“You know who didn’t have any bad years? Bernie Madoff — until he got caught.” — Ken Fisher
What is the most dangerous threat to your wealth today? You have several choices:
- Bear markets
- Bad investment advice
- Investment fraud
With all these threats, one wonders if anyone can make it on Wall Street! Fortunately, there is hope if you follow my three rules listed below.
Let’s review how serious each threat is to your portfolio:
- A higher cost of living and loss of purchasing power can cut into the value of your investment account by 10% or more every year.
- And paying taxes on interest, dividends and capital gains can reduce your profits by 24-40%, depending on your tax bracket and where you live. Fortunately, there are plenty of ways to minimize your tax bill.
- Bear markets can devastate your portfolio. In my lifetime, I’ve seen investment accounts drop 50% during a downturn.
Fortunately, if investors held on, they saw their portfolios recover, and even move higher. Optimism pays off. As William Vanderbilt said, “This country is very elastic… like a rubber ball hit, it will spring up again.” (“Maxims of Wall Street,” p. 109).
As this chart below shows, it pays to hold onto your stocks long-term.
However, it’s also true that “Nothing is more difficult than holding onto your stocks during a bear market,” to quote market trader Mike Turner. (p. 111).
He also notes, “Buy-and-hold works if you live long enough, never need the money and don’t mind losing 50% or more from time to time.” (p. 139).
Sad, but true! I tend to be a “buy-and-hold” investor, but it isn’t easy.
What About Bad Investment Advice or Even Fraud?
Four and five. Finally, some major threats to your wealth can be bad investment advice or outright fraud. In my long career on Wall Street, I’ve encountered many cases of investment malfeasance and even theft of people’s hard-earned money.
As Woody Allen once said half-jokingly, “I’m a money manager. I manage your money until it’s all gone.” (p. 88).
Many investors are afraid to invest themselves; they prefer to turn their money over to an independent money manager.
Fortunately, most brokers and investment advisors are conscientious, hard-working analysts, but even then, it’s tough to beat the market.
My advice? Be especially suspicious of any money manager whose funds are not quoted daily on the stock exchange or an investment account. I’ve met too many investors who spend years building up a successful business or 401k plan, but then lose it all in some cockeyed investment scheme.
Follow the advice in “The Maxims of Wall Street”: “Concentrate to make your fortune, diversify to keep it.” (p. 160).
Gerald Loeb warned, “Avoid the promoter, the ‘penny share,’ the new stock with a glamour or romance title, the ‘boiler room’ operator and ‘sucker list’ mailings.” (p. 90).
Three Rules of Successful Investing
I suggest you follow these rules when it comes to investing:
- Be your own money manager as much as possible. Keep at least half your funds in a broad-based index like the S&P 500 Index Fund, and see if your own stock selection can beat the market over the long run.
- If you don’t feel comfortable investing, choose several money managers whose investments are secured in an independent brokerage account and whose investments are quoted every day online or in the newspaper. These would include mutual funds, exchange traded funds or closed-end funds that you can buy or sell through a brokerage firm such as Charles Schwab, T. D. Waterhouse or E-trade. Invest after consulting an independent rating system such as Morningstar.
- Don’t count on the government to bail you out of your mistakes. If you are a victim of fraudulent or deceptive investment practices, you may or may not get your money back.
What I Learned from the Madoff Scandal
Last week, my wife and I watched “MADOFF: The Monster of Wall Street,” a series on Netflix. It’s the story of the biggest Ponzi scheme in history. Investors lost around $64 billion of their hard-earned money.
After the fraud was revealed, I interviewed Harry Markopolos, the author of “Nobody Would Listen.” He was the accountant who blew the whistle on Bernie Madoff, but to no avail. He warned the SEC several times about Madoff’s fake trades, but they ignored him.
In October 2011, I had a bizarre encounter with one of the top SEC officials after the scandal became public. I had been invited to speak at a conference of accountants at Utah State called “Partners in Business.”
A Confrontation with a Former SEC Official
In the morning session, one of the top accountants of the Securities & Exchange Commission (SEC) from 2007 to 2011 (he now works for Price Waterhouse but said he wants to come back as an SEC commissioner) spoke for nearly an hour on the “Current Developments of the SEC.”
Oddly enough, he did not once mention the $64 billion Bernie Madoff scandal or how it has affected SEC policy (such as its new whistleblower program and investigative procedures).
Needless to say, I was incensed. After his talk, he took questions, and I asked, “I’m amazed that in your entire talk you never once mentioned the worst scandal in SEC history and biggest financial fraud ever committed on Wall Street. Is it because you are too embarrassed to talk about it? Do you think that investors who lost money in the Madoff scandal should have the right to sue the SEC for negligence?”
The SEC man looked shaken and visibly upset. He strongly defended the SEC, saying he sacrificed his salary to work for them, and that the SEC gets hundreds of letters about potential fraud cases and can’t police them all, but that the SEC does a highly competent job for the American people.
He made no attempt to express sympathy for the victims of the Madoff crime, or what changes the SEC has made because of its massive failure. When I brought up Harry Markopolos and his book “Nobody Would Listen,” about how Markopolos repeatedly warned the Boston and New York offices about Madoff’s Ponzi scheme, he was silent.
“Is that your apology?” I asked.
“Apology? I don’t need to apologize and will never apologize for what happened. In fact, you should be thanking us for what we did,” he said with considerable emotion. He was red-faced and angry.
Half the audience applauded!
Can you believe the arrogance of this former government official? Why couldn’t he just acknowledge that the SEC made a huge blunder and has adopted a number of policies and rules to make sure it never happens again? Instead, he adopted the “no apology” and “let’s not talk about it” routine.
