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CHAPTER ONE: THE STOCK MARKET CAN WE WIN AT THIS GAME?

Winslow, Edward Berrett-Koehler Publishers ePub

The investor’s chief problem—and even his worst enemy— is likely to be himself.

BENJAMIN GRAHAM, FATHER OF VALUE INVESTING,
SECURITY ANALYSIS, 1934

MANY MODERN-DAY investors have become like crazed gamblers, risking their nest eggs and retirement money on visions of a chance at 20 percent-plus returns on their investment portfolios. Most of them don’t even take the time to read a financial statement, yet they scamper to brokerage firms and mutual funds, surrendering every spare cent they can on a stock market system few of them understand. Greed, advertising, and peer pressure have lured them into a terrifying real-life game with sky-high stakes of fortune or poverty.

That’s gambling.

Have investors forgotten that stocks do not exist just to give us a lottery ticket to future riches? Stocks finance the agendas of business and their corporate executives. It’s a system run by professionals who spend a lifetime mining riches, at times contrary to the letter of the law. In the end, when the vein is dry, the gold is in their account; the fool’s gold is what’s left in our portfolios.

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CHAPTER FOUR: FAITH IN PROFESSIONAL ADVICE CONFLICTS OF INTEREST

Winslow, Edward Berrett-Koehler Publishers ePub

Well, the broker made money and the firm made money— and two out of three ain’t bad.

ANONYMOUS

IT’S A DIFFICULT JOB, at best, to evaluate the merits of a corporation as a potential investment. Interpreting the accounting, understanding how the business operates, and factoring in a host of other issues, including current investor psychology, can make the task pretty intimidating for even the most seasoned professional. But the decision as to whether a stock should be bought, held, or sold is made easier for most employees of the brokerage and investment banking industry because as a group they think it’s always a great time to jump in and buy.

Investment analysts are researchers whose responsibilities include reporting on a particular company, following that company, and making recommendations on whether to buy, hold, or sell stock. With the emergence of CNBC and other investment-related media, analysts are continually in demand for interviews and their “educated” comments and recommendations. Their comments and stock ratings have become like gospel for certain investors. A new report on a company by these media analysts can have a dramatic effect on the stock price. In other words, they are influential figures in the investment world.

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CHAPTER FIVE: THE REAL WINNERS OF THE STOCK MARKET GAME

Winslow, Edward Berrett-Koehler Publishers ePub

An infectious greed seemed to grip much of our business community. It is not that humans have become any more greedy than in generations past. It is that the avenues to express greed had grown so enormously.

ALAN GREENSPAN, TESTIMONY TO THE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, U.S. SENATE, WASHINGTON, D.C., JULY 16, 2002

THE INVESTORS who put their hard-earned dollars into the market take on the majority of the risk but receive only the crumbs of a market advance. The real winners are the executives, the brokerage industry, and the corporations. The potential rewards are so great that the behavior of these beneficiaries of market advances can range from unethical transgressions to outright fraud.

The primary argument in favor of large stock option grants to executives is that they give incentive to focus on earnings growth since management benefits if the stock price increases. If the stock price goes up, current stockholders should be happy to reward management for a job well done. There are some major flaws with this line of reasoning due to the inherent conflicts of interest and shortsightedness created by stock option compensation.

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CHAPTER ELEVEN: REFORMING THE SYSTEM

Winslow, Edward Berrett-Koehler Publishers ePub

Creative thinking may simply mean the realization that there is no particular virtue in doing things the way they have always been done.

RUDOLPH FLESCH, PHILOSOPHER AND EDUCATOR,

WWW.LINEZINE.COM

WE HAVE SEEN the tremendous conflicts of interest that plague corporations and their CEOs, the accounting industry, the brokerage industry, and even our federal government. These conflicts contributed to the shocking evaporation of wealth that investors endured in the early 2000s when the market bubble finally burst.

The solution to these problems isn’t easy. It will take a concerted effort by all concerned to re-create a fair and equitable capital system in which the investor gets a reasonable return that is proportionate to the risk assumed when purchasing equities. The markets will eventually provide such a solution, either through decreased share prices or meaningful change at all levels. If reformation doesn’t occur, further harm to stock portfolios is inevitable.

Investors who employ strategies for protecting principal are prepared for any scenario. The major overhaul required to win back investor faith and confidence is a huge and complex undertaking. Conflicts of interest still exist, which make the task a strenuous challenge. 190

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CHAPTER SIX: REDEFINING RISK MANAGEMENT

Winslow, Edward Berrett-Koehler Publishers ePub

Today we could with total truth be called a nation of speculators…

THE NEW MCCLURES, A POPULAR MAGAZINE OF THE 1920S

ONE OF THE first steps to developing a financial plan involves taking an accurate assessment of what you own and owe, along with your sources of income. The next step is to get a handle on your attitudes toward risk and a clear understanding of your goals and objectives. This might be determined from a series of questions that you ask yourself or from an interview with a financial planner. The answers to these questions are important components in determining an appropriate investment plan because your risk tolerance level determines your overall approach to investing.

Investors define risk as the probability or likelihood of losing money. Here is a listing of risks that are traditionally of concern to investors:

Market risk—the probability of losing money in the securities markets

Interest-rate risk—the chance of being tied to a low rate for a long period of time when interest rates go up

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