Breakout

3 Ways Wall Street Is “Rigging” the Game

Jeff Macke
Breakout

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As a former, and rather infamous stockbroker, Lee Munson has an intimate knowledge of the financial industry. Now an author and founder of the advisory firm Portfolio LLC, Munson has turned the tables on his former industry by exposing some of the most egregious ways Wall Street is rigging the playing field at the expense of individual investors.

In the attached clip Munson describes 3 products and strategies decidedly not in your financial self-interest.

1. Wall Street invents products then creates demand

"Wall Street is constantly coming up with a new product or mantra to get you to buy," Munson explains. By way of example the author of Rigged Money: Beating Wall Street at It's Own Game cites the 1980's creation of separate classes of mutual funds such as "Value" and "Growth".

The differences in most of these funds are not what they hold but how they're packaged. Investing is and always has been all about finding growth at a reasonable value. There is no actual mandate as to what these funds can and can't hold. Mutual fund managers are in the business of generating returns (read: "growth"). That's how the managers keep their jobs and add value.

The bastard children of Growth and Value --BRIC Funds (BKF), and the now retired Bill Miller's Legg Mason Capital Value Management (LMVTX) which famously held value plays like Amazon (AMZN)-- are simply different spins on the same fake distinction charade. "Buy and hold" is largely a function of clients wanting to avoid having their brokers pitch them a faux new strategy every few months.

2. The Lie of the Pie: Allocation suggestions are absurd

"The most important thing for investors to understand right here, right now, is the lie of the pie chart," says Munson.

The pie chart is a time-honored Wall Street illustration of how your money can be best spread out among asset categories to maximize returns while minimizing risk (another twist on value vs. growth). This point is best illustrated rather than spoken. Consider the above points about false distinctions between highly correlated asset classes for a moment.

Now look at this typical pie chart suggestion for how you should invest. If you can tell me the distinction between "Real Return" and "Absolute Return" strategies, I'll ask Munson to apologize.

3. Most ETF's are scams

Dismissing exchange traded funds as a product that's been "bastardized" beyond repair by the industry, Munson says there 20 or 30 good ETFs providing a liquid way to mirror major indexes. From this useful beginning, we now "have one or two a day coming out now that the SEC should be ashamed about approving."

ETFs amount to passively managed mutual funds. An ETF wholesaler smells appetite for a sector or region, picks 20 or 30 names it deems representative of said sector at the moment of inception, then releases the product for mass consumption. Whatever happens to individual companies in said ETF over time matters not a whit; the companies and ETF stay the same no matter how the world turns.

As for the leveraged ETF's Munson dismisses them as not leveraged, not accurate, and correlated only day to day as opposed to over the long haul. They work on a day to day basis but Munson equates levered ETFs with a trip to the craps table in terms of an investment strategy.

Munson says those who "do anything other than day-trade, you should stick far, far away from (leveraged ETFs) them."

Having torn down the industry, the appealingly shameless Munson has a single bit of advice for those looking to chart a logical investing course: "Buy the book."

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