More than a decade ago I worked at a miserable back-office job in the bowels of the financial services industry. But my true love was securities market analysis. I was keenly interested in stock investing and was always looking for new investment strategies. My specialty was options, a financial derivative that gives the buyer the right, but not the obligation, to purchase or sell a company’s stock for a fixed price within a certain period of time.
The thing I love most about options is that they are almost like Legos for investors. You can put them together in almost any combination you can imagine in order to build exactly the kind of investment structure you want. The best part is that you can easily determine the profit-loss characteristics of an options strategy before you invest a penny of your own money. Pretty great, right?
But options, like all potentially complex financial instruments, must be treated with respect. They are inherently levered derivative products that can just as easily magnify losses as gains. So it is best for investors to tread carefully in this space.
But in 2005 I felt like a mad scientist, feverishly slapping different option spreads, collars and overwrites together in unorthodox combinations in order to synthesize the perfect investment. One of the motivators behind my option-themed vision quest was the desire to create an investing strategy that could keep up with the then booming stock market, but with less risk.
And then I found it – the (nearly) perfect options strategy. I was ecstatic. This new options method boosted my projected investment returns by around 200 basis points, or 2%, per annum. That is a massive performance increase in the world of investing. Better yet, it increased potential returns while strictly controlling risk at the same time – a vitally important feature of any good investment plan.
But then I looked around and noticed something deeply disturbing. You can’t compete with Wall Street con men.
If an honest man painstakingly finds a way to boost investment returns from 10% to 12%, the stock fraudsters will claim to be able to get 15% or 20%. If an honest man discovers a new, low-risk investment strategy, the securities con artists will falsely say that their investments have no risk whatsoever. If an honest man invents a legitimate way to lower volatility in a portfolio without compromising returns, the Wall Street con men will purport to construct portfolios with high returns and no volatility at all.
Unfortunately, my cynicism surrounding the securities industry is borne out of experience. For example, back during the housing bubble in the mid 2000s, Wall Street con men in very expensive suits were selling shady CDO (collateralized debt obligation) and RMBS (residential mortgage-backed security) securities as substitutes for ultra-safe U.S. Treasury bonds. Investment advisors and portfolio managers stuffed these dubious AAA-rated CDOs and RMBSs into the investment accounts of unsuspecting victims all over the country.
And they were AAA-rated securities, but only because the rating agencies had been bribed; they were cut-in on the action by the Wall Street con men! In the end, huge numbers of these worthless CDO and RMBS securities went to zero during the Great Recession of 2008-2009.
Bernie Madoff is another poster child for the ubiquitous Wall Street crime syndicate. He ran a well-respected wealth management business that claimed to use options to achieve exceedingly high returns with unnatural consistency. In reality, Madoff presided over one of the world’s greatest Ponzi schemes, which totaled some $50 billion.
And he kept up the charade for an astounding 15 plus years until it spectacularly collapsed in late 2008. His victims, mostly non-profit charities, have only recovered a small fraction of their losses. As a final insult, Bernie Madoff had served as the vice-chairman of FINRA (Financial Industry Regulatory Authority), Wall Street’s self-regulatory agency!
There is a trend here. Whatever returns you can safely achieve in an investment will always be bettered by the Wall Street con men. A con artist will always tell you exactly what you want to hear in order to separate you from your money.
This revelation is especially pertinent in our current bubble market environment. Today’s Wall Street con men push stock investments in companies like graphics card manufacturer Nvidia, Chinese social media platform Weibo, or mobile app maker Snap. All of these firms trade at prices that will never be justified by future business results. But all that matters to smitten stock market investors right now is the siren song of easy profits.
The fact is that there is no such thing as a completely risk-free investment. Even such staid financial instruments as U.S. Treasuries and bank CDs have some miniscule risk associated with them. But there is a world of difference between the harrowing risks of today’s bubble stocks and the very modest risks of overlooked alternative assets, like fine art and antiques.
Buying bubble stocks is certain to make you destitute, but not before the Wall Street con men have paid themselves some very nice bonuses from your wallet first. On the other hand, fine art, antiques and other tangible assets will earn you a nice, steady return on your money, provided you do your homework and choose wisely.
I encourage you to take a step back and really think about the investments you have in your retirement and brokerage accounts. Steer clear of the “sure thing”, “can’t lose” investments pushed by glib Wall Street con men. They will tell you anything they think you want to hear in order to get your money. And when the inevitable financial crisis eventually arrives, they will disappear like thieves into the night, because they are thieves.
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