Backstage Wall Street

Joshua M. Brown paints an ugly but entertaining picture of the inner working of Wall Street and how they sell investments to retail investors in his book Backstage Wall Street. It’s illuminating to see how large firms can take fresh employees who start with an interest in helping their clients, and drive these employees to treat retail investors as marks and sell them bad investments.

The book begins with a foreword and introduction that try to sell the book so hard that I almost stopped reading. The definition of terms up front along with a history lesson on Wall Street didn’t help either. Fortunately, I made it to Chapter 5 for a story about brokers enduring morning motivational speeches screamed by a 300-pound man dubbed the “Mountain of Misinformation.” In my opinion, this is where the book should have started. The rest of the book from this point was an entertaining and illuminating read.

A particularly interesting chapter was on the “straight line pitch,” a set of scripts used by stock brokers on cold calls to prospective clients. I wasn’t expecting much, but was surprised at how effectively they countered the main objections people would have to investing with a stranger on the phone. I could imagine being taken in by this pitch when I was younger and more naive.

Brown says that the life of young stock brokers consists of “guzzling Red Bull energy drinks, listening to every word at those brutal morning meetings, and learning nothing about the markets or portfolio management; they are only taught how to sell and sell hard.” As for qualifications, “Anyone who is willing to casually lie about his or her ability to outperform the markets can work there.”

Summing up his 10 years as a stock broker, Brown says “For years I had front row seats for the Olympic Games of investing stupidity,” and “brokers have no business making investment decisions for anyone.”

About deferred sales charges: “These are basically the devil.” A broker who sells funds with deferred sales charges “is either a dirtbag or he just hates you or he truly doesn’t know any better.”

Concerning mutual funds, the book has a funny table providing translations for some marketing words. One example is “Balanced” – “We will underperform both the bond and stock market. You’re welcome.”

A funny chapter begins with a phone call where he argues with an ETF provider about whether inverse ETFs are “built for crackheads and traded primarily by crackheads.” The contrast between the logical reasoning and the insulting language just added to the fun.

Parts of the book are definitely not G-rated. Elliot Spitzer’s “inability to masturbate was his eventual undoing.”

This book can hardly be called balanced, but it does provide a small counterbalance to the investment industry’s marketing machine. Overall, I think the important message is that the investment industry can take decent people and drive them to sell you investments that are bad for your investing health. There are good financial advisors, but you should start with a healthy dose of skepticism.