Get new posts by email:

Just Close Your Eyes and Swing

“Taking investing advice from a Wall Street firm is like getting hitting tips from the opposing team’s pitcher.” – Michael James
Years ago I thought I understood the mechanics of investing. You had a broker at some big financial firm who took your trades and gave you advice on trading stocks and bonds. The first time I found out that these same firms also have people who do trades with company money, I couldn’t understand how this could be anything but a huge conflict of interest. But, I assumed that I just didn’t understand some critical aspect of this relationship.

Enough time has passed that I now realize that I wasn’t really missing anything; there is a conflict of interest. There may be rules or laws intended to prevent abuse, but there remains an incentive for financial firms to advise their clients to trade the opposite sides taken by their internal traders. For example, if the company is trying desperately to unload a pile of XYZ stock they believe is about to tank, one way to find enough buyers is to advise their clients to buy XYZ stock.

Given this misalignment of interests, why do so many people take investing advice from financial firms that trade on their own accounts? How do they tell whether they’re getting the investment equivalent of “just close your eyes and swing”?

<< Previous Post Next Post >>

Comments

  1. geneSeptember 19, 2012 at 12:29 PM

    Hmmm, this insight leads to a contrarian strategy. When a broker calls, simply take the opposite of the recommendation. He says buy, you short. This will confuse and demoralize your broker, so it's really a double win.

    ReplyDelete
  2. Michael JamesSeptember 19, 2012 at 12:48 PM

    @Gene: This would probably work nicely if your broker is consistently steering you the wrong way. So, you need to get the least scrupulous broker you can find to make this work :-)

    ReplyDelete

Post a Comment

Popular posts from this blog

Short Takes: InvestorLine’s HISAs, 24-Hour Trading, and more

I recently moved some cash into BMO InvestorLine’s high-interest savings accounts (HISAs) that are structured as mutual funds.  Their designations are BMT104, BMT109, and BMT114, and they purportedly pay 4.35% annual interest (which they can change whenever they like).  However, the way they report the monthly interest payments is so baffling that I wasn’t able to sort it out in my first 15 minutes of trying.  A further complication is the following text in the HISA description: “The Bank may pay, monthly or quarterly, compensation to your Dealer at an annual rate of up to 0.25% of the daily closing balance in the BMO HISA.”  I couldn’t find any evidence of such a charge, but I haven’t been invested for a full quarter, and I can’t yet say that such a charge isn’t buried somehow in the confusing reporting.  I have more digging to do before I can recommend these HISAs. Here are some short takes and some weekend reading: Preet Banerjee explains the dangers of Robi...
Read more

My Asset Allocation

I’ve resisted discussing my asset allocation for some time, but now is finally the time to describe it and the reasons behind it. I’m not holding it out as a model portfolio; I believe it’s suitable for me and not necessarily anyone else. With that warning, enjoy the discussion and feel free to ask questions or take some pot-shots. The main reason why I haven’t discussed my asset allocation in detail before now is that I don’t want readers to treat it like a model portfolio and follow it blindly. Everyone’s situation is different. The need for variation in asset allocation from one investor to the next usually isn’t huge, but there is no one-size-fits-all portfolio. A secondary reason for keeping my asset allocation to myself is that I can’t be sure I’ll never change it. For example, I recently made the minor change of switching from an ETF of small-cap stocks to an ETF of small-cap value stocks . I don’t have any plans to change my current allocation, but I may think differe...
Read more

What to Do About Crazy Stock Valuations

Image
The last time I had to put a lot of effort into thinking about my finances was back when I retired in mid-2017.  I had ideas of how to manage my money after retirement, but it wasn’t until a couple of years had gone by that I felt confident that my long-term plans would work for me.  I had my portfolio on autopilot, and my investing spreadsheet would email me if I needed to take some action. I was fortunate that I happened to retire into a huge bull market.  I got the upside of sequence-of-returns risk.  The downside risk is that stocks will plummet during your early retirement years, and your regular spending will dig deep into your portfolio.  Happily for me, I got the opposite result.  My family’s spending barely made a dent in the relentless rise of the stock market. However, stock prices have become crazy, particularly in the U.S.  One measure of stock priciness is Robert Shiller’s Cyclically Adjusted Price-Earnings (CAPE) ratio .  In the U.S...
Read more

Archive

Show more