3 Rules to "Rig the Game"

Photo by  Dave Gough

Photo by Dave Gough

“The game is rigged.”

Anybody remember Merrill Lynch CEO, David Komansky, publicly apologizing back in 2002 for Merrill’s analyst, Henry Blodget, publicly hyping a stock called “Infospace,” while privately referring to it as a “piece of junk”? Then NY Attorney General Elliot Spitzer said, “This was the way things worked at Merrill Lynch.”

“The house always wins.”

Dozens of leading brokerage houses, including Bank of America, Citigroup, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley, Wachovia Capital, Wells Fargo, UBS, and others collectively paid hundreds of millions of dollars in penalties for their roles in defrauding investors through misconduct that led to or arose from the 2008 financial crisis. The transgressions included concealing from investors the risks, terms, and improper pricing of complex structured products and/or making misleading disclosures to investors about mortgage-related risks and exposure.

“They don’t build those big buildings on Wall Street on winners.”

In 2014, ten of the biggest brokerage firms payed $43.5 million dollars in fines according to FINRA.org, “for allowing their equity research analysts to solicit investment banking business and for offering favorable research coverage in connection with the 2010 planned initial public offering of Toys"R"Us.”

At times, it can seem that the fat cats have stacked the deck against the average investor. However, if you follow a few simple rules, you can swing the odds in your favor in spite of so many of the brokerage companies putting profits ahead of their customers.

Rule #1 - Have a long-term perspective. Imagine you were a recent college graduate in December 1972 and you received congratulatory gifts totaling $1000. Avoiding the temptation of applying your windfall towards a new car with an average price of $3200, you are able to invest the entire amount in the S&P 500® index. That wasn’t actually possible then, nor is it now, but we’re imagining. Vanguard was still a couple of years from opening their doors, so you probably couldn’t have even approximated this feat without incurring substantial commissions or sales charges, but for the sake of imagination let’s pretend that you could.

Here is how your hypothetical $1,000 investment made on 12/31/1972 would have looked at the end of subsequent years, along with what may have been some typical thoughts:

1973  $853    “I knew I should have waited.”
1974  $627    “I wonder if I’m the only fool still invested in stocks?”
1975  $860    “I should have bought a car!”
1977  $990    “I could be earning 10% a year in CDs!”
1982  $1,913 “Time magazine said stocks are dead?”
1992  $8,509 “I’m glad I didn’t put it all in CDs!”
2002  $21,107 “The bubble has burst!”
2008  $23,769 “How much have we lost this year?”
2012  $42,082 “Glad I didn’t panic in 2008!”
2014  $61,400 “I am an investing genius!”

You should know that the past can’t predict the future, and that expenses and taxes would have led to these results being somewhat lower, but this is a powerful example of the benefits of patience and compounding.

Rule #2 – Keep it simple. “Listen, here’s the thing. If you can’t spot the sucker in your first half hour at the table, then YOU are the sucker,” said the character, Mike McDermott in the 1998 film, Rounders. The investment industry thrives on selling products that are profitable to them and confusing to you. If it sounds too good to be true, it probably is.

Similar to advice suggesting you stop smoking, exercise more, and eat your vegetables, we practice and preach diversification, keeping costs down, and disciplined rebalancing. If someone is pitching an approach much more complicated than that, start looking for the sucker at the table.

Rule #3 – Be courageous. Warren Buffet famously shared, "I will tell you the secret to getting rich on Wall Street. You try to be greedy when others are fearful. And you try to be fearful when others are greedy." To muster the necessary courage to follow this advice, it can be helpful to remember that courage is only possible if you are scared.

Comprehensive financial planning coupled with psychometric risk profiling can help you better understand what may be necessary to achieve your goals, from a resources as well as a risk perspective. That’s why we offer these services to all ATX Portfolio Advisors’ clients.

There is no certainty year to year that any investment approach will beat another, but by following these three rules you can “rig the game” in your favor, no matter what junk the fat cats are peddling this year.