Are Investing Experts Ethical?

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 ethicalInvesting 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.

photo credit: epicharmus photo 

15 thoughts on “Are Investing Experts Ethical?

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  2. Captivating read, but you didn’t say much about what we as investors should do to invest properly or any specifics on why you think it is going to be different this time around. This type of thing has happened before and history has been repeating itself. Is the information age going to save us or is it because so many middle class people are managing their own money now for retirement?

  3. Captivating read, but you didn’t say much about what we as investors should do to invest properly or any specifics on why you think it is going to be different this time around.

    Thanks for stopping by and offering your thoughts, SavingMentor.

    I think that investors should take valuations into account when setting their stock allocations.

    You’re right that we have fallen into the trap of letting the stock market become insanely overvalued four times now and it seems to be something we do every 30 years or so. We spend decades building up our economy and then we tear it to the ground, and then we spend years or decades rebuilding it again. It’s a saddening experience to look at the history of investing and to see the humans make the same mistakes again and again.

    I am an optimist. We have had advances in other fields of human endeavor. I think we can have genuine and lasting advances in the investing field as well. The most encouraging development is that we made the study of investing a scientific endeavor for the first time in history in the 1960s. That’s huge. That gives us a way to verify objectively what works and what does not and to learn from our mistakes over time.

    We didn’t get everything right the first time we tried to come up with a workable model. In the grand scheme of things, I don’t see that as being a big deal. It’s just one of those things, you know? We are now beginning to come to terms with the mistakes we made on the first draft effort to explain how investing works scientifically and I believe that we will soon start correcting the errors and move on to much better things.

    We didn’t always have electricity. We didn’t always have indoor plumbing. We didn’t always have the cures to a lot of diseases that we have the cures to today. There’s such a thing in this world as progress. I believe that progress can be achieved in the investing realm just as it has been in many other areas.

    The key is getting a good number of the humans interested in achieving progress in this field. When the investing advice available to middle-class people is dangerous, the entire economy suffers. We all need to take an interest in providing middle-class people a way to obtain far more effective and realistic investing advice than The Stock-Selling Industry has been willing to provide them in recent decades.


  4. My issue with Investing “experts” is a little different than Rob’s, though I can see his argument as well.

    I hate, HATE MER. Well, not all MER – a little bit is OK, but when you are getting advice from an “expert” chances are you aren’t paying a “little bit of MER”.

    For example. Last June Mrs. SPF and I had an Investors Group “expert”, “advisor” – whatever you want to call him (or he wanted to call himself) pitch his sales pitch to us. I’m relatively new to sinking my teeth into PF but I had been reading some great sites and blogs for a number of months and there wasn’t a word that came out of his mouth that I didn’t already know. Heck, I was even able to describe the Smith Mavouvre to Mrs. SPF better than he was able.

    What was his rate to be our advisor? Ha! 3.05%. Nice try. You need to tell me stuff I don’t know if you want more than 1% of my investing money and for 3% you better guarantee an 11% return (which no one can do).

    So I found his being “unethical” was in that he was trying to steal my money, as far as I could tell. He wanted $3.05 out of ever $100. He wanted $305 out of $10,000. Annually! No one cares about our money more than I do. I’ll go ‘er alone thank you sir. Please find your next victim.

    (the look on his face as I described the SM was funny – it was a look of fear – he knew he wouldn’t get a sale)

  5. I think access to information and the way public companies are communicating with shareholders has changed so much that individual investors are much more informed and empowered. Likewise, discount brokerages have made things cheap. All said, I have little need for investment experts at this early stage of my investing life.

    1. Jaymus, what do you use to evaluate investments? That’s where i’m finding things hard – finding the appropriate tools to evaluate an index or a stock. Rob has his methodology but I can’t quite figure out how to use his particular tool to evaluate an index. I also like to look at stocks and ultimately feel looking at just one stock stat is not enough to consider an investment.

  6. Rob has his methodology but I can’t quite figure out how to use his particular tool to evaluate an index. I also like to look at stocks and ultimately feel looking at just one stock stat is not enough to consider an investment.

