Mainstream investing is about Wall Street but can you trust the system?
There are common but illegal ways the individual investor can get shut out and lose money on Wall Street.
On the illegal side you have the following shameless activities that rob investors:
Insider Trading. Made famous by movies like Wall Street, insider trading involves trading in a public stock by someone who has access to non-public, material information about the underlying company or stock and takes advantage of that information for profit.
Front Running. A close cousin of insider trading, front running is when a broker or other party enters into a trade because they have foreknowledge of a big non-publicized transaction that will influence the price of the asset, resulting in a financial gain for the broker.
Pump and Dump. A pump and dump scheme involves crooks who own shares in a particular stock then use misinformation and misleading statements through a variety of means – mostly through the Internet – to boost the price of the stock. Then when the price increases, they dump their stock for a big gain, causing the price to fall back down.
Poop and Scoop. The opposite of a pump and dump, the poop and scoop involve spreading misinformation and misleading statements to drive down a stock’s price and then scooping them up at bargain prices.
Stock Manipulation. Market manipulation refers to artificially inflating or deflating the price of a security or otherwise influencing the behavior of the market for personal gain through deceptive buy and sell practices. One common practice is when someone places multiple simultaneous buy and sell orders through different brokers that cancel each other out to give the impression of high interest and trading volume – driving the price up.
Cornering the Market. To corner the market means to acquire enough shares of a particular security type, such as those of a firm in a niche industry, or to hold a significant commodity position to be able to manipulate its price. For example, cornering the market on a particular ingredient essential for making a popular and demand-inelastic pharmaceutical to increase the price of the ingredient and profit from it would fit the definition of this type of illegal activity.
Although not technically illegal, there are many schemes and practices used by financial advisors and brokers that have the same effect of lining their pockets at the expense of their clients.
The most common unethical activity is churning where advisers make up reasons to encourage clients to execute unnecessary transactions to generate commissions.
It should come as no surprise that churning is a common abusive practice when advisers are paid based on transactions and not performance.
Transaction-based commissions are not the only way Wall Street fleeces the investing public. Everywhere you look, Wall Street players are lining their pockets at the expense of investors. Mutual funds? Public hedge funds? REITs?
The managers and sponsors of these organizations all get paid first before their investors and whether their funds make money or not – relying on a plethora of fees including management fees (based on a percentage of assets under management), fixed fees and commissions (based on a per-transaction fee from the buying and selling stock and bonds).
Ideally, wouldn’t you want Wall Street to partner with you, where like in most partnerships, nobody gets paid unless everybody gets paid?
Try as you might, Wall Street would never agree to this model. Wall Street has no interest in partnering with you.
They have too much to lose and they know that incentive-based pay is a one-way ticket to poverty since more than 90% of financial advisers and professional managers do no better than the S&P index. Who needs them?
Investors shouldn’t want to partner with Wall Street. Why? Because there’s a better market to invest in – the private market.
It seems silly to entrust someone with your finances who gets paid even if you lose money.
What makes more sense is to partner with experts in their fields with a track record of success who have skin in the game and who makes the investor their priority. Putting the investors first includes paying them with the first profits through preferred distributions and also from asset sales.
IN OTHER WORDS, THEY DON’T GET PAID UNLESS YOU GET PAID.
This model can be found in abundance in the private markets through private investment funds where the sponsors of these funds partner with you to mutually benefit from a cash flowing venture designed to reward everybody – and not just the promoters.
Unlike the Wall Street crooks, these private fund managers put their money where their mouth is. They have been successful before and are confident in their continued success and have no problem with performance-based compensation because they know they will perform.
Why even try partnering with Wall Street?
They’ll never change their stripes.
Look to private investments and partner with true experts who will put your interest first.
