There is Nothing New About Conflicts of Interest

Earlier this week TheStreet.com announced layoffs. I’ve been an outside contributor there since 2005. My experience with them has been fantastic and I hope to write for them for a long time. I only found one news story about this from Business Insider and far more interesting than the article was the tone of some of the comments in terms of immense and intense hatred for all things Wall Street; any type of firm and the media covering it.

The comment thread was not contained to dislike for the Street.com, it was directed at everyone. Occasionally I see similar comments on posts at Seeking Alpha as well. Clearly the lousy long term returns of the last 12 years and the news about how various brokerage firms treat clients’ interests is a very discouraging combination so I can’t fault anyone for wanting to chuck the stock market altogether. 


I won’t defend brokerage firms and the domestic equity returns for the decade were lousy and many of us will see another lousy decade in our lifetimes. I don’t think the brokerage firm behavior is much different than it has ever been (my direct experience goes back to the 1980s) but it is more noticeable when returns stink and investment products malfunction one way or another. We all know that equity returns were lousy in the 1930s and 1970s as well as the 2000s so this has been happening about every three or four decades (the 1870s were also bad and there was a terrible bank crisis in 1907). 


The potential benefit to investing in stocks is getting a rate of growth for your assets that exceeds inflation. There is no guarantee it will work out that way for anyone but that is the potential. If you can take my word that dishonesty is not new and you realize that there have been other bad decades then these things become recurring obstacles to the thing we want which is having enough money when we need it. Other recurring obstacles include poor analysis (either our own or by the people we hire) and succumbing to our behavioral flaws. 

During the previous decade investors had to deal with all four (lousy results come along every so often but the other three can impede results no matter what the market is doing) yet Brazil managed to go up 300% and there was an ETF to access that market which also went up 300%–the iShares MSCI Brazil ETF (EWZ). As I’ve documented dozens of times there were plenty of markets that had normal returns in the previous decade and while there were not ETFs for all of them then, there are ETFs for many more countries now including some of the ones that will have great returns this decade. Of course there are always individual stocks too.

Some will read the above and reply that the stock game is rigged (brokerage firm dishonesty) but that didn’t prevent Altria (MO) from going up a couple of hundred percent in the last decade (plus pay all those dividend) as the S&P 500 was declining. A rigged game also did not prevent client holding Nike (NKE) from going up a little less than 200% in that decade. I mention those two names because they are far from obscure microcaps. 

The point here is not to try to convince anyone that there are not dishonest dealings and conflicted interests but to instead point out that if these obstacles have always been there then part of the way to get to where we want to be is to work around these obstacles–obstacles we know will always be there. You don’t have to buy IPOs, you don’t have aggressively trade VIX ETNs; you can buy great companies for the long term and use plain vanilla ETFs for the long term and you can focus on increasing your savings rate. 

If you must give up on stocks (or equity funds) then you need to understand the tradeoff of giving up potential returns that exceed inflation which is that you will probably need to save a lot more money. That doesn’t have to be the end of the world if you realize this going in.    

2 Comments

  1. What makes me mad today is the debt burden can be dealt with but our leaders choose not to do so. The lack of compromise is disheartening. There are ways over the next 10 years so it will not be a tremendous burden. I fear some day, the market will dictate enough is enough.

    Reply
  2. We need the random roger etf, NOW!

    Reply

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There is Nothing New About Conflicts of Interest

Earlier this week TheStreet.com announced layoffs. I’ve been an outside contributor there since 2005. My experience with them has been fantastic and I hope to write for them for a long time. I only found one news story about this from Business Insider and far more interesting than the article was the tone of some of the comments in terms of immense and intense hatred for all things Wall Street; any type of firm and the media covering it.

The comment thread was not contained to dislike for the Street.com, it was directed at everyone. Occasionally I see similar comments on posts at Seeking Alpha as well. Clearly the lousy long term returns of the last 12 years and the news about how various brokerage firms treat clients’ interests is a very discouraging combination so I can’t fault anyone for wanting to chuck the stock market altogether. 


I won’t defend brokerage firms and the domestic equity returns for the decade were lousy and many of us will see another lousy decade in our lifetimes. I don’t think the brokerage firm behavior is much different than it has ever been (my direct experience goes back to the 1980s) but it is more noticeable when returns stink and investment products malfunction one way or another. We all know that equity returns were lousy in the 1930s and 1970s as well as the 2000s so this has been happening about every three or four decades (the 1870s were also bad and there was a terrible bank crisis in 1907). 


The potential benefit to investing in stocks is getting a rate of growth for your assets that exceeds inflation. There is no guarantee it will work out that way for anyone but that is the potential. If you can take my word that dishonesty is not new and you realize that there have been other bad decades then these things become recurring obstacles to the thing we want which is having enough money when we need it. Other recurring obstacles include poor analysis (either our own or by the people we hire) and succumbing to our behavioral flaws. 

During the previous decade investors had to deal with all four (lousy results come along every so often but the other three can impede results no matter what the market is doing) yet Brazil managed to go up 300% and there was an ETF to access that market which also went up 300%–the iShares MSCI Brazil ETF (EWZ). As I’ve documented dozens of times there were plenty of markets that had normal returns in the previous decade and while there were not ETFs for all of them then, there are ETFs for many more countries now including some of the ones that will have great returns this decade. Of course there are always individual stocks too.

Some will read the above and reply that the stock game is rigged (brokerage firm dishonesty) but that didn’t prevent Altria (MO) from going up a couple of hundred percent in the last decade (plus pay all those dividend) as the S&P 500 was declining. A rigged game also did not prevent client holding Nike (NKE) from going up a little less than 200% in that decade. I mention those two names because they are far from obscure microcaps. 

The point here is not to try to convince anyone that there are not dishonest dealings and conflicted interests but to instead point out that if these obstacles have always been there then part of the way to get to where we want to be is to work around these obstacles–obstacles we know will always be there. You don’t have to buy IPOs, you don’t have aggressively trade VIX ETNs; you can buy great companies for the long term and use plain vanilla ETFs for the long term and you can focus on increasing your savings rate. 

If you must give up on stocks (or equity funds) then you need to understand the tradeoff of giving up potential returns that exceed inflation which is that you will probably need to save a lot more money. That doesn’t have to be the end of the world if you realize this going in.    

Submit a Comment

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