The Tycoon Report

The Wall Street Conspiracy

Wednesday, March 21, 2007 | Wayne Mulligan

At the risk of sounding like a complete lunatic, I’m going to let you in on one of the best kept secrets in the history of the stock market.

No, I’m not going to give you some sales pitch on how you could “turn $10,000 into $10,000,000 in 37 seconds.”

I’m going to tell you about a conspiracy that is so far reaching that, even after you read this article, you still might not believe that this is a concerted effort on the part of the Wall Street "elite" to keep them rich and keep you in need of them.

But believe me when I tell you, every single word you’re about to read is the truth – and I’m going to back it up with fact!

My motivation behind writing this piece is that I’ve been getting some rather impatient e-mails lately.  E-mails from Tech Stock Insider (the service I run here at Tycoon) members who are wondering why I haven’t been buying any stocks this month.

That’s right, I said it.  I haven’t bought a single stock in the last 30 days.

Now that might seem preposterous to you – you probably subscribe to some services that shoot off 50 trade alerts every week – but with the market where it is right now, I can’t see myself stepping in and buying stock for the sake of buying stock.

But I’d bet any amount of money that this is exactly what your brokers and money managers have had you doing all month – going in and out of stocks with the hopes of striking it rich on that one big trade.

Well, that leads me right into the beginning of my story about the biggest and oldest game in the stock market.  For lack of a better term, we’ll call it, “The Wall Street Conspiracy”... dum, dum dum ...

Once Upon a Time …

Once upon a time, in a land far, far away there was a young man who had a great idea – a fantastic idea – an idea that would help his fellow man ... and make himself a handsome profit in the process.

But he had no money.

Now, how could a man this brilliant and this creative have no money?

Well, I don’t know how.  Maybe he liked to go to the track, but he didn’t have a dime to his name.  What was he to do?

Well, in this day and age he’d go raise some money from investors and sell shares in his company to them.  And you know what?

That’s exactly what this man did!

And with that, he gave birth to the most primitive form of the stock market.

The stock market gives companies – and brilliant young entrepreneurs – the ability to harness the collective capital of a society and direct it towards producing valuable goods and services.  This then increases the wealth of the company, its owners, and the lucky few who invested in it.

This capital also allows the company to hire employees and put food on their tables – and they, in turn, may go out one day and start a business of their own ... and the cycle continues.

The stock market is one of the most profound and beautiful manifestations of free market capitalism on the face of the earth, and I love it dearly.

However, there’s a dark side to the market – get the Darth Vader image out of your head, I’m trying to be serious here – a side that is so dark and powerful that it’s managed to creep into our lives, into our beds, and make us believe that it doesn’t even exist.

We just go about our day and think that “this is the way things are supposed to be.”

And what I’m referring to here is, very simply, stock brokers and money managers.

I’m not going to lie.  I was once one myself, and that’s how I know that everything I’m about to tell you is the 100%, unadulterated truth!


The Wall Street Conspiracy

Now, let’s go back to the beginning of the stock market, where our imaginary entrepreneur has just started his business by selling shares to the public.

After that, thousands of other aspiring entrepreneurs saw how successful this guy was and decided they were going to start businesses, too.

After that, there was a public market, where people bought and sold shares in thousands of different companies.

However, the only people involved were the ones who had direct access to these new companies as they were first emerging and raising capital.

But what if a Regular Joe wanted to get in on the action?  What if a regular person wanted to buy shares in one of these new businesses?

Well, he could walk himself down to the market and negotiate for some shares – the more valuable the business, the more he’d have to pay.  Is this sounding more and more like today’s market or what?

 “Regular Joe” is actively buying and selling shares in some of these businesses.  His friends see how well he’s doing and decide they also want to trade in this new market.

But some of them are really busy people.  They don’t have time to walk to the market and haggle over shares and kick the tires of these new investments.  Basically, they have money to spend but, no time to spend it.  What's an investor to do?

Well, once it becomes apparent that there’s all this money on the sidelines, the market gives birth to the Stock Broker.

This guy agrees to kick the tires, haggle over the share price, and even evaluate the profit potential of each and every investment.  This way he only brings Regular Joe the best investment opportunities.

So Regular Joe asks the Stock Broker, “Well that’s very nice of you, Mr. Stock Broker, but what do I have to do for you?”

The Stock Broker scratches his head and asks himself, “How can I make the most money possible off of this guy?  He’s not very well informed, doesn’t have the time to do the leg work himself ... I’ve gotta be able to make a buck or two off of him!”

So instead of doing something reasonable, like charging on a performance basis, the Stock Broker says, “OK, what we’ll do is charge you a percentage on every single one of the trades I execute for you – so whenever I buy shares or sell shares on your behalf, you’ll pay me.  And it’s all worth it because I’m bringing you some great advice, right?”

