Beating Wall Street at Its Own Game (Part 2) – Defensive Moves Needed

Tuesday, April 13, 2010

To play and win at the Wall Street game requires strong defensive moves. Wall Street firms are adept at selling (both advice and products), and we must avoid being drawn into inappropriate investments.

What’s wrong with Wall Street advice and products? They often are based on investors’ current feelings, not on long-term needs. This is like the tongue-in-cheek description of a consultant: “A person who borrows your watch to tell you what time it is.”

For example, when were those exciting ads showing a tropical island with “Retire Rich!” emblazoned across it? Answer: Near the top of the market, when investors were jumping into exciting and supposedly surefire investments. Now we see “retire comfortably” in lower-case letters and no islands.

What changed? The investors (AKA the customers). Before, they wanted big returns. Now they want safety, income and assurances. So, Wall Street has shifted gears. Not because doing so is the wisest investment course, but because it makes good business sense. Meeting investors’ desires rather than their needs is always an easier sale.

Gone (pretty much) are the days of commission paid brokers pushing trades to “churn and earn” (or “churn and burn,” depending on whether we’re talking about the broker or the customer). Now, fees tend to represent much of the income, although the fees can differ and there are still commission payments – both can affect the advice and product marketing investors receive.

This activity doesn’t mean we need to avoid Wall Street’s advisory services and products. Many can be important tools. But we have to use them on our own terms. That means ensuring we have a strong defensive play to keep from getting sold by Wall Street’s latest sales pitch, even if it feels good.

So… Expect Wall Street to be focused on the easiest sale, with a slant to what pays best. With that defensive point of view, we can then look at what Wall Street has to offer and select what can be valuable to us.

Next: Part 3 – Advisory services

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John Tobey on Seeking Alpha

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April 2010