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Saturday, February 21, 2009

Lie to me...

No, I am not talking about the TV show...

In this case I am referencing an article called The 5 biggest lies on Wall Street by Michael Brush. I have highlighted excerpts and give my take on each as well as his…

Big Lie No. 1: The market will take care of everything.

My take:
I keep thinking of an example from the little book which recounts the professor asking his lecture class about graphs of stocks. It doesn't matter which one you look at (pick one). “Why does the chart go up and down all the time?”. The professor got all the good answers about valuation, supply and demand, earnings reports, product pipeline, etc etc...

The real answer is - “because the market has no idea what any particular stock is worth at any particular point in time.”

Yes, we can use all the good market analysis techniques to make “educated” guesses, but it still comes down to speculation.

Of course, what would be nice to go along with all this educated speculation would be proper regulation and oversight? But that did not happen...

Article…
Wall Street lobbyists persuaded would-be regulators to lay off. "The markets". They and the market would find the best solutions to any problems on their own. We convinced ourselves that the inmates could regulate themselves. Perhaps the biggest gaffe was allowing a multitrillion-dollar market in credit default swaps. In the free-for-all that ensued, the Wall Street Masters of the Universe made untold millions -- and left us with huge problems. The damage caused by all the tricks, scams and skullduggery has cost more than $7 trillion in market losses so far, not to mention millions of jobs and a deep recession. Of course, none of this could have happened if regulators hadn't looked the other way as mortgage originators handed home loans to anyone who could fog a mirror.

Big Lie No. 2: The 'experts' will help you.

My take:
When I first started investing, I did like most: bought a couple mutual funds and passively let others do my thinking.

Over time, I realized that I could do just as well if not better than some, on my own. Yes, it required more work and more thought, but hey, what’s wrong with some good ol' fashion work, research and actually thinking about things and coming to your own conclusions...

Article…
Most mutual funds are down as much as the market -- or worse. The geniuses running hedge funds did little better. A few commentators managed to forecast the market disaster; most missed it. There's a simple reason why they missed the coming carnage.The "experts" have conflicts of interest. Mutual funds, hedge funds and brokerages want to keep you at the table so that they can continue to earn fees from your nest egg. " They don't care if you win or lose; they just want you to keep playing the game.”
The media don't get a free pass either. Media outlets such as CNBC, and presumably this Web site (MSN Money), regularly fall short in guiding investors because their real priority is to provide entertainment -- and that they have to dumb things down too much to keep content interesting.

My take: (continued)
I am not so sure about his MSN Money reference. I don’t think the Money section of the site is soooo bad. MSN Money does want readers / viewers to keep coming back to their site. They do need to keep their content somewhat entertaining, if not interesting.

After all, I keep reading them because over time I have found some to have good insight and ideas. Also, the site has helped me in my research and screens.

I would however; put Cramer and Motley Fool into the dumb down and sacrifice content for entertainment category…

Big Lie No. 3: Buy and hold.

My take:
I actually used to follow this more closely than I do now. After all, one of the ‘rules’ from the little book is to buy and hold for at least a year. About the only thing I hold now is cash...

I did however stick to my 20 – 20 rule, more importantly the bottom 20% rule and sold as soon as a stock I owned lost 20%. Unfortunately I did not always follow the top 20% rule and ended up missing out on taking my profits when I had them. Lesson learned...

Think of it this way. Lets say we use a nice easy modest but good number of 10%. Would you be happy if, when you made money you were guaranteed to make at least 10%. Sure! If you could be guaranteed to never lose more than 10% would you be happy? Maybe, just so long as you didn’t continuously loose 10% over and over again…

If a stock hits your goal of return, be happy that you were right and take your money. If you were wrong, be happy you did not loose your shirt.

If you think you can be right again, you can always reinvest it.

Article…
Anyone who has followed this advice since the late 1990s now feels deceived."Buy and hold" once seemed so obvious. Over the long haul, stocks advance 10% to 12% a year, goes the mantra. So you can't ever go wrong adding money to stock funds.Then the level of risk in the stock market changed violently. But investors -- or their financial advisers -- didn't adjust their portfolios away from stocks toward safer assets like cash, "If the risks in the markets change, your investment allocations must also change.”

Big Lie No. 4: Overpaid CEOs are worth the money.

My take: - I’ll just site the article on this one…

Article…
Company PR machines trot out the old saw that pay has to be so high "to attract the best talent."Oh, really?An extreme under appreciation of his problems; At Lehman Bros.' very last annual meeting in April 2008, the then-CEO Richard Fuld opined that "the worst of the impact of the financial markets is behind us.” In June, he told investors the investment bank was "well-positioned" because of efforts to strengthen its balance sheet. Yet by autumn, Lehman vanished, setting off the October 2008 market crash. It had been killed by mortgage-backed securities and other investments made on Fuld's watch. The cost of moving too fast; On Sept. 15, Bank of America CEO Ken Lewis announced that the banking giant was buying Merrill Lynch, saying the deal -- cobbled together over a weekend -- was "a great opportunity" for shareholders because together the companies would be "more valuable" due to synergies. Bank of America reported a $21.5 billion fourth-quarter loss. The government responded by injecting $20 billion in new capital into Bank of America, and guaranteeing $118 billion in potential losses from the Merrill Lynch deal.

What seems clear is that these executives were blissfully ignorant of the growing risks to their businesses or simply chose to ignore them. They were rewarded for hitting benchmarks on cost cutting, pretax income and operating cash flow.
None of this is new. CEOs have been collecting big bucks for lousy performances for years.

Big Lie No. 5: Buy a flat-screen TV, save the economy.

My take:
On this is a little bit different than his but overall similar. Let me explain.
I think, for good reasons, that the pendulum has swung too far the other way. Before it was too far towards ‘debt is OK’. Now, it is too far towards hoard all your cash…

Rather, some of the same old mantras should still be followed…

- Don’t spend more than your earn
- Save for a rainy day
- Set goals, be flexible and more importantly it’s ok to reward yourself once in a while.

Article…
Maybe the biggest lie about to be fed on people is that they should go out and shop to save the economy. Wall Street wants you to spend to pump up the economy. Much of the federal stimulus package enacted this week entails tax breaks and handouts to get people spending.But it's really just another big lie to tell people they'll make a difference if they go out and shop.The problem is that the economy is going nowhere -- no matter how much anyone spends -- until someone comes up with a plan to give the banks enough of a capital cushion so they start lending again. So far, we haven't seen that happen.So play it safe. Hold on to your money. Most of you need to save more for retirement, anyway.

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