RE: Care to give me a hand?

Here are a few of my responses from the comments on yesterday’s blog post. My questions to you were:

How do you think mutual fund money managers and Wall Street brokers and pros make these all-important decisions?

Are they just guessing? Shooting blind? Or do they have tested, reliable ways to structure portfolios that truly do minimize your risk while maximizing profit potential?

Elizabeth - 01.20.10 at 11:39 am

I think too many Wall Street insiders are exactly that — insiders, operating with too much foreknowlege due to deliberate manipulations by those who make money when stock goes in either direction. What I find so infuriating is that the average American investors (Jack and Jill with their 401(k) plans) are so clueless, and so manipulated, and the targets and victims of predators completely out of their league. Theft and deception is the name of the game. People are slowing awakening and wising up. The financial system is not only sick, but dying, and will bite the dust. At this point I just stay out of the paper and digital games, and only buy physical product precious metal and store it in locations I control.

Dear Elizabeth,

You’re absolutely right, there is no doubt lots of insider info Wall Street uses to their advantage.  But they’re also obviously, not smart enough to use their strategic advantages to time their investments (and the ones they pitch to the public), accurately enough. If they were, they would have avoided the real estate meltdown!

My view is that Wall Street itself gets all too caught up in crowd behavior, and very often, cannot see the forest from the trees. So they are doomed to getting the major turns in markets and the economy, wrong. The key to successful investing is to use the history of the markets and its various sectors – they are full of objective lessons to be learned! — Larry

Dennis Healey - 01.20.10 at 11:40 am

Larry,

My opinion isn’t worth much, but here it is:

1) Fund managers and the like must know something but so many of them are so wrong most of the time that what they know doesn’t amount to much.

2) Their jobs and reputations depend more on not getting it wrong than getting it right, and their bosses demand instant and constant results so that they are stuck in the short term. Strange when their advice to clients is usually “Buy and hold.”

3) There are lots of people who have been, Gann, and are, Buffett, successful investors and traders.

Gann wrote a book about his methods and proved they worked. I believe Buffett says very little about how he does it, but he does it convincingly. I think it’s called talent, and some of us have it in spades, in all sorts of fields, concert hall, sports, or market.

4) I would put my money, if I had any, on numbers and patterns.

Dennis Healey

Dear Dennis,

I agree – despite many attempts at reform, even the current ones – Wall Street remains as biased an industry as there is, and full of conflicts of interest. The street is largely driven by here and today, by the commissions they can generate, the profits they can garner short-term – and all at the expense of the public.

As you note, and I express to Elizabeth above — The key to successful investing is to use the history of the markets and its various sectors – they are full of objective lessons to be learned! — Larry

Steve Beckle - 01.20.10 at 11:42 am

I think their hands are partially tied by the mutual fund’s requirements to be x% invested in certain stocks (e.g. large cap, growth, etc based on the fund definition), preventing them from moving into cash during obvious bear market conditions. Risk avoidance is not part of their M.O. as evidenced by them continuing to buy and issue buy reco’swhen the market tanked early last year. Given the overall poor performance of the funds in 2008, I would have to say they’re all pretty much following the crowd and the funds rise and fall close to the major indices in general. As anecdotal proof of this, a friend of mine quit his job as a youth pastor, joined J.D. Edwards as a financial consultant with no experience, and after 6 mos. training was certified as a financial adviser with that company. Rather scary.

Dear Steve,

Yes indeed, Wall Street is all about risk, the problem being, they risk “OPM” – Other People’s Money!  How can we change that? My view is that part of regulatory reform should be to require a certain level of education for brokers and financial advisors that bases itself upon a rigorous study of the history of markets, economies, and past financial crises. There is none of that on Wall Street. Ask your friend, trained for just 6 months before becoming a financial advisor for J.D Edwards. Ask him what he knows of the Panic of 1907 … the Great Depression … the origins of the Federal Reserve – and even the recent tech wreck or real estate and mortgage bust. With all due respect, if he knows anything about them he is likely self-taught, and a very rare person. — Larry

Rob Lane - 01.20.10 at 12:15 pm

Larry–

I have a degree in Economics plus some graduate work, so that may give me a slight advantage when looking at trends in the economy and market sectors. Of course I may as well be overconfident in my own ability as contrasted to the “pros” who do in-depth analysis and pick stocks for the mutual funds.

Being retired (since age 51, now 70!) I am extremely cautious with my investments. A person with limited means has to carefully weigh the risk/reward balance. I think that most fund managers are slightly more aggressive than I am comfortable with, although most do a creditable job for their investors. I would rather go with the fund that has shown solid performance over many years than a hotshot fund that varies widely in performance, posting a loss one term and a 60% gain the next.

As to your specific question, I think that the great majority of fund managers do take their fiduciary responsibility seriously, but the depth and accuracy of analysis between funds varies widely. I doubt seriously if any fund manager goes strictly by gut feel. Of course, there will always be those slimy individuals and companies which treat the investors’ funds as their private piggy bank and manipulate funds so as to generate the largest commissions possible, regardless of the best interest or risk tolerance of the client.

It all boils down to getting a trustworthy fund manager within your risk tolerance framework, then watching him like a hawk!

Dear Rob,

Kudos to you for using your educational background in your investments and taking control of them! I think Wall Street is conditioned to perform poorly for two major reasons …

A. The short-sighted need to generate commissions every day

B. A very serious lack of education in the history of markets, market panics, and overall macro economics. — Larry

Lynn - 01.20.10 at 1:20 pm

I think Wall Street is just as confused as the rest of us. They would lead you to believe they employ modern portfolio theory and allocations - but their decisions are driven by their bottom line - which is very seldom the individual investor’s bottom line.

This question is timely because I am trying to decide whether to hire an investment manager. The hype is that they are unemotional and have vast amounts of backroom research to follow all the trends in the various asset classes and interest rates. This is still a version of “we can beat the market”. Your questions in these blogs - point to the underlying questions most investors now have - what is the “market” - is buy and hold still a viable strategy - who can I trust with reliable advice - etc.

Thanks for making us think thru all this.

Dear Lynn,

Right on! Their decisions are all too often driven by their bottom line, not yours! The biggest problem: A lack of education in the history of the markets, in the real patterns that give birth to market movements, and what I call “linear thinking”.  Today’s world is too complex for linear thinking. One must think dynamically, and question everything with a scientific and historical rigor. Otherwise, as the saying goes, one is doomed to repeat the mistakes of the past. — Larry

Related Posts

• Care to give me a hand? (01/20/10)
• Wall Street’s Achilles’ heel: How vulnerable are you? (01/25/10)
• Time to load up on gold and silver? (01/29/10)
• Can Wall Street EVER be trusted? (02/05/10)
• Washington Screws It Up AGAIN! (02/04/10)