Why He Fired His Broker

Here is a pretty amazing article in the May 2009 The Atlantic Magazine –

http://www.theatlantic.com/doc/200905/goldberg-economy

It is the story of an average guy and how the recent Stock Market Crash has changed his thoughts on investing and his trust for the Financial Services Industry. I think it is representative of a great deal of individual investors.

“For most of our adult lives, my wife and I have behaved in the way responsible cogs of capitalism are supposed to behave—we invested in a carefully calibrated mix of equities and bonds; we bought and held; we didn’t overextend on real estate; we put the maximum in our 401(k) accounts; we gave to charity; and we saved, but we also spent: mainly on gasoline, food, and magazines. In retrospect, we didn’t have the proper appreciation for risk, but who did? We were children of the bull market… I took a random walk down Wall Street and got hit by a bus.”

Investing is a process of determining when to take risk and when to avoid risk. Now, more than every, you will need to be able to identify when to risk capital and when to protect it.

Investment Paralysis“But for now, no whining: just confusion and bemusement and fear, along with an uncharacteristic sense of paralysis. In the past six months, I’ve bought and sold virtually no equities. And I rarely take the pulse of my 401(k).
I called a psychologist to find out what could explain this weird passivity… ‘You no longer know the world you live in,’ he said. ‘You played by the rules, the rules benefited you. The world functioned according to some regularities. Right now, it’s unclear what rules apply. There is a new regime. What seemed prudent earlier has disappeared. I’m surprised Americans aren’t more panicked… Paralysis is one response to this level of insecurity.’”

Oh Brother, have the rules changed. Wall Street now rules Washington DC and we are all pawns in their game.

Merrill Lynch
“(W)e haven’t heard from our Merrill broker in nine months.”

“I should have seen the signs of dysfunction much earlier. It was more than a decade ago that our first Merrill Lynch adviser put us in a company called Boston Chicken. A Merrill analyst described it as “the restaurant concept of the ’90s.” It went bankrupt in 1998. Only later did I learn that Merrill had underwritten the initial public offering for Boston Chicken stock, and so had an interest in selling the company to its customers. There were other brilliant pieces of advice—long-term “buy and hold” recommendations that emerged from the Merrill analysis factory: Qualcomm; Sun Microsystems; Nokia; and Citibank, of course, which has recently dipped as low as a dollar a share.”

The perception of the average investor is that the Large Banks and Brokerages are making investment decisions that are good for the Company at the expense of the Client. Who can blame them for this… How many advisors did the homework and told their clients to protect their money in late 2007- early 2008? Do you know how hard it was to do this? Do you know how little resources are committed by the Banks to help clients protect their money?

Richard Bernstein – Merrill Lynch Chief Investment Strategist“Bernstein, the chief strategist, has actually been bearish for much of the past decade. Given his recent disposition toward market pessimism, I asked him why he didn’t tell Merrill’s clients to dump their equities seven months ago. ‘I said it as best as I could within reasonable professional standards,’ he said. ‘I’m not going to yell ‘Sell, sell, sell!’ I’m not going to go out and be irresponsible.’
I imagine that many of Merrill’s clients are now wishing that Bernstein had been more irresponsible.”

In the eyes of Wall Street Brokerage Firms, it is “irresponsible” to tell clients that they need to protect their capital? Are you kidding me? I go back to the Jon Stewart line “Who’s side or you on?”

People aren’t stupid. They are figuring out that things have changed and that Wall Street is now great at doing one thing – making money for itself – and is terrible at making money for clients.

Do It Yourself“I believed I could find investments for myself…every so often, I would follow the recommendations of the financial magazines, SmartMoney in particular, because for a long while I was an ardent consumer of financial pornography. No more. In the harsh light of recession, I find it hard to believe I listened to a magazine that, in August 2007, recommended American Express at $63 a share (a “conservative way to make hay from global credit-card growth”), which as I write this is selling for $13 a share.”

Maybe the magazines and Barron’s and CNBC aren’t so good at making you money either.

“It turns out that my crucial mistake was believing that the brokers and wealth managers and cable-television oracles who make up the financial-services industrial complex actually had my best interests at heart.”

People need a trusted advocate to cut through all of the double standards and false motives to be able to help clients. It is a constant uphill battle against the industry to do the right thing for clients. But it can be done and is being done by those willing to do their homework and make sacrifices for the betterment of long term relationships.

Robert Soros (George Soros’ Son)“You think a brokerage should be a place you go to pay commissions for fair and unbiased advice, right?” he asked.
“Yes,” I said.
“It’s not. It never has been.” He then cited another saying of Buffett’s: “‘Wall Street is a place where whatever can be sold will be sold.’ You are the consumer of their dreck. What they can sell to you, they will sell to you.”
“But they told us—”
“They lied.”
He went on: “You should be disheartened and disappointed. But don’t kid yourself. You’re a naive capitalist. They were never your advisers. Do not for a moment think that a brokerage firm is your friend.”

I have been saying this for a long time. Wall Street has perfected the art of making money for themselves and not for their clients. The realization of what is going on will lead people to take their money out of the large Brokers and move to more customer-focused venues that design their products and services around doing what is right for their clients and not what is best for their own interests.

My Market Niche“If the head of Merrill Lynch and every other investment firm had their way,” he continued, “no individual broker would ever recommend an individual stock or bond to a retail client again. They have essentially gotten out of the brokering-and-advising business and gone all in on the ‘wealth management’ business. The new model is to gather assets from wealthy people and then place those assets with a whole bunch of managers who will manage different pieces of it in diversified styles so you don’t lose it all at once. And by the way, people with less than $10 million need not apply.

That is a grotesque statement. I need the flexibility to be able to manage money the way it needs to be managed and not the way my company wants me to do it. Go read the recent interview with William O’Neil of Investors’ Business Daily, where he tells you that if you are sustaining 50% losses, then you have no clue what you are doing with your money. For Wall Street to advise you to buy and hold something, even when a guy like Bernstein knows that puts assets at massive risk in unconscionable.

The $250k to $10 million investor is under(un)serviced. They want somebody to be their advocate, coordinating the advice from their Tax and Estate Planning advisors and building a customized personal plan for how to achieve their goals. The winners in the investment world of the next 20 years will be those who build their businesses on these concepts.

Giving Up at the Bottom?“In retrospect, I can’t imagine what led all of us to believe that we could regularly expect double-digit annual returns on our money, for doing no work. Maybe this attitude will cause me to miss the next great run-up. No matter. I’ll take 3 or 4 percent gains a year, or 1 or 2, if necessary.”

The markets are designed to suck money in at the tops (euphoria) and get you to sell at the lows (panic). They have clearing done their job on this poor reporter. He will no doubt be the one buying at the next high.

My first goal over the last 18 months was to avoid the pain, to allow myself and my clients to be in a position where we could make decisions based upon the facts and not have the hangover of massive fear when the markets turned.

The setup is there for a significant market rally. The only question is where or not Big Money commits and starts buying in the next month or two. So far they have not, but the setup is there.

My other goal was to raise cash and have lots of capital to commit to the new leadership that would drive this new Bull Market. The leaders of the last Bull seldom lead the new one, so you need to sell past leaders when they are high in price to be able to buy the next round of leadership.

I think I achieved both of those goals. That is why you are reading my blog and not looking for a new advisor.