Are Investing Experts Ethical? The short answer to this one is: “No.”
By the standards that apply in most other fields of life endeavor, the investing / financial advice field is frighteningly corrupt. I worked for several years as a tax lobbyist (hey, we all have a past!). So it takes something special in the department of ethical lapses to shock me. The investing advice field is something truly special in this regard.
But wait! I’m not going to let you walk away from reading this article feeling depressed!
There is reason for hope. Something else I have learned is that most of the people who work in this field very much want to see things change. People in this field want to be able to give good and honest investing strategy advice. And there are things we all can do to make that happen. Things are going to be looking a lot different in the not-too-distant future than they have been looking in the recent past.
Investing experts are in a terrible bind. The money in this field is made by selling stocks. I remember when I purchased IBonds paying a return of 3.5 percent real (this was some years back) because stock prices had gone so high that stocks were unlikely to pay that high a return for a time. I had a hard time finding someone to handle the transactions. My sense is that the commissions paid on purchases of IBonds are very small. Had I been seeking to buy stocks, there would have been people lined up to take my money.
Ninety-five percent of the investing advice you hear is shaped by this reality. That should shock you. Middle-class people have been left in charge of financing their own retirements in recent decades. We need straight-talk investing advice. If 95 percent of what we hear is shaped by the desire to make a buck and making a buck means painting a picture in which stocks are always the best thing to buy, we are in big trouble. I do think that’s the reality and I do think we are in big trouble. That’s the bad news.
The good news is that things have gotten so bad that we are close to getting to the breaking point. Things are going to be changing soon. The system is going to be taking on so much strain that we’re not going to be able to duck the problem much longer.
Are you able to guess the dollar amount of over-valuation in the U.S. market at the top of the bull market in January 2000? The number is going to amaze you — $12 trillion. The entire accumulated Federal debt going back to the days of George Washington is $14 trillion. Stocks always return to fair value prices over the course of about 10 years. So, in January 2000, those who were paying attention knew that our economy was going to be losing about $12 trillion in buying power over the course of the next 10 years or so. And there are people wondering why we are in an economic crisis today?
That’s what happens when everyone in a field is singing the same tune: stocks are always best for the long run; you should never lower your stock allocation, that would be timing and timing doesn’t work; you know the song: market research isn’t perfect. All of this conventional advice is a marketing gimmick. If you don’t believe it coming from me, I ask that you take a look at a recent column in the Wall Street Journal in which Brett Arends engaged in a rare bit of candour regarding this matter. He said: “For years the investment industry has tried to scare clients into staying fully invested in the stock market at all times, no matter the stock market trends …. It’s hooey…. They’re leaving out more than half the story.” Just how are investing experts ethical?
The history in this field is that investing expect ethical lapses always spread in bull markets. The full truth is that bull markets couldn’t exist without ethical lapses. Think what it means to say that stocks are “overvalued.” It means to say that they are mis-priced. To sell something that is mis-priced is a form of ethical lapse, is it not? Bull markets are liar’s markets (they don’t call it a bull market unless there is massive overvaluation, that is, massive mis-pricing).
The bull market is over. We are as a society slowly coming to grips with the reality of how much human misery we caused ourselves and others with our tolerance of the runaway bull of the late 1990s. When we do come to terms with the realities, we will be looking for some new investing ideas to help us rebuild our economic system. One of the things we are going to discover is 30 years of long-ignored academic research that will help us all to invest more effectively than we ever have before and that may make bull markets (liar’s markets) impossible in the future.
All of our lives will be better when Liar’s Markets (and the economic crises that follow from them) are a thing of the past. The pain that we are all experiencing today is taking us to a better place.