Capital Markets Today
I had originally planned to continue writing about Municipal Bonds, but a question I was asked recently really got me thinking: with all of the scandals and problems that have come to light, can we really trust our financial future to Wall Street brokers and bankers.
In case you hadn’t heard, HSBC and several other very large banks have been accused of falsifying their reporting of LIBOR (London Interbank Offered Rate) a measure of the interest rates at which banks expect to be able to borrow money from each other, and thus a good gauge for trust and liquidity within capital markets. LIBOR is also the interest rate underlying literally hundreds of trillions of dollars’ worth of financial instruments, including most adjustable rate mortgages here in the United States.
This comes on top of accusations that several large banks have been helping drug dealers and rouge nations like Iran launder hundreds of billions of dollars through the financial system. Not to mention the Bernie Madoff scandal, the mortgage meltdown and the near collapse of our financial system caused in no small part by the excesses of our nation’s largest financial institutions. No wonder people are asking if they can really trust capital markets!
First, forget about Wall Street and ask yourself if you believe in Capitalism. In its purest form, the function of our financial system is to connect those who have money (investors) and those who need money (businesses). This is the beating heart of our capitalist system. This is the most basic role of an investment bank.
Unfortunately, while that’s a fairly profitable business, this is really only a small part of these banks’ revenue streams today. Actually, quite a bit of money is made simply by acting as the middleman (broker) between investors making bets on the price movements of different securities.
At the same time, people like us who are trying to ‘trade’ securities against these organizations are at a huge disadvantage in terms of information and resources. Furthermore, the markets tend to be pretty efficient. Even those who do uncover some nugget of actionable information that nobody else has will not have long to profit from it. The more times you try to do it, the more likely you are to lose to the insiders with better information and better access.
In that regard, investing is somewhat like tennis. Professional tennis is a winners’ game. The pros rarely make mistakes, and often win by scoring points like by acing a serve or driving the ball to the one spot their opponent can’t reach. My tennis is more of a loser’s game: the harder I push myself, the more mistakes I will make, like hitting the net or hitting out of bounds, thus allowing my opponent to win. By taking it easy, I will make fewer mistakes than my opponent and probably win the game.
For most of us, investing is a lot like my tennis game. We maximize our earnings by making fewer mistakes. The more times we trade, the higher our costs will be and the more opportunities there are to make a mistake and lose money. The more times we react emotionally, the more likely we are to make poor investment decisions and even bigger mistakes.
So what’s the best way to profit from our capitalist system, no matter what Wall Street traders do to each other? By setting up a disciplined long-term investment plan with an advisor who is on your side – that is, paid by you, not by the fund or insurance companies whose products he’s selling you – and sticking to it is your best chance to win the losers game and invest your savings for the long run. Keep your costs low and your trades few. And a Certified Financial Planner ® professional is a great place to start.
This column is prepared by Rick Brooks, CFA, CFP®. Rick is Vice President for Investment Management with Blankinship & Foster, LLC, a wealth advisory firm specializing in comprehensive financial planning and investment management. Rick can be reached at (858) 755-5166, or by email at brooks@bfadvisers.com. Rick and his family live in Mission Hills.
Category: Business
