Wall Street WARZONE

Trust No One With a Yacht, No Bankers, No Brokers, No Fund Managers, Not Even “The Buddha”

by Paul B Farrell, JD, PhD
| | 5/10/2010

Some things never change. Wall Street’s script was written long ago—long before behavioral finance came on the scene—it was written and memorialized in Fred Schwed’s amusing 1940 classic about Wall Street’s insatiable greed. The message rings as true today as back then, when America was still smarting from Wall Street’s disastrous 1929 Crash and a long Depression. Schwed charms us from the start in “An Ancient Story,” his explanation of the origin of his title: “Once in the dear dead days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor. ‘Look, those are the bankers’ and brokers’ yachts.’ ‘Where are all the customers’ yachts?’ asked the naïve visitor.

“Once in the dear dead days beyond recall” is the first line of the enduring popular tune, “Love’s Old Sweet Song,” by James Malloy back in 1884. And with that  bit of historical context, let’s flash forward to the present and consider why Schwed’s book is so relevant in today’s Wall Street war against Main Street. A couple years ago I was reminded of Schwed’s challenging question while flipping through Fortune magazine when my eyes locked on a photo of “Utopia,” the aptly-named new mega-yacht built for legendary fund manager Bill Miller.

So, where are all the customers’ yachts?

The truth is, “naïve” is an apt description for all investors all the time: It was appropriate in 1929, remained so in 1940, and still fits today. Actually more so today: Despite the flood of high-tech data, news sources, research and analytical tools now available, America’s 95 million investors becoming more and more vulnerable, gullible and naïve by the day. Schwed’s story perfectly captures the endless daily transfer of billions from the pockets of Main Street’s naïve customers, into the pockets of Wall Street’s insiders. In fact, every year more than $200 billion is siphoned off the top of the $10 trillion Main Streeters have invested in mutual funds alone.

And thanks to all the protection Wall Street gets from its friends in Congress, at the SEC and among the new behavioral finance geniuses, most of that $200 billion in fees, commissions and other payments will be quietly hidden in bank accounts, undisclosed, without clueless Main Street’s customers even aware of what’s happening to their money.

They love bragging about the yachts you bought for them

However, their egos frequently do get the best of Wall Street’s finest—they cannot resist flaunting their wealth on the world’s stage, an art collection, or a sports team, or yacht. Publicly bragging about your wealth may be a bit gauche, like the mounted trophies of wild animal heads displayed by big game hunters, but the urge is irresistible. So when the news breaks about their little public displays of wealth, we’re reminded once again of the “old sweet song” and yachts anchored off the Battery, as naïve customers and competing managers alike go gaga with admiration and envy—even though the Fortune photo of Miller’s yacht did little justice to his magnificent ocean-going vessel.

But, you ask, where did the money come from? Oh, that’s obvious. It was a “reward” for Miller’s winning streak as portfolio manager of the $11.5 billion Legg Mason Value Primary Fund, part of the powerful Legg Mason group of companies that was wheeling’n’dealing with Wall Street powerhouses like Citigroup, in a $3.7 billion swap of assets that helped one portfolio manager become this years latest example of Schwed’s dream.

“Greatest money manager of our time” needs a yacht

At the time every investor in America knew Miller was the only fund manager who had beaten the S&P 500 index every year for fifteen straight years, an incredible feat, given his extremely high 1.68 expense-ratio handicap. His performance was like being a multiple Oscar-winning leading man, which made mega-bucks for him for years along the way.

In fact, Fortune even jumped on the bandwagon calling Miller “the greatest money manager of our time.” And yet, they were hedging their bet in late 2006, which journalists often do late in the year. As Wall Street’s frantic race to the finish line heated up, Fortune asked the inevitable question that makes for exciting drama in financial journalism as well as in sports: “Will The Streak be broken?” The 15-year streak. The answer, said Fortune’s new managing editor, Andy Serwer, was not encouraging: “It’s likely to be a rather glum New Year’s Eve this time around for Legg Mason Capital Management. The Streak is probably over.”

Glum? It’s already his yacht, you can’t have it back!

Not so fast, Andy, I’m still betting on Bill!” Every year-end we’d hear the same mock racetrack drama: “They’re rounding the final turn! Heading into the home stretch! Will Bill win again? The crowd roars! He’s closing on the outside rail, closer, closer …” But I’ve heard this breathless drama before. Miller had run this race so many times before, pulling ahead at the finish line, that I was certain he’d beat the odds again. How? Very simple, to mix metaphors, he was not racing some fleabag thoroughbred, he was racing his new “Utopia” super-yacht that year, which Fortune said he “plunked down tens of millions.” It has a heliport, a gym, twelve guest cabins and requires a crew of twenty. And anyone can charter it for around a half-million dollars a week.