Needless to say, my tough questioning was the talk of the conference.
Afterward I received several reports from attendees saying I was the best speaker at the conference. So, I guess not everyone thought I was rude and a troublemaker!
The Madoff documentary said that the law firm in charge of tracking down and distributing what remained of the Madoff assets and past profits made over $1 billion in fees; meanwhile many investors were left empty-handed.
Several Madoff victims sued the SEC for gross negligence, but the courts ruled against them. Apparently, the SEC has immunity. A grave injustice.
Congress investigated and scrutinized SEC officials for their sins of omission — and then increased their budget! (Harry Markopolos recommended that the SEC be abolished.) My friends on Wall Street told me that after the Madoff scandal the SEC sent swarms of agents to harass hedge funds in New York, coming up empty-handed in most cases.
Lesson learned the hard way: You can’t count on the SEC or other government agencies to protect your wealth. They give investors a false sense of security.
Lesson learned: “Investigate before you invest!” (p. 85). As Thomas S. Monson says, “No one takes care of a ship like those who sail it.” (p. 85).
You Blew It!
Rent Control is Back — Again!
“The rent is too damn high!” — Jimmy McMillan (New York)
We urge your Administration to pursue all possible strategies to end corporate price gouging in the real estate sector.” — Senator Elizabeth Warren, Representative Alexandria Ocasio-Cortez (AOC) and 50 other Democrats.
One of the reasons inflation is so dangerous is that it brings out the worst in politicians, who call for wage-price-rent controls as a panacea.
Rent controls are the new demand. Rents have climbed nearly 8% in the past year, which is in line with average price increases since the 2020 lockdown.
As usual, California leads the nation in anti-economic policies. The new law took effect in 2020, limiting annual rent increases to 5% plus the local Consumer Price Index inflation rate, or 10%, whichever is lower.
Other states are following suit, including Oregon and New York. The Wisconsin Housing and Economic Development Authority and Pennsylvania Housing Finance Agency, for instance, have agreed to cap annual rental increases to 5% per year for federal- or state-subsidized affordable housing.
Now the Biden administration is jumping on board the rent control bandwagon by rolling out the “Renters Bill of Rights,” and encouraging lawmakers to push for federal rent controls.
Any attempt to impose rent controls will have unintended consequences. Over the long run, it will reduce the number of rental properties in the rent-controlled area as real estate investors take their money elsewhere. They will find ways to cut corners on improvements and repairs, or develop clever ways to charge renters more (such as “key money” — you have to pay a substantial fee to get the key to open the rental property). There’s a long history showing how rent control fails time and time again to address the problem of high rents.
Here’s a short article outlining the downside of rent controls.
And the media has the audacity to call those supporting rent control “progressives.” They are simply ignorant of sound economics.
To Make Money and Keep it, Consult the Bible of Wall Street!
In this column, I’ve quoted extensively from my book, “The Maxims of Wall Street,” now in its 10th edition. Over 45,000 have been sold.
There’s a reason why investors call it “the Bible of Wall Street.” Just one quotation can save you or make you a bundle.
As Dennis Gartman, editor of the Gartman Letter, states, “It’s amazing the depth of wisdom one can find in just one or two lines from your book. I have it on my desk and refer to it daily.”
“Maxims” is a treasure trove of proverbs, slogans and quotes, with plenty of stories and commentary to go with these gems. It’s been endorsed by Charles Schwab, Warren Buffett, Jack Bogle, Alex Green, Kim Githler and Barron’s. Bert Dohmen says my book is a “beautifully bound collector’s item… It should be on every investor’s bookshelf and read regularly.”
Good news: I just got in a new shipment of both “The Maxims of Wall Street” and “The Making of Modern Economics,” both available at a discount at www.skousenbooks.com.
The Maxims cost $20 for the first copy, and $10 for all additional copies. I autograph and number each copy and mail them for free if mailed inside the United States.
I just got an order in for an entire box (32 copies) from a subscriber. The price for an entire box is $300 postpaid if shipped in the United States. As Hetty Green says, “When I see a good thing going cheap, I buy a lot of it!” (p. 38).
Maxims is a great gift book to clients, friends and associates. As Rodolfo Milani (Riley Wealth Management) states, “I find them to be ideal gifts for my best clients.”
Hotels in Vegas Now Going for $400 a Night – But We Still Have Our Room Block at $159!
Join me and my wife at the EconoSummit in Vegas, March 11-12. Now is the time to act! The NCAA “March Madness” basketball tournament will take place in Vegas during our conference, causing Ahern Hotel to charge $400 a night for a room. Fortunately, our hotel room block is still available for only $159 a night. But hurry. We have to give back the rooms next week, and only a few rooms are left at this low price. Call 1-725-414-4800, ext. 2, and use the code “HighMark” to get the discount.
For more details on this unique event, go to www.econosummit.com.
I am happy to announce the appearance of several new speakers: Sean Flynn, a top economics textbook writer, will speak on “How Environmental Extremists Threaten Prosperity and Your Investments.” You will be shocked at what he has uncovered about the fake data environmentalists are using to support global warning. We have also just confirmed the attendance of Chuck Muth, the state’s best expert on politics. He will talk about “Nevada Politics: The Good, the Bad and the Ugly.”
Other confirmed speakers are John Fund, senior writer for National Review, who will speak on “Election Geopolitics: Hard Lessons I’ve Learned After 50 Years at the Ballot Box,” and Floyd Brown, publisher of the Western Journal and author of the new book “CounterPunch.” My wife, Jo Ann, and I will also be speaking.
See you in Vegas.
Good investing, AEIOU,