Navigating the waters of sophisticated investments can be difficult, to say the least. Unless your background is in finance, the terminology alone can be overwhelming. Of course, it doesn’t help when terminology is misappropriated (like Wisdom Tree calling its ETF “managed futures”), or when people who know little to nothing are able to sound like they do by relying on seemingly seamless use of jargon to boost their credibility.
Case in point: the lovely (heavy sarcasm) stock broker (we think) who was next to one of our associates on a flight from Chicago to New York this morning, doling out advice to some finance newbies. He was regaling them with stories of how to make money, and his “market” advice, without any kind of reasons or numbers provided to support his “wise” direction:
- Trade stock options. They’re easy and safe.
- As a stock broker, set your commissions as high as possible, and trade as frequently as possible.
- Never trade on margin.
- Trend following doesn’t work. It never has.
- Forex trading is the best way to make money today.
If your stomach is turning, join the club. For the record: options trading is not easy or safe; churning accounts with high commissions is illegal and immoral; we believe the facts say otherwise on trend following; and on forex… well, here’s all you need to know about our view on forex trading.
This sounds more like a line we’d hear during a backroom deal in the movie Boiler Room than in a real life conversation today, but it brings up a good point.
There’s a reason the old school stock broker (and futures broker for that matter) is going the way of the dinosaur to more of an advisor relationship where money is invested in managers rather than ‘traded’ by a broker.
The broker’s value even when they are of the highest ethical standards is questionable, as they have no track record to review and in many cases no systematic way of making their trading decisions, leaving the client at the whim of their gut feelings about this stock or that. And when they are some of the bad apples such as this guy on the plane – you’re at risk of losing a lot of money fast.
For those of you patting yourself on the back for avoiding working with transaction based brokers who are also in charge of the transaction (i.e. old school stock and futures brokers), finish up and listen up, because the moral of this story (outside of doing just that) extends far beyond the boiler rooms of Wall Street. No matter who you are, what your net worth, or what asset class you’re looking at, before you find yourself working with a guy like the clown above, do your homework. If the individual you’re about to work with sounds perfectly informed, question what you’re hearing, and do your research. If you’re being advised to adopt a strategy you don’t understand, do your homework. Watch your statements. Make sure things add up. If you’re at all concerned, get a second opinion from someone you trust. Ask for references. If you stumble across something that raises a red flag, ask them directly what it means, and dig into the issue further. At the very least, go to Google.
Our point is that no one should ever invest blindly, and that extends to selecting who you’re investing with. This philosophy is part of the reason we publish at the rate we do on the variety of topics that we do. We don’t want you to invest if you aren’t confident in where you put your money. Guys like the one above give the industry a black eye, and try as we might to counteract that, the best way to ensure that those types of fools don’t put investors at risk is through education. Even if smacking him upside the head is the more tempting solution…