Moreover, Utopia had to be such a powerful incentive, I was sure Miller would win again, even though he was about 10 points behind the S&P with just a month left. Besides, he was always a brilliant come-from-behind finisher. But even if ‘The Streak’ was broken (which it was, by the credit meltdown, and has yet to recover), it’d still be a great perk for insiders and institutional customers, and who knows, even some naive customers might get to work on the crew, while dreaming of their own utopian retirement.

Your nickels’n’dimes pay for “utopian” indulgences

Obviously Miller would disagree emphatically with financial consultant Laszlo Birinyi’s Forbes column: “Mutual Funds Stink,” which appeared about the same time as the Fortune story about Miller and Utopia. In contrast though, Birinyi was retelling Schwed’s “Ancient Story” from a more sophisticated customer’s point of view. Here’s why Birinyi says “funds stink:” You decide:

“As the recent scandals showed, some mutual fund managers count on sticking it to the small investor. The vast majority of mutual funds lag behind the S&P. Some are way, way behind. At a time when the S&P is showing double digits, large-cap growth funds are barely in the black.” Then Birinyi asks a rather harsh question: “What do you get for the fees you pay to your fund manager? Herd investing!” His solution: “You don’t have to pay a mutual fund manager a fee to follow the herd … Buy stocks on your own.”

So investors, do it yourself! True, Birinyi is a successful stock-picker. Doesn’t trust mutual fund portfolio managers. But any naïve investor can beat the S&P with a simple, well-diversified portfolio of low cost, no-load index funds. Birinyi’s indictment that “Mutual Funds Stink” is not news. Jack Bogle has been highly critical of the actively-managed fund for charging excessive fees for decades. And a few years ago Senator Peter Fitzgerald told Congress that the “mutual fund industry is now the world’s largest skimming operation, a $7 trillion trough from which fund managers, brokers and other insiders are steadily siphoning off an excessive slice” of America’s savings.

Nothing changes, this story never ends …

Schwed’s “Ancient Story” will be replayed over and over again till the end of time. Yes, we know history is a great teacher. But unfortunately, experience also tells us that naïve customers are in a plentiful and forever renewable supply—there is indeed a sucker born every minute, and they rarely learn from history, so they are doomed to repeat its lessons the hard way.

Schwed’s humor has drawn many laughs since 1940. But the humor is dark and the laughs nervous … because nothing changes. Efforts by Bogle, Fitzgerald and friends merely provoke and ultimately strengthen the opposition, forcing Wall Street and the fund industry to fight back harder, become more defensive, secretive and stronger. No, nothing changes. Wall Street controls the casino, plays with a stacked deck, and the playing field is never level. You play by their rules—or you don’t play. And in that is your salvation: Never, never play their game by their rules, to win you must play a new game—your game, your rules.

Can’t own a yacht? Rent for a day! Or join the crew!

The truth is, America’s naïve investors will never own yachts. They will always be left standing on the wharf, bewildered. Their portfolios average less than $100,000. Imagine any one of them “plunking down” their entire retirement nest egg to charter one day on a super-yacht like Utopia!

Of course you might be able to get a job on the twenty man crew as a summer job. That might be fun, and you’ll get back a little of the money your ship’s captain skimmed to build his yacht. More likely though, you, like the other 95 million American investors, will be left standing on the dock staring in awe, and with a childlike innocence, ask once more: “But where are all the customers’ yachts?”

Destiny, intelligent design and an infinite gene pool

Bottom line: Main Street is breeding an infinitely renewable gene pool of naïve customers who will forever be following along with the herd, throwing away billions in unnecessary fees and commissions while Wall Street’s insiders—bankers, hedge fund managers, fund owners, brokers and their fellow conspirators—siphon off billions to buy more yachts and art collections, sports franchises, Aspen villas and Bentleys.

Of course, all those Wall Street insiders definitely get the punch line in Schwed’s gallows humor … as they sail the high seas, laughing all the way, thankful and secure in knowing that each new generation will bring a whole new crop of “customers” as naïve and clueless as the last … customers who will never learn the lessons of history … who will always be ripe for the taking, courtesy of the growing army of new quant behavioral finance warriors working silently in Wall Street’s “engine rooms.” Yes, they will be forever thankful and secure in knowing there must be an intelligent design in the universe—one that has shaped the destiny of those who will own the yachts and those destined to pay for the yachts. A timeless destiny indeed.

“Believe nothing, no matter where you read it nor who has said it, not even if I have said it, unless it agrees with your own reason and your own common sense.” Buddha 2,500 years ago

FirstPubDate: Nov’06

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