Financial Adviser Requirements

Most investors don’t need financial advisers for three basic reasons.

First, basic investing principles are easy to master. Secondly, what to buy is simple in the age of index funds. There is no reason to attempt to buy individual securities. I have explained why in much of my past comments and books.

Importantly, adviser fees eat too much out of investment earnings. I repeat this constantly. Adviser fees can account for as much as 20% and more of annual investor earnings.

The garden variety of advisers, that is the bulk of them, are not worth the money because their expertise is run-of-the-mill.

On the other hand, investors who have estate and tax questions need legal advisers. That has little to do with portfolio selection. ( See the Earl J. Weinreb NewsHole® comments.)

Short Selling Market Advantages

Populist politicians and the bulk of the media give the impression that short sellers are bad. And that short selling causes much of our financial problems.

There are times when it does. But short selling usually has a proper function in the securities business and our economy.

This is the practice of selling borrowed securities, in the hope of buying them back at lower prices in the future.

Without short selling, overheated, overvalued securities would continue rising and add to dangerous bubbles, and thus prevent markets from being priced more rationally.

Short selling generally keeps markets honest. Dictating when to stop or retard its use will only exaggerate market extremes. ( See the Earl J. Weinreb NewsHole® comments.)

Aggravating Financial Meltdowns

Short-term, in-and-out, frenzied trading by the pros is what aggravates financial meltdowns. It is the segment of Wall Street that I always avoid in good times. Imagine what can happen in dangerous markets.

This is precisely what aggravated the 2008/2009 market selloff, aided and abetted with mark-to-market and short-selling.

True, erratic markets create opportunities for professional traders, particularly those I call inside players. But not the vast majority of investors. ( See the Earl J. Weinreb NewsHole® comments.)

Playing the Yield Curve

One of the strategies suggested in the financial media is the “yield curve.” This has to do with the difference in yields of the different maturities of U.S. Treasury bills, notes and bonds.

There is usually a normal difference in return, depending on years to maturity of the security. But this can change, depending on economic conditions and influences, including fiscal activity of the Treasury and monetary action by the Federal Reserve.

But playing yield differences is a timing, short-term exercise which is tough enough for pros to succeed at. It’s best that average investors forget about this strategy.

The AIG Panic Revisited

Human error was instrumental in the financial meltdown of 2008/2009,and various bubbles that we have had in the past.

In each case, there has been finger-pointing, usually by anti-business politicians and by bureaucrats whose immediate impulse is to blame big business and bankers; the usual scapegoats. That is the litany of criminalization in left-wing lexicon.

I have always blamed human error. Whether it be loose monetary policy of the Federal Reserve, in inflating currency, or inappropriate accounting rules for normal securities market situations, actions that hasten the ruin of investment liquidity.

In the case of AIG, the value of its derivative insurance coverage was also being determined on the basis of fictitious existing market value. This time, not on possible claims in the future, at the maturing of company obligations, but at supposed current valuations.

That produced a condition that induced premature bankruptcy in a panic venue; a rush to judgment when cool heads and hands ought to have been the hallmarks of expertise.

The AIG panic was evidenced by the rescuer’s paying of debts on the basis of 100 cents on the dollar to some bankers in this country and abroad.

Credit Default Swaps Are Back

Just a year or two ago CDS, or credit default swaps, were considered by liberal politicians to be the cause of the financial meltdown.

They thus conveniently forgot the real cause of the financial meltdown, which would have pointed to much of their past political activity. That financial debacle owed much more to Washington antics and influence than it did to Wall Street.

But Credit Default Swaps are back because they are needed in a burgeoning market by a number of industries, particularly big banks. Even the debt of General Motors Co. debt which doesn’t presently exist, but may in the future.

Dodd-Frank and Too Big to Fail

The Glass-Steagall Act, created under the Banking Act of 1934, was terminated during the Clinton administration. It had separated regular banking from investment banking activity.

However, it’s easier to talk about the problems of not having the legislation, than the separation of investment banking and ordinary banking, once the two have been so connected for years.

The question of proprietary trading arises. Both regular and investment banks had executed such trades, ordinary banks to a lesser extent. Moreover, such trading generally represented a very small, insignificant amount of activity and income.

Furthermore, the definition of what is a proprietary or “prop” trade is hard to delineate.

The result, with all our populist politicians, we have bombast, finger-pointing, and economic panic and damage.

We wound up with Dodd-Frank, a complex maze of regulations that has, as one of its missions, an attempt to separate commercial and investment banking. And preventing banks from getting too big to unwind as failures.

The result so far: Banks are getting bigger and the risk of failing is ever-larger.