In honor of Jason Zweig’s new book, The Devil’s Financial Dictionary, I came out with a mini-dictionary of my own, using common sports terminology. These terms will help the average investor understand how they are being deceived by fancy-pants Wall Street guys speaking in their own lingo, designed to confuse and obfuscate the masses.
Unlike Mr. Zweig’s book, which you will now have to wait until December to receive, you can use this playbook immediately. Think of this as your own “Steel Curtain” to protect yourself against the many wannabe Jordan Belforts who are looking to separate you from your hard-earned money:
1. Junior Varsity – This is the team you get to manage your money at many wire houses. God forbid you have less than $250,000 to invest. As a penalty, you will be stuck with the J.V. team of rookie advisors who can use you for training camp before they move on to hunt the Whales.
2. Garbage Time – Watching talking heads on financial porn channels fits this description. 24/7 financial news is a concept that needs a huge amount of filler to take advantage of your emotion du jour. Call a time-out and just walk away.
3. Luxury Tax – Many endowments and high-net worth clients are the beneficiaries of this return killer. Hedge Funds that charge 2% AUM fees and 20% of the profits reap the gains, though they often can’t even match the returns of a basic indexed 60/40 stock bond portfolio. Learn to be like the “non-profit” NFL and declare yourself exempt from this tax
4. Unsportsmanlike Conduct – This is very prevalent in the boiler rooms of the penny stock world. Such expressions as “don’t pitch the b*tch” as female clients tend to be suspicious of their “pick up” lines), are quite common. So-called established blueblood companies are not immune from this. Many insurance firms insist new hires sell policies to friends and relatives before they bring them on board. Throw the challenge flag and get a penalty called on these guys.
5. Triple Play – Don’t be a victim of a sleazy broker’s dream of a diversified portfolio. This would include Private Placements, Non-Traded R.E.I.T.S and expensive Variable Annuities in tax-advantaged accounts. Make it to first base safely by simply walking away if anyone tries to sell you these three products.
6. Subs – Commission-hungry brokers will often try to substitute expensive, illiquid, and risky products for safe, low-cost portfolio stabilizers like Treasury Bonds and cash. Remember, there is nothing that is “like a C.D. or a Treasury Bond.” Make sure you play the A-Team and not some “bond substitute” — filled with M.L.P’s, high- yield stocks, and securities from nations on the verge of bankruptcy.
7. Too many men on the field – Often transaction-hungry brokers will fill your portfolio with hundreds of stocks and bonds to create a sorry excuse for a diversified portfolio. Two dozen gold stocks and thirty silver miners does not a diversified portfolio make. Less is often more in investing. A half dozen index funds will often do the trick. While a basketball team can have 15 players, only about 7 of them play on a regular basis. Go with your best players and leave the rest of these investment dogs on the bench, where they belong.
8. Blind Side – Often investors are invited to a “free” informational dinner about investing. Instead of enjoying your chicken francese, you are blindsided with an aggressive sales pitch. In lieu of leftover cheesecake to bring home, you are stuck with an expensive, risky and illiquid investment. Get your own version of all-pro left tackle, Michael Ohr, and protect your blindside by turning down these misleading invitations from head-hunting salespeople.
9. Calling an Audible – Many unscrupulous advisers will tell you exactly what you want to hear. This is the polar opposite of prudent investing advice. If you have an idea, they will find you a product to buy. This transaction will be conducted, despite the fact it will make a bad portfolio worse. Stick with an advisor who has a sound evidenced-based investment process. Save the audibles for El Manning. A perfect example was when he spotted one-on-one coverage on Plaxico Burress, and changed the play enabling the Giants to win the Super Bowl. (Full disclosure I am a Giant’s fan.)
10. Roster Bonus – When a broker leaves his current position to join another firm, he often receives a bonus to bring his existing clients with him. Often clients will have to pay fees to exit their current investments and pay again to buy his new firm’s products. The broker gets the old and new fees, plus his bonus — on your dime. Do yourself a favor and look for client friendly incentive bonus, like beating a certain predetermined bench mark. Your broker should not be the only one receiving a bonus.
These terms should make investing conflicts and Wall Street misdirection plays a little clearer to any WFAN all-sports radio listener. Just like sports dynasties, where personnel decisions are based on the long-term and cost control, so too should be your decisions regarding your investment portfolio. Don’t let someone block your shot at a comfortable retirement.