“To catch a thief, appoint a thief.”
This is a comment supposedly attributed to President Franklin Delano Roosevelt when he appointed Joseph Kennedy as the first head of the new Securities and Exchange Commission (SEC)
“There are two things people should never see being made—-laws and sausages,”
– Nineteenth Century German Chancellor Count Otto von Bismarck
Many in the financial services industry—big brokerages, big fund companies, high-priced advisers—want you to invest their way. That means using pricey products that are good for them, but lousy for the average investor.
The piggy ones—brokers with sales quotas, the fund companies with high-cost structures including lavish advertising budgets that get included in their outrageous fund expense ratios—hope you will never see them making their financial sausages. They’re often rancid and overpriced.
Yet many in the business want you to buy high priced products. They’re often made by employers and cost the client more than easily obtainable plain vanilla competitors.
Why?
They often get paid more in commissions when you buy their employers’ products, even if they are lousy, overpriced and inappropriate for the average investor. One of the goals of a MoneySense investor is to identify those bad products that eat up precious investment dollars and avoid them. Then substitute simple easy-to-use investments that achieve long term financial goals.
The plain vanilla funds often turn out to be the simplest, often not-advertised, products. They also tend to be better performers over the long term, but it is difficult to explain this to some investors.
They often focus on what happened in the last quarter or year. They want quick, overnight wealth. They are excited by some sales oriented financial professionals who believe their company’s funds or investments are fabulous. The sales jockeys—men and women with sales quotas—make promises that are unachievable. And, at the height of a bull market, many investors often have unrealistic expectations.
Ridiculous Expectations
I remember, at the end of the 1990s, when markets were routinely returning 20 percent a year, some thought they were being ripped off because they didn’t get more than that. They opted for riskier investments. They turned their backs on the plain vanilla options that offered them the best chance to get good long-term returns.
In short, this chapter will explain why low-cost index funds are the best choice for most beginning MoneySense investors.
They are also usually better for many people who have already accumulated some assets. By the way, Warren Buffett has said that, for most individual investors not willing to do through extensive investment research to find the best stocks, index funds are usually the best option.
Different People Reach the Same Conclusion
In going through the reasons why low-cost index funds are the best investment for most individual investors, I will rely on experts such as John Bogle, the founder of the Vanguard Group of Funds, and Wayne H. Wagner, a stock trading expert who has been an adviser to money managers and studied how costs affect investors.
I will also cite one of the analysts who was caught up in a huge Wall Street financial scandal—Henry Blodget. For many, he was the ultimate financial industry sleazebag. He was an example of how the financial services business, like most of big government, puts its interests before those of the individual.
Blodget is a former Merrill Lynch analyst who was thrown out of the securities business. He had been recommending stocks his employer was pushing. These were stocks he knew were losers for the investors but great for his employer.
Why am I including the once sleazy Blodget as one of our guides to obtaining good returns and building up a nest egg over the long term?
Like Bismarck and Joe Kennedy, the “born again” Blodget knows where the bodies are buried. He understands how the tricks are played. He played many of them himself. Personal aside—how does one learn about something that one could not understand on one’s own?
Can You Find the Scam?
As a reporter, I have seen, many times, that the way to learn about something that seems as if it will never be understood is to look for someone who has been or was thoroughly involved in a scam and is now so upset that the he or she is ready to spill the beans. Ask him or her to explain to you how a scam works step-by-step. Since he or she has been part of a con game, this person can simplify something so that even the average person can understand what is going on.
Scotty Reston, a well-known columnist and reporter for the New York Times in the 1940s through 1990s, learned about the 1944 Bretton Woods monetary agreement when others didn’t have a clue what was going on. He spoke with a conference delegate who was angry about the international monetary policy agreement. He was willing to explain everything to Reston privately and in detail. He even gave him a copy of the Bretton Woods agreement, which was a major coup for Reston’s paper.
“Always look for the unhappy ones,” Reston concluded. That is in part how we identify the bad investments that are all around us.
So Blodget, in a mea culpa book, “The Wall Street Self-Defense Manual. A Consumer’s Guide to Intelligent Investing.” (Atlas Books, New York), tells you exactly why index funds are your best investment. You don’t have to like Blodget to like the book. In admitting his sins, Blodget explains how and why to avoid some of the worst investments.
It reminds you of Bismarck warning you about sausages and bad laws. It is the same reasoning that led FDR to appoint Joe Kennedy as the first head of the United States Securities and Exchange Commission (SEC).That’s because Joe Kennedy, who pulled a few shady deals in his time, knew all about bucket shops. Indeed, the idea of finding the right person to root out a rogue is that “it takes one to know one.” It is the idea that it takes a thief, or possibly a reformed one, to catch a thief.
A bucket shop was a sleazy, unregulated brokerage where the average investor was often cheated. Blodget, like Bismarck and Joe Kennedy, knew all the tricks of the game. He knew them because he pulled many of them and he also knows how to steer clear of them.
What was Henry Blodget’s recommendation? More in the next installment.
