable evidence to support the idea that active management (stock picking, market timing, etc) adds any value whatsoever.  In fact, there is a lot of very well researched evidence to the contrary.

End of story.  Cramer loses again.  Mom and pop may not know it because no one on CNBC has the balls to say it (almost all of their advertising revenue comes from perpetuating the myth), but the professionals do.

So, if the professionals know this, why do the vast majority of them still attempt to convince their clients and/or their prospective clients that active management works?  Read on.

Buster looks a lot like Gordon Gekko

You didn't expect me to use my real photo, did you?

Tuesday, August 3, 2010

Forget what you think you know about investing

Whatever you think you know about investing, forget it.  The vast majority of the beliefs held by most individual investors come from the daily diet of misinformation handed down by the financial press.  From CNBC to Money Magazine to Barron's, it's almost all completely worthless.

Have you ever noticed that all of this drivel is contradictory?  That one talking head on Squawk Box says one thing and five minutes later another one says something completely different?  The fact is, if they are attempting to forecast the future, neither of them have a clue.

When you examine the track record of those who attempt to predict the future, you find that it is universally abysmal.  The best manage to get it right just over 50% of the time - very slightly better than what you'd expect from random chance.  In fact, since the stock market goes up more often than it goes down, simply predicting "up" every time will put you at the top of the pack.  Yet, everyone tunes in to see what these people have to say.  Are you starting to see the disconnect here?

What are the television networks and magazine publishers really trying to do?  Are they trying to help you with your investment decisions?  No.  They are trying to garner ratings or sell magazines.  Do you think that they would sell many magazines if, each month, they stated the truth and said that no one can reliably predict where the market is headed and that buying and holding a properly diversified portfolio that's designed for your risk tolerance and capacity is the thing that works best?  It's a pretty safe bet that after a couple of months they wouldn't be selling magazines or advertising.  Then what would they do?  Go get a real job?  That's no fun.

Can you handle the truth?

You can't handle the truth!
Colonel Nathan Jessup in "A Few Good Men" states it rather bluntly.  "You can't handle the truth!"

Well, we're here to make the truth available to you.  Whether or not you can handle it is up to you.  We're going to tear apart the Wall Street lies and the financial media hype and teach you how to be a successful investor.  Because we can only be completely straightforward if we do this anonymously, we can't tout our resumes.  You'll just have to trust us.  We know what we're talking about.

It's up to you.  You can continue to be one of the sheep that follow the self-serving lies perpetrated by the large brokerage firms, the salesmen masquerading as "advisors", and the media clowns (Jim Cramer), or you can take the time to actually learn what works.  We have no financial stake in this.  We're just tired of watching people being manipulated.