Terror on Wall Street, a Financial Metafiction Novel (20 page)

APPENDIX ONE

LONGEVITY

Census data shows us that we Americans are living longer. For a couple in their mid-seventies, there's a good chance that of one of them will live into their mid-nineties. This is extremely important and affects your entire investment plan. First, you can be sure that social security will not kick in until the age of seventy-five, so your accumulation period (defined as the time between the ages of 30 until 75) is approximately 45 years. As a consequence, you have 45 years for your portfolio to grow. We call these 45 years the 'accumulation period'. Here is a list of the things you should consider:

• The longer the accumulation period (the period you have earned income from labor), the bigger your retirement investment will become.
  
• But the longer the accumulation period, the more money you will need to counter inflation (count on a 3% increase per year.)
  
• Having your investment funds in a tax-free account becomes vital. ( see Roth IRAs)
  
• Keep trading stock that will keep taxable events to a minimum.
  
• At the age of 75, consider purchasing an immediate annuity from an AAA-rated insurance company.
  

APPENDIX TWO

ABOUT BROKERS

• Brokers take a simple examination consisting of questions about what a broker can and cannot say when talking with a client.
  

• There are no educational requirements, compared with the education and skill required to be a barber in your state.
  
• A broker will sell you actively managed mutual funds. The front-end load is money that the mutual fund pays him.
  
• The broker will sell you those stocks that earn him the highest commission..
  
• He has no fiduciary duty to sell you the product with the lowest cost or tell you if he knows about an index fund.
  
• The majority of investors buy actively managed funds suggested by their brokers.
  

• These funds will have front end loads and 10b1 fees
  
• A broker will tout the fund’s 1,3, and 5 year average annual return
  
• Never will the broker mention a measure of the risk of the investment
  
• Actively managed mutual funds have one-third risk more than the market index fund.
  
• The fund he sells you has been selected by evaluating the fund’s track record. Studies show that this is not an accurate method of selecting a fund that will meet or beat the market.
  
• In fact, there is no known method of selecting a fund that will outperform the market.
  
• Actively managed accounts have a portfolio turnover of 80% to 100% per year, triggering taxable events that, according to studies, can reduce the funds after tax earnings by 1% to 2.5% per year.
  
• Can a stockbroker earn a living by selling you the proper securities for your age and risk tolerance? No, it is doubtful that he can.
  
• But he
  is
  very skillful at transferring money from your bank account to his.
  
• Brokers are trained to sell stocks and extra high commissions are earned when he unloads toxic merchandise sitting in the firm’s inventory.
  
• It’s not only stocks that are peddled this way, but bonds as well.
  

APPENDIX THREE

SELLING SCRIPTS

From an unknown source

The following are examples of “sales scripts" which stockbrokers have used to push worthless stock on unsuspecting investors. "Sales scripts" are written by individual stockbrokers, a stock promoter, or management and given to stockbrokers to help them open accounts and sell stock. These sales scripts were used at a brokerage firm that has since gone out of business, in part due to regulatory pressures and lawsuits from investors who were defrauded by the firm's fraudulent practices and illegal manipulation of small stocks.

     If you ever receive a call from someone like this, hang up the phone or contact your state securities commissioner.

         
Sales Script #1:

Mr. Burns, We've been on the phone for 10 minutes now and you sound like a hell of a nice guy. Let me ask you a question. Why is it that 90% of the people who invest in the market lose money or see mediocre results? Why do the Warren Buffets, the Carl Icahns – why are they always the ones who seem to make the money?

I'll tell you why. It's because they deal with the right people, who are very well connected. Believe me. I am one of those people. I have connections all over the street. You name the firm and BELIEVE ME, I know someone there.

I know how you feel. I am a couple thousand miles away, you don't know me, and we've never done business together. I can appreciate that. Perhaps you've lost money in the past with other brokers, and you're annoyed - and you know what? I'm a little annoyed too, because it makes my job ten times harder than it has to be.

