Wall Street and its many helpers have many secrets. Here is the good news. I have spent multiple decades trying my best to learn about those secrets and now I am going to share with you all that I know so you can know the truth vs. the noise that is distributed via marketing, on a daily basis. Here is more good news. Once you hear the secrets, you cannot unhear them. Let's go behind the proverbial curtain!
Those who work in the industry know there is a lot of smoke and mirrors to distract the average investor. That is on purpose. It is kind of like the magician as he distracts you from what he is really doing. Much of that distraction when it comes to money starts and ends with marketing. Watch here for one of many examples. They are simply casting out the bait (marketing) and waiting to catch a few fish (us and our money).
If you gave everyone in the industry a truth serum, it would go something like this. We only have a chance in hell of beating the market over time with active management, but we spend millions of dollars convincing people we can. It is money well spent as we spend our days scaring people and telling them stories that are very unlikely to happen before taking their money and then giving them below market returns.
Here is more truth serum. There is a lot of internal costs with actively managed mutual funds and advisors beyond the expense ratio, which tends to be 10x to 100x higher than an index fund. Higher turnover leads to much higher trading costs, commissions, and taxes. The bid/ask spread costs go way up. Impact costs go way up with selling of blocks of shares. The expense ratio is only one of many costs. Learn more here.
Complexity convinces a gullible public to buy even when the fees are dramatically higher and the returns are far lower. It goes like this. The more confused we can make the investor, the more likely they will defer to our judgement thinking it is too hard to understand themselves. This brings in a lot of money that we can manage. It's easy money. It feels like money falling from the sky! Watch this.
We spend a fortune on finance degrees at famous institutions to appear intelligent when it comes to stock picking. The truth? We are no better than a five year old at picking the best stock to buy or sell at any given time in the market. We can study balance sheets for 20 hours a day for 30 straight days and it doesn't matter. The chance of us picking some amazing stock is incredibly low. We ignore probabilities.
The only people who are good at picking winning stocks are people who cheat, called insider trading. Insider trading is baked into market returns meaning when you own the markets, you benefit from insider trading without actually doing it with the chance of getting caught and going to prison. Some greedy people think it's worth it. I think it's better to own the market and avoid prison.
Hedge funds are created to make a lot of money for those who run them, not those who invest in them. People with a lot of money are convinced they are going to get higher returns and better service with a hedge fund. What they actually get is higher fees (2% a year and 20% of the profit goes to the guy or gal running it) with lower returns and the high likelihood of it going out of business within the next three years.
Private equity, real estate, or credit equals high risk, illiquidity, and a bunch of companies they are trying to turn around to make a fast buck. Does that sound good to you? Not me. Private equity is packaged in a way to motivate people to take more risk than they realize with no transparency and no accountability. It is fool's gold. It sounds good, but when you look under the hood, it's messy. Learn more here.
Here is more truth serum. We can protect your money with life insurance products like annuities and whole life. This false sense of security has a boatload of commissions built in to pay the army of salespeople sent out to sell this crap. They are big money makers for the insurance company and its agents. They are also illiquid in the early years to make sure the commissions get paid out. We love them.
More truth serum. We can't sell junk bonds, so we will call them high yield bonds. We change the way we describe corporate bonds that have a high risk of defaulting. This brings in a lot more money which we all love. Same goes for death insurance. It did not sell, so we changed it to life insurance. Sales and commissions went up dramatically by the name change. Lipstick on a pig doesn't make it a beautiful woman!
More truth serum. I am graded based on how much money I pull in, not how much money I make my investors. My talent is not with investment policy, it's all about sales. The more I can pull in to manage, the more money I will make. I don't want small accounts, I want BIG ones. If you don't have $1 Million or more, go away peon. Fisher investments charges over 1% on roughly $450 Billion. Do the math!
We track everything you do with your money to include how you invest in markets all over the world. When markets drop, we ramp up the marketing because we know you are scared. We can push our services and investments like Gold and Silver when you are most vulnerable. By convincing you that we will protect your money from loss, we end up making a lot more money. We love using fear, it works!
Here is the truth we don't want you to know. We are basically a leach feeding off your money. We don't add value, we subtract value much of the time. You would be better off owning index funds and never selling. We are clinging to you by a thread, scared to death of you becoming knowledgable on the subject. The smarter you get, the more you realize you don't need us and our high fees. That's your inside information!