Regular Joe thinks for a minute and agrees to this compensation system ... and here is where the conspiracy began.

From this point forward, the interests of investors and their money managers were to never be aligned – brokers and clients will never be on the same team, simply as a result of the way that they’re compensated.


Want to know why?

Because brokers, money managers, investment advisors, etc. ... these people are NOT trying to make you money.

Their incentive isn’t to help make you rich – it’s to help make themselves rich.

Now, think about that for a minute – wouldn’t it be in their best interest to make you money too?  Then you’ll stay with them longer and do more trades and pay them more commissions, right?

Wrong!

These guys are in the business of collecting assets and churning your money.  This generates healthy commissions for themselves and the firms they work for.

They know that even if they lose you your money, there are thousands of other people just waiting to give them more.

As a former broker, I know I wasn’t rewarded when I had a winning stock.

The President of the firm wouldn’t walk over to my desk and say, “Wayne, you did a great job analyzing that company.”
  
The only time the President would walk over to anybody’s desk was when they had a “good day”.  And a “good day” was a day they did a lot of trades – a day they generated a lot of commissions.

Whether or not those commissions were generated from buying new stocks or just selling losing positions was irrelevant – as long as you were moving money.

Like I said earlier, I haven’t bought a stock for 30 days – if I had done that while I was a broker I wouldn’t have gotten a pay check for that month.  And if the President did notice, he probably would've yelled at me!

So understand this:

1. Your broker is not rewarded or incentivized to make you money – he’s incentivized to trade your money.
2. Your broker HAS to trade your money if he wants to make a living – so even if he’s a “great guy,” he’s always going to put his pay day before yours.
3. Even if he loses your business – both he and the firm he works for know that there are thousands of other investors that can take your place.

You’re probably thinking, “Wayne, this is just the way things are, this isn’t some big conspiracy.”

Well, that’s the furthest thing from the truth!

This is a HUGE conspiracy!

Why do you think there are thousands of different asset classes and “financial products”?

Mutual funds, index funds, spiders, options, asset allocation plans, and the list goes on ...

These are all created to force you to pay more fees and stay in the game for as long as possible.  Wall Street knows that if they get you to buy more products, then the higher the likelihood is that you’ll stay in the game even longer – this way, they can keep charging you fees and sales commissions.

And it doesn’t even have to be this way.

The wealthier investors get to invest in other investment vehicles that actually align their interests with those of the people managing their money – namely, hedge funds.

In a hedge fund, the managers only get paid based on the profit they earn for their investors – usually 20% of the profits.

And for some “bizarre” reason, hedge funds tend to outperform the market.  Their investors are rich, they get richer; the managers are rich, and they get richer ... the system actually works.

Reason being:  Their interests are aligned!  The hedge fund manager knows he won’t eat if he doesn’t turn you a profit – he’ll work tooth and nail to earn money for you, because that’s where his pay day is, too.

But for the typical broker-client relationship, the broker usually gets rich and the client usually loses money.

This shows that there are places on Wall Street where things work as they “should” – but for most investors, they just get caught up in the conspiracy and continue to follow the crowd.


So What Should You Do?

Quit playing the game!

Quit blindly taking advice from your brokers!

Don’t get me wrong – I’m sure there are some good advisors out there, and you might even have one of them on your team.  I’m not saying to go out and fire every one of your brokers.

But what I am saying is you need to take some initiative and do your own research.

You worked hard to make your money; work a little bit harder to make sure you don’t lose it due to some broker’s need to pay his rent that month.

The next time your guy calls you up with a “great investment opportunity,” listen to what he says and then tell him you’ll call him back after you look into it.

I can almost guarantee that he’ll have at least five reasons why you need to buy the stock right then and there.  Ignore him, thank him for the recommendation and then hang up the phone.

There’s a slim chance that a stock will go from $20 to $60 per share in a day or two – it has happened, but it’s just not likely.  So don’t be afraid to take a little time to look into an investment before putting your money into it.

One of the best things you can do is educate yourself – reading The Tycoon Report is a fantastic first step (or any other publication that tries to simply educate investors).  Equip yourself with so much information that a "slick talking stock broker" can never get you to do something you don’t feel is in your best interests.

This will help you become a better investor and have a better relationship with your advisors.  You’ll be able to separate the good guys from the bad ones fairly quickly ...

You’ll fire the bad guys and keep the good guys.

This isn’t to say you’ll always make money with the brokers you keep around; everybody takes some losses, after all.   But what it will do is make you more active in how you manage your money and will make you more aware of how it’s being invested – which will dramatically increase your likelihood of having a consistently profitable portfolio.

So, quit playing the game!  Do some legwork!  And take the time to protect your hard earned money!




Wayne Mulligan
Contributing Editor
The Tycoon Report