Mr. Burns, if you work with me on 1,000 shares of Buskins Buckets, you will be doing so much more than buying a small piece of a phenomenal company. You'll be buying a broker who really cares about his clients. BELEVE ME, I am at my office every day at 7:30 in the morning breaking my ass to make money for my clients. I don't leave until 10 at night. This business means everything to me.

Do this. Go with me on 1,000 shares.

Sales Script #2

Mr. Burns, I deal with the most sophisticated investors, presidents and CEOs of major public corporations from Maine to California.

Over the next twelve months you are going to realize this was the best call you've ever gotten from a broker. You're going to thank me for giving you the little push you need today. Give me the shot, and you'll be very impressed.

Go with 200 shares.

Sales Script #3

I'm about to tell you something that nobody on Wall Street will ever tell you: my commission on 1 share (or 10,000 shares) is $75. I split that with the firm and the government.

PTER

APPENDIX FOUR

              MARKET TIMING

Market timing:  Trinity Investment Management Corporation, Boston, Massachusetts, October 1994, states the minimum batting averages necessary for a market timer to outperform a continuously and fully invested indexer. In order to achieve this, a market timer would have to have a minimum forecasting accuracy of at least 80% for rising markets and 90% for falling markets. In effect, a market timer would be required to bat about 700 to beat an indexer fully invested in the market on all timing.

APPENDIX FIVE

ABOUT THE VALUE PREMIUM

Value stocks are defined as stocks with a low book to price ration.  Rick Ferri speaks about the value premium. I believe, as he does, that the value premium is behavioral – but only to the extent that people expect a higher return for taking more perceived risk. Prices are a reflection of perceived risk. Even if that perception is proved to be incorrect over time, people will act today based on whatever information is available. That is how the market prices securities. And when prices are falling like a rock, there is a lot more perceived risk than there might be over the long-term. Fannie Mae and Freddie Mac are good examples. The long-term risk of Fannie and Freddie going out of business is remote, but there is a real possibility that short-term investors will lose a lot of money fast. The price of those securities must fall to reflect both fundamental risk and short-term trading risk.

APPENDIX SIX

LONG TERM RETURNS

*Investors are cautioned not to use this data to plan their returns when saving for retirement. You are advised to use Gordon’s Equation to forecast future returns. Furthermore, it is a better idea to use the equation to forecast the returns for each asset class in your portfolio. Gordon’s equation at present indicates a real return of from 6% to 8% for equities and 2% for bonds. A conservative number for inflation for the foreseeable future would be 3%.

APPENDIX SEVEN

NEW INVESTORS

Most people who become interested in buying marketable securities harbor preconceived notions about how to go about selecting stocks for their portfolios. If you belong to this camp, and then you may find it difficult to accept what you will learn as you read this book. Believe me: diving into the market with your hard-earned money without some understanding of how difficult and expensive it will be will prove a challenge unless you first gain some understanding about the market and the competition out there. There are hundreds and thousands of investors      competing with you who seek to buy stocks that are undervalued to buy or overvalued. At any instant in time, the market has determined the correct price for each and every issue. Prices of securities change when some unanticipated event occurs and investors react to this random event.

APPENDIX EIGHT

MARKET OUTLOOK FOR NEXT 30 YEARS

Using Gordon’s formula over the next 30 years, equities will return between 4% and 8% (real inflation adjusted returns).  Bonds will return 2%. The prices of equities and bonds will increase in value, keeping step with inflation.  At present the market is fairly priced, with the S&P at 1100 for equities.  Asset classes that are undervalued are the European market and real estate trusts (REIT).

     The best equity allocation is 70% total domestic market and 30% foreign equities. And the debt allocation should be adjusted to your age.  A 60-year-old should have 60% debt and 40% equities.

     If you need higher returns to retire, tilt your portfolio towards value and small cap stocks for domestic equities and reduce bond allocation.

     Owning a home is not an investment. When buying a home, offer 150 times the rental market. For example, a house that rents for $4,000 a month is worth $600,000.  If the house you want costs less than $4,000 to rent, then rent it rather than purchasing it

Long term returns on homes:

Luxury homes in Holland over the last 400 years provided zero return after adjustment for inflation.

Domestic U.S. market 1890-1990 provided 0% return, inflation adjusted.