Knowing what you ought to know about Wall Street will do wonders for you as an independent investor!
they usually think about something BIG in the financial world. However, as pleasant as The Wall Street sounds, there’s one inconvenient truth you have to know about―a truth that will help you make better decisions as an independent investor. Are you ready? Keep reading to know why you should ignore 99% of Wall Street’s advice and headlines.
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Knowing what you ought to know about Wall Street will do wonders for you as an independent investor! People tend to do what they are paid to do. Offer them a reasonable sum of money and they will work on what you want them to work on. Why is that so? It’s because they are motivated by the reward! That’s how people make money. Let’s apply that concept to Wall Street… In a similar manner, Wall Street makes money in the transaction of buying and selling, not in buying a stock that goes up. The one that buys a stock that goes up is the individual. This means Wall Street’s real clients are corporations. Wall Street chooses a firm based on research about a particular company―its industry and ability to get transactions completed. According to investing giant Seth Klarman, “Wall Street analysts are unlikely to issue sell recommendations due to an understandable reluctance to say negative things, however truthful they may be, about the companies they follow. This is especially true when these companies are corporate-finance clients of the firm.” “...there is more brokerage business to be done by issuing an optimistic research report than by writing a pessimistic one.” “A great many of those who work on Wall Street view the goodwill financial success of clients as a secondary consideration; short-term maximization of their own income is the primary goal.” Aside from Klarman, another investing giant who spoke about this more than 70 years ago was Ben Graham. He said, “I must say frankly that our studies indicate that you have your choice between tossing coins and taking the consensus of expert opinion and the results are just about the same in each case.” “Wall Street people typically learn nothing and forget everything.” Furthermore, Arnold Van Den Berg said when you plan to capitalize bull and bear markets, Wall Street analysts offer no help at all. Why? If you remember one of the disciplines we discussed a few weeks ago about capitalizing bull and bear markets, we mentioned that as an investor, you don’t have to worry yourself about predicting the market. Part of a good investing discipline is not in being able to predict the market but in being able to recognize changes in the market. … and yet here we are with these Wall Street analysts, who seem to love making predictions all the time! According to Marty Whitman, “A lot of what Wall Street does has nothing to do with the underlying value of a business. We deal in probabilities, not predictions.” Meanwhile, Bill Miller said in terms of research quality, Wall Street analysts offer next to nothing in the quality of their buy and sell recommendations. Woah… that’s quite a hard pill to swallow! In Miller’s words, “The first duty of the investor or analyst is to figure out what is embedded in the price, what is discounted.” "The failure to address that question is the main source of the poor relative results of most money managers and the general lack of value provided by the opinions of analysts [Wall Street Analysts].” Realistically speaking, there’s no doubt that Wall Street publishes A LOT of content. As in MASSIVE amounts of content! However, the problem is that only a small percentage of that content is valuable to a buy-side investor (someone who buys stocks of companies). As stated by Peter Lynch on the proliferation of this kind of content: “Thousands of experts study overbought indicators, head-and-shoulder patterns, put-call ratios, the Fed’s policy on money supply… and they can’t predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack.” I’m not against Wall Street research. My point is that just like what these investing giants mentioned in this article, we should be wary and careful enough to not easily believe everything that Wall Street says about the market, finance, or investing. Wall Street may have become a big name now but it’s not perfect. As an independent investor, you should be wise enough to know what types of information you should believe in and what you should not. By doing so, you’ll be able to make smart decisions on how you can maximize your wealth and what types of asset classes and allocations you should use to put your money into. Hope you’ve found this week’s insights interesting and helpful. Follow us on LinkedIn. Stay tuned for next Wednesday’s The Independent Investor! Understanding risks are vital for your investments. Learn more about how you can increase your chances of avoiding investment mistakes by understanding risks on next week’s The Independent Investor! |
