& THE FINANCIAL CRASH
Almost totally ignored
in the coverage of the financial crash is the role of poor investment
advice. Not the Bernie Madoff version, but run of the mill standard
advice that left endowments of non profits and 401Ks down 40%.
At the heart of
this bad advice was the absence of a single word: sell.
This is not unique
to the fiscal crisis. Investment advisers hate that word. Try
to find good discussions on when to sell a stock and you'll be
hard pressed. It's there, but just not anywhere near as handy
as its opposite: buy and hold.
Part of the problem
may be a loyalty to the overall market as opposed to the individual
investor. After all, if everyone played the market smart, it
wouldn't be anywhere near as good a place to put your money.
If, say, everyone tried to sell a stock when it declined a certain
amount, only the lucky early traders would be ahead of the collapse
as the stock headed like a cigarette butt to the floor.
But as long as you
have a huge constituency of the placid, predictable and permanent,
traders can have their profits without the amateurs spoiling
Some of this is
what Catherine Austin Fitts calls "pump and dump,"
-"artificially inflating the price of a stock or other security
through promotion, in order to sell at the inflated price,"
and then making even more by short-selling." In fact, Fitts
thinks the whole American economy is being pumped and dumped.
But if you think
about it, any form of gambling depends heavily on a large number
of reliably gullible participants. The financial markets are
Where there is a
difference is that the federal government does not pretend to
regulate the rules of poker the way it claims to control the
Let's imagine that
we were to turn over the regulation of markets to the EPA or
FDA. One of the first things these agencies might do is figure
out how to have average participants adequately informed of the
hazards they face and what to do about it. This would be in contrast
with federal market regulators whose first concern is the market
There are, to be
sure, some non-governmental sources of such information and while
they are a bit hard to find, they are well worth pursuing.
One is the amazing
Mark Hulbert who years ago decided to keep track of how well
investment newsletters actually did their job. He follows over
180 newsletters and the results can be pretty glum. For example,
in the past year only less than ten percent of the newsletters
have made suggestions that have produced a net gain. Over five
years, almost precisely half have made no money. Hulbert tracks
both long term and short term results and parses them by different
categories. Imagine if the federal government required every
registered investment advisor to report their personal score
with the same accuracy as, say, a baseball team.
Hulbert's work also
points to newsletters that have good records in dealing with
timing such as Timers Digest, the Chartist and Cabot Market Letter.
Timers Digest, for example, keeps close tabs on the timers with
the best records and Cabot offers some good and simple advice
on when and how to sell, such as
- When to cut losses
- Never let a solid profit turn into a loss
- Remember that you can always buy a stock back
How much and what
sort of regulation there should be to allow investors to be better
informed about dealing with bear markets and when to sell is
a worthy topic for considerable debate, but what isn't debatable
is that, in the face of 40% market collapse, untold numbers of
investors ended up in trouble because they had been taught to
buy and hold.
To give an idea
of the effects of such advice, consider two investors: one who
sells a stock when it drops 20%, the other who holds on to the
stock as it declines 40%. The first investors' portfolio needs
to rise 25% to get back to where it was; the second's portfolio
will have to go up by two thirds. This is not an insignificant
As things stand
now, the average investor gets neither good basic information
about the reliability of their investment advice nor is the government
interested in slightest in doing something about it. And so these
investors buy and hold and while others, who aren't called traders
for nothing, make their profits.