With the euphemism, “alternative investments,” Wall Street was “putting lipstick on a pig,” as the old saying goes. The Street took a page out of the modern playbook of one of America’s most insightful political strategists and pollsters, Frank Luntz, author of Words That Work: It’s Not What You Say, It’s What People Hear. Luntz is the guy who reframed much of the conservative political rhetoric and the buzzwords floating around America’s contentious and highly partisan political arena since the 2000 election: In this new fantasyland, hot-button terms like “oil drilling” magically become “energy exploration,” the attack aimed at the “estate tax” on large fortunes passing by inheritance focused on the “death tax,” “logging” becomes “healthy forests initiative.” Up is down and down is up in this land of make-believe.
Most the time you’re an engineer, teacher, lawyer, parent, programmer. And you play the part like a responsible adult and a leader. But occasionally when you don the role of an “investor,” you enter the world of children’s fairytales. There you become innocent, vulnerable, disoriented and impressionable. You walk through the looking glass, suddenly fall down a rabbit hole. You’re in Alice’s Wonderland, where the storytellers’ favorite weapons-of-choice are words that make you believe “up is down, down is up,” that fantasy is reality.
Brillig, borogroves, jabberwockies … and “alternative investments”
In that world Humpty Dumpty tells you that, “when I use a word, it means just what I choose it to mean, neither more nor less.” Humpty controls the rules of the game, possessing magical powers that cast magical spells over your brain. Remember, when sweet innocent Alice challenged his authority: “The question is whether you can make words mean so many different things?” But Humpty quickly retorts: I am “the master, that’s all” that counts, my dear!
For example, America’s 95 million investors have been listening to a similar modern fairytale titled “Alternative Investments,” a clever, deceptive euphemism concocted by Wall Street bankers, brokers and their friends, much as Lewis Carroll created “brillig, borogroves and jabberwockies,” words that mesmerize the naïve into setting aside reality and entering fantasyland. Historically, investors have always been treated like children who need to be told stories by Wall Street in order to make us willingly fall down rabbit holes and naively do things against our better judgment and our economic interests.
“Kissing frogs” becomes “wealthy prince explorations”
The truth is, the investor’s brain really is easy to manipulate: With the simple wave of a magic wand and a sprinkling of fairy dust over your eyes, it’s amazingly easy for a few new words to transform scowls into smiles: A subtle shift by redefining a two or three words, and suddenly something you’re “against” (an ugly frog) becomes something you’re “for” (a wealthy prince in disguise!), and you’ll willing kiss it (yuck!).
Similarly, “alternative investments” is the product of some fab-u-lous Luntzian-style spin, cleverly designed to change the way naïve investors play the game in this latest Wall Street fairytale. Warning: “Alternative investments” is a deceptive new nametag being used to sugar-coat ol’ higher risk investments that are being aggressively marketed to naive Main Street investors as well as presumably sophisticated institutional, pension and retirement fund boards.
Everyone loves a fairytale about a pig wearing lipstick
Yes, this new fairytale simply puts lipstick on ugly frogs to make them more appealing to the naïve and the pseudo-sophisticated. The spin magically transforms “kissing frogs” into a “wealthy prince exploration.” But underneath you’ll see the same ol’ high-risk investments—hedge funds, real estate deals, commodities, junk bonds, gold, currencies, derivatives, options and futures trading. So what’s the big danger? Higher risks! Hidden under this neutral sounding Luntzian spin about “alternative investments,” Wall Street’s storytellers are also promising you that with higher risks comes higher returns.
Worse yet, this trend is accelerating: In a recent Rydex “National Survey of Registered Investment Advisors,” we hear that 43% of advisors have increased their use of alternatives “moderately” in a recent five years, while a quarter of them have increased 100%. Moreover, advisors see these “alternatives” becoming even more important in the future: The “survey indicates that nearly one fourth of advisors believe that alternatives will be more important than traditional investments, such as stocks, bonds and cash, in the coming years.” Get it! Next, your financial adviser will be pushing high-risk “alternatives” at you in the future!
Investors take more risk, brokers make more money
Why are “alternatives” getting so popular with advisors? On the surface, advisors are telling themselves: “As markets become more challenging, RIAs are seeking new ways to help their clients reach their investment goals.” But the real reason is that advisors know alternatives are a way of increasing their own income. So in theory, “alternatives” could be win-win, making more money for both investors and advisors—except that investor is the only one taking on more risks!
Think about it: By “challenging,” the report is referring to the poor performance of the stock market since the 2000 crash. Investors want more. After seven years, the DJIA has increased an average of just 3% annually since the 2000 peak, a miserable return. In short, aside from the huge salaries and bonuses for Wall Street insiders, the stock market has been a disappointment for Main Street investors. So it’s no surprise that amid all the noise about new record highs in the press, America’s 95 million Main Street investors feel confused and adrift in a schizoid “Wonderland,” searching for the next new frog-prince charming to kiss. Moreover, Wall Street not only knows Main Street is confused, they are taking full advantage of that knowledge to their own advantage, using it against Main Street, to control them. That‘s right, the authors of this new fairytale are taking advantage of investor vulnerability, putting lipstick on high-risk frogs like hedge funds, commodity futures and other questionable ventures, even though most of these “alternatives” are bad news for the vast majority of Main Street investors.
Bogle’s “Iron Law:” Heads they win, tails you lose
Jack Bogle’s “Iron Law of the Markets” makes clear why alternatives are bad news for Main Street. Once all the transaction costs, increased fees and taxes are loaded into the equation, the investors take on the added risks, while the middlemen pockets most of the rewards. The recent upsurge in ETFs is a good example. Here’s how Bogle put it in a 2007 Wall Street Journal op-ed column:
Exchange-traded funds “are a gold mine to brokers … Adding up these costs, we’re talking about ETFs earning billions of dollars for our intermediaries. … And yet there’s another side to the argument that we seem to ignore. It is the iron law of the markets, the undefiable rules of arithmetic: Gross return in the market, less costs of financial intermediation equals the net return actually delivered to market participants. To the extent that ETF’s increase intermediation costs, it follows that they must reduce the returns of investors as a group.”
“Alternatives” for whom? Main Street risks, Wall Street rewards
Bogle elaborated on the “Iron Law” a couple years ago in his keynote address at the 60th Anniversary Conference of the Financial Analysts Journal where he detailed the huge sums made by the middlemen: “Revenues of investment bankers and brokers came to an estimated $220 billion; direct mutual fund costs came to about $70 billion; pension management fees to $15 billion; annuity commissions to some $15 billion; hedge fund fees to about $25 billion; fees paid to personal financial advisers, maybe another $5 billion … all directly deducted from the returns that the financial markets generated for investors.” Get it? The increased costs of risk-taking come out of Main Street’s pockets: “By definition, those costs not only cannot create above-market returns,” says Bogle, “they are the direct cause of below-market returns, a dead weight on the amount earned by investors as a group. In investing, all of us together get precisely what we don’t pay for.“
Bottom line: Main Street investors have not faired well in the years following the 2000 crash, and yet the mania and gimmickry of the late nineties is creeping back. “Alternative investments” is just another fairytale about kissing frogs in search of the next new “rich prince,” a fantasy designed to manipulate naïve investors into taking more risks … so Wall Street’s Humpty Dumpty can skim off more of your money … before he has another “great fall.”
FirstPubDate: Feb’07