How Guilty Are Inside Traders?

Insider-trading prosecution trials have been confusing the investing public more than they should; convictions have unfortunately clouded rather than clarified the picture. The media have been of relatively little help in remedying this public confusion.

The problem is actually twofold: One has to do with legality. The other has to do with what investors seek as a “level playing field.” They have nothing to do with each other. The former is about a forbidden activity. The other may be about a perfectly legal pursuit, but the public opposes it for a good pocketbook reason.

In the first instance, what is illegal is the sale or divulging of information that an employee or principal is contractually not permitted to divulge. It may be part of their employment contract or obligation to their company.

As an investor, you may not be hurt by such illegality, despite what the government prosecutors are able to get judges and juries to believe. However, judges and juries, unfortunately, are not always conversant with the way the investment industry truly works. Innocents as well as the guilty may therefore get caught up in such zeal in the future.

Investors do expect federal and state regulatory agencies will help thwart any Ponzi-like chicanery. Unfortunately, many of these deceptions are never caught in time by the authorities.

What the Securities and Exchange Commission, for example, seems to be excellent at, is the ability to impose nit-picking regulations that require the costly issuance of theatrical data which most investors cannot possibly comprehend or use in a practical sense. That fuzzy data generally comes in the mail and winds up, unread, in the garbage.

Let’s now turn our attention to what investors really want, apart from justice when any criminality exists; they want a level playing field when they put their funds at risk.

There is a practical way for all investors to get that sought-for level playing field. It’s simple enough.

They can get this when they avoid the adverse impact of those I often refer to as the financial industry’s “inside players” who, incidentally, usually operate legally,

These players include stock brokers who push over-zealous traders trying to  outfox each other; advisers with “tiny” management fees that translate into as much as 20% or more of their earnings each year; hedge funds that think nothing of taking an additional 20% of any annual earnings profits on top of fees; and analysts who suggest securities of corporations they diligently evaluate, though they could not run their own profitable pushcart.

All these costs that uneven the playing field are charged without any commensurate service.

When research shows that low-cost index mutual funds and ETFs are invariably the alternative bargains to the wares of the inside-players. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)