Why Moody's and S & P Should Be Taken Outside and Shot
Wednesday, September 12, 2007 | Dylan JovineRating:
FOLKS, I COULDN'T HAVE MADE IT UP EVEN IF I'D TRIED.No, I'm not talking about the fact that Hillary Clinton actually looks like a lock to win the Democratic nomination for President.
Nor am I talking about the fact that Idaho Senator Larry Craig had the gall to plead guilty to soliciting sex from a male in a public bathroom and decided not to resign afterward.
(What the heck ever happened to doing the "honorable thing" and falling on your sword, for goodness sake! JEEZ!)
Nope, today I happen to be talking about what may be the most offensive thing I've ever read.
Yup, today I happen to be talking about two disclaimers that a fellow Tycoon Report reader so diligently pointed out to me in the wake of the subprime meltdown.
The first disclaimer is from Moody's (SYM: MCO), and it reads ...
"MOODY'S HAS NO OBLIGATION TO PERFORM, AND DOES NOT PERFORM, DUE DILIGENCE."
Huh? Did I read that right? That must be a mistake. Let me check the disclaimer from Standard and Poor's (a unit of McGraw-Hill, SYM: MHP) just to see if this is standard operating procedure for these freaks, or if I'm just smoking crack or something.
Sorry to report that it just gets better (or worse, if you've actually taken advice from these ninnies). Here's the disclaimer from S & P:
"ANY USER OF THE INFORMATION CONTAINED HEREIN SHOULD NOT RELY ON ANY CREDIT RATING OR OTHER OPINION CONTAINED HEREIN IN MAKING ANY INVESTMENT DECISION."
Are you kidding me?
I don't know about you, but usually I get taken out to dinner before I'm screwed. In the case of Moody's and S & P, most investors pay for themselves to get screwed over like this.
I'm sorry, folks. The last thing I want to do is start your day with a foul-mouthed rant about Moody's and S & P, for goodness sake!
But when a Tycoon Report reader recently pointed this out to me, I couldn't believe my eyes.
Forget the electric chair. We should invent the electric couch for people with this kind of moxie.
(I should re-read these disclaimers each and every time I forget why we started The Tycoon Report in the first place!)
But you know what? It shouldn't have surprised me really.
Quite the contrary. We should have known it would be very difficult for them.
And why not? Most of these people were the same kids we knew in grade school.
You know who I’m talking about. That kid who always had a runny nose whether it was 20 degrees or 90 degrees outside.
Or the one who wore his pants all the way to his chest and always had the right answer, regardless of the question.
Yeah, those annoying little turd-kids.
In fact, it shouldn’t have been surprising to me at all.
The fact that the very same annoying students - today's self-described "Masters of the Universe" - can't even seem to give advice that they're proud to back up.
So we can't trust Moody's and S & P to back up the very integrity of their own products. OK, I get it. But can I trust anybody on Wall Street?
No, folks, I'm sorry, but I don't think so.
That's right. From top to bottom, Wall Street by and large provides a WORTHLESS service to individual investors.
(You notice how I just mention individual investors? The service they provide to corporate clients is just fine. Whenever a corporation wants to raise money - often at the expense of individual investors - it doesn't seem to be a problem at all.)
And that just pisses me the heck off!
(You hear the stories I hear every day about small investors with families and mortgages getting screwed over, and see how angry you get. It's like being a proctologist: the behind never quite looks the same ever again, regardless of how attractive the person is.)
Just think about it. Each and every year I read virtually the same headline:
"IN 8 OUT OF 9 INVESTMENT CATEGORIES (e.g. "VALUE" and "GROWTH"), INVESTMENT PROFESSIONALS WERE TROUNCED BY THE INDEXES."
In other words, you could have bought any major index fund - without paying commissions or fees - and you would have outperformed most of those runny-nose “Pros” who manage your money.
Which begs the following question:
Why do these fund managers have such a difficult time beating the “averages” each and every year?
Well, the answer to the question reveals as much about Wall Street as it does the nature of people managing money these days.
Follow me on this one, folks.
Wall Street wants you - the individual investor - to do “average”.
Not too good. Not too bad. Just “average”.
That’s because Wall Street, in large part, is in the business of gathering and managing assets.
Just like a bank. But not quite.
It’s the “new” brokerage model: Raise money. Gather assets. Offer checking accounts.
It wasn’t always this way. At one point, brokerage firms tried to pick stocks and make their clients some money.
But that changed in the early 70s. When the “powers-that-be” decided that they had had enough.
Enough of the bull market/bear market cycles that blew up their clients every four years.
Enough of the unsteady returns and cash flow that their kind of business brought with it.
So, in the early 70s, the “powers-that-be” had an idea.
It was a brilliant idea, actually. And it went something like this:
Instead of having their runny-nose Pros try aimlessly to pick stocks while blowing up their client base every four years, they latched onto a theory.
A theory so absurd - yet so powerful - that it literally changed the way Wall Street worked.
It was the Efficient Market Theory (EMT).
In short, EMT states that it’s a waste of time to try to pick individual stocks.
Why?
Because markets are already efficient.
Therefore, nobody could make money picking stocks, because markets - by definition - have already priced in all information.
That means any type of analysis - including the efforts of yours truly - are indeed a waste of time.
In one fell swoop, this silly little theory explained why their people couldn’t pick stocks.
It also gave them a goal ...
A goal to make as many “products” as possible to sell to individual investors.
Products that just mimic the averages.
Products that just help them raise money.
So, for the past twenty years or so, the big brokerages have transformed themselves into money management Goliaths that want you to do “average”.
This is not to say that they don’t want you to make money. Or profit from the next internet craze.
But for the most part, they want you to do no better and no worse than “average”.
Why?
Because if you do average ... then you won’t complain.
Sure, the market may go down. But if you’re doing “average”, you won’t lose more than your golfing buddy does.
And if the market goes up - you won’t make more than your golfing buddy.
This way, through good markets and bad, you won’t leave the firm.
And why would you leave if everybody, including your golfing buddy, is doing average?
But there seems to have been a problem. Something unexpected.
And it happens almost every year. But hardly anybody complains anymore.
The problem?
The runny-nose “Pros” who are entrusted with doing “average” can’t even beat the averages.
Not even close.
That’s why it pays to listen to what we have to say.
Yes, us - the authors of The Tycoon Report.
That's because we started this company with the sole objective of giving it to you as straight as we can.
That doesn't mean we're right 100% of the time - far from it.
But it does mean that we're not getting big fat checks from corporations to green-light a portfolio of bad subprime bonds.
Nor are we getting a check from our investment banking clients just to recommend their stocks to the investing public. To moms and dads and average Americans with mortgages and car payments and school payments for their children.
Nope, we serve one master and one master only. You.
And like I said, we may be right sometimes, and we may be wrong sometimes.
But you have my word as a man that we'll always admit our mistakes and that you'll never have to worry about us promoting other interests ahead of your own.
I've always hated the term "whistle-blower". I've never viewed myself as that type of person. I'm a businessman.
But somebody has to blow the whistle on sickening things like this.
And if that somebody is going to be me, rest assured that I have my whistle with me at all times.
Until next week,
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Dylan Jovine
Chief Investment Officer
The Tycoon Report