    With individual stocks you are right that there are many factors that need to be considered, SPF. This is the beautiful thing about indexes. With indexes, none of the many factors you need to study when picking individuals stocks (management, research pipeline, industry competitiveness, on and on) need to be considered. A mix of good and bad re all those points is priced in to your index purchase.

    There’s only one thing that can never be priced in. That’s the extent to which the price of the index is wrong (mispricing by definition can never be priced in). The word “overvaluation” is just an alternate way of saying “mispriced.” So if you buy the index without adjusting for the mispricing, you might not be getting a good deal. If you perform an adjustment for overvaluation, you can look at the adjusted price (the proper price) and know your return and decide for yourself whether that is good enough or not.

    Indexes make returns predictable. That’s the big breakthrough. Because you get this broad mix of inputs, all you need to know to identify your long-term return is the average long-term return of equities (6.5 percent real in the U.S.) and the adjustment you must make to the average return to count in the effect of mispricing (overvaluation or undervaluation). We now can know the return we are going to get on stocks (not perfectly, but to an extent far greater than most people realize) BEFORE we put money down on the table.

    At times of moderate or low valuations, we can know in advance that we are going to see a good return on our index fund investments. At times of high valuations, we can know in advance that we are going to see a poor return on our index fund investments. Indexing made this possible by holding all factors other than mispricing (management, research pipeline, competitiveness, etc.) stable and thereby permitting us to focus on the one factor totally in our control (the price at which we purchase the index fund).

    My rule is that I will not buy an index fund unless it is offering a 10-year return at least 2 percentage points higher than what is available from a super-safe asset class (TIPS, IBonds, or CDs). I feel that I should receive at least 2 percentage points of return to make it worth my while to take on the volatility of stocks. When the super-safe asset classes offer a better deal, I abstain from buying stocks until the level of mispricing has diminished to the point where stocks again offer a strong long-term value proposition.


  7. I guess my only question is, does this guest post say we should try and time the market?

    That’s a super question that gets right to the heart of things, Broke Professionals. Thanks for having the courage to ask it.

    My response is — an enthusiastic “Yes!”

    Timing has developed a bad rep in recent years. This is the primary reason why our economy is in such a mess today.

    Please think for a moment what it would mean not to time the market. It would mean not to take price into consideration when buying stocks. Are you able to imagine any way that that could work out in the long run? It cannot. Every time we have taken price discipline out of the market we have brought on a wipeout of stock investors and an economic crisis. There is no other way that things can turn out once a large number of investors come to believe that timing might not be required.

    There’s much confusion over this point. Many people believe that there are studies showing that timing doesn’t work. I have searched everywhere I can think of for such studies. Do you know how many there are? Zero. There has never been a single study showing that timing doesn’t work or isn’t required for long-term success.

    There are studies showing that short-term timing (changing your stock allocation with the expectation that you will see a benefit within a year or two) doesn’t work. There are tons of those. But there has never been a study showing that long-term timing (changing your allocation in response to big price swings with the understanding that you may not see a benefit for as long as 10 years) doesn’t work or isn’t required. Every study that looks at this question shows that long-term timing ALWAYS works.

    It’s not even possible to imagine a scenario where it wouldn’t work. For long-term timing not to work, the price charged for stocks would have to not affect the value proposition obtained from them. That cannot be. It’s a logical impossibility.

    The two most important discoveries in the history of investing research are: (1) that short-term timing NEVER works; and (2) that long-term timing ALWAYS works. My conclusion is that we should all disdain short-term timing and be sure always to practice long-term timing.

    Never try to guess where stocks are headed over the next year or two — it cannot be done. But never fail to take the price at which stocks are selling into consideration when setting your allocation,. If you fail to consider price, you will sooner or later be going with a horribly inappropriate stock allocation for someone with your risk tolerance. That is sure to cause you major financial setbacks somewhere down the line.

    Or at least that’s my sincere belief, based on the nine years of effort I have directed to study of this question.


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  11. In recent years, I’ve also learnt that same painful lesson! Been paying annual charges & management fees for way too many years and I have nothing to show for it. Portfolio growth was pathetic and these professionals have the cheek to tell me that we have to take a long term position – and that’s after 8 years of paying fees? How many more years before they consider that a long term position i wonder…. So yes, we have to be our own master when it comes to managing money, no two ways about it!

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