I’ve always been intrigued by how seemingly small events can trigger sudden downturns in overvalued market sectors. In March of 2000, a Barron’s cover story did more than anything to accelerate the bursting of the dotcom bubble. Last week, a single tweet sparked a major selloff in biotechs and pharmaceuticals.
After one of the craziest rides anyone can remember, with the Dow dropping over 1000 points in a session for the first time and everybody learning the definition of “Rule 48,” stocks ended up pretty much where they began last week. Incredibly, the Dow, S&P and Nasdaq were actually up modestly by Friday’s close. Besides Xanax manufacturers, there were two clear winners in all of the sound and fury signifying not very much: the market’s croupiers—the brokers and Wall Street traders who collect commissions on stocks, bonds, and other financial products—and Mr. John Clifton Bogle.
As a Princeton graduate student in the 1970s, Bogle invented the index fund. Today almost 1/3rd of all mutual fund assets are invested in index funds and Bogle’s Vanguard Group is the nation’s largest money management firm as measured by assets under management. Study after academic study shows that the S&P 500 has produced an 8.5 percent annual return since World War II, while the average actively-managed mutual fund has delivered about 7 percent (after deducting the 1.5 percent average “expense ratio”). The typical retail investor lags far behind, earning closer to 5 percent a year. Weeks like this past one are a big reason why.
A few months ago I traveled to Houston and wrote about the increasingly upbeat mood I encountered at the energy companies I visited there. I came away from that trip thinking that well-managed service and exploration firms might be attractive investments. Many had declined 40-60 percent in response to oil’s decline from $104 last summer to the low-$40s by late fall. As oil prices rose past $60 this spring, I suspected these stocks could eventually rally.
So much for that idea.
I’m always amazed—and a little horrified—at how poorly my industry treats its customers. Unlike many service professions, the licensing requirements for financial advisors are minimal, and far too many so-called “wealth managers” manage their own wealth first by promoting what John Bogle calls “salesmanship over stewardship.” Like real estate agents or used car salesmen, they push big ticket, financially destructive products with sizable embedded commissions.
But as incompetent and flat out dishonest as folks in my business can be, John and Jane Q. Public are often their own worst enemies. Through greed, gullibility, or gross negligence, people routinely blow large sums of their hard-earned savings. These five mistakes are, by far, the best ways to torch your net worth:
Another week has brought yet another much-publicized call for the Federal Reserve to delay raising interest rates. Yesterday, the International Monetary Fund opined that the Fed should hold off on a rate hike until 2016.
Give me a break.
Apologies for the sporadic blogging of late. I’ve been travelling a fair amount and I also wrote a piece for CNBC.com on the Five Ways to Spot a Dead Company Walking.
Two important and closely connected events took place in the world of finance since my last post. First, former Fed chair Ben Bernanke announced that he was taking a job as an “advisor” at the massive hedge fund Citadel Group. Then the stock of Goldman Sachs hit $200 for the first time since January of 2008. You might not think these things are related, but to me, they’re inextricably linked–and extremely dispiriting.
More than half a century ago, President Eisenhower warned the nation about the burgeoning Military-Industrial Complex. That monstrous public-private hybrid now sucks up more than half of all discretionary spending. But these recent events prove that the Wall Street-Washington Complex might be even more dangerous.
[note: this post originally appeared on my Yahoo! Finance contributor page]
For the past few weeks, Wall Street pundits and prognosticators have been loudly citing every hint of bad economic news as a reason the Fed shouldn’t follow through with its pledge to boost interest rates. “Corporate earnings are down!” they’ve shouted. “Job growth is decelerating! Inflation dropped to zero again! We can’t raise rates in this environment!”
It’s time to stop listening to these market Cassandras. We not only should raise rates, we must raise rates.
Earlier this week, I watched the documentary Page One about the inner workings of the New York Times and the dire financial difficulties daily newspapers face to survive. It’s a great movie. It’s also a very depressing movie. Journalism is one of my passions. Every year, I lecture at the journalism schools of UC Berkeley and Northwestern, and I believe an informed citizenry is vital for our country’s economic and cultural wellbeing. That’s why it’s so disturbing to see newspapers dying all over the country while glib, superficial, and often politically slanted outlets like Gawker and the Huffington Post thrive.
The movie also touches on another depressing trend in American business–the “strip and flip” mentality of too many private equity firms, and the warped way our tax system aids and abets these destructive behaviors.
Last week it was widely reported that regulators slapped a $43.5 million fine on multiple investment banks for passing off overly positive research analysis on the now private retailer Toys R Us. They did this hoping to curry favor with the current owners of Toys so that the company might pick those Wall Street firms as bookrunners for a possible Toys initial public offering.
I was shocked to hear this. Not shocked because news broke that some purportedly objective research from Wall Street turned out to be bogus, but because that is news at all. By now, I figured everyone–and I mean everyone–knew that recommendations from Wall Street always have been and always will be skewed at best and flat-out misleading at worst.
In case you missed it, something unusual happened last week: a dishonest money manager went to prison.
Former hedge fund manager Larry Goldfarb was sentenced to 14 months in prison for pocketing $6 million from side pocket investments and diverting money for his personal use. I write about Goldfarb in my book (available for preorder here!). He was a prominent figure in the Bay Area investment world. To his credit, he gave a lot of money to charity and worthy causes. Unfortunately, a lot of it wasn’t necessarily his to give. He was busted a couple of years ago and promised to repay his investors the money he took from his fund. But Larry couldn’t stop being Larry and now he’s going to federal prison because of it.
According to the federal prosecutor in charge of the case, “instead of paying the agreed upon restitution and disgorgement, Mr. Goldfarb spent hundreds of thousands of dollars on various personal indulgences, including Golden State Warriors season tickets, private air travel, and vacations.”
Mr. Goldfarb is a poster child for many people on Wall Street and in investment management: smart, personable, and shamelessly unethical. He is another example of why Wall Street, far more than corporate America, needs tighter regulation. But the truly disturbing part of Goldfarb’s career might not be the illegal stuff he was prosecuted for–it’s the legal activity one of his former employers practiced right out in the open.