WHAT NOW? TIPS FROM FROM THE EXPERTS

Have you been gored by Wall Street bull?
Have you been gored by Wall Street bull?

Excerpts from "What Now?" by Jeffrey Goldberg in The Atlantic, May 2009

Jeffrey Goldberg, a successful writer who has recently lost a third of his life savings after "paying a premium for quality research" advice from Merrill Lynch and others, asked a number of investment gurus what he should do now? Here are some exerpts from the experts ranging from Robert Soros to Bill Gross to survivalist Cody Lundin. I think you may find the answers he got amusing if not a solution to your financial future.

Richard Bernstein, Merrill Lynch chief investment strategist--Extend your financial horizon; the probability of losing money decreases as the time horizon lengthens; "You have to give an investment strategy time to reach gestation."

[Goldberg--"But my investment strategy gestated for 15 years. Then it died."]

Daniel Kahneman, Nobel prize behavioral economist--"You no longer know the world you live in. You played by the rules, the rules benefited you.The world functioned according to some regularities. Right now, it's unclear what rules apply. There is a new regime. What seemed prudent earlier has disappeared. I'm surprised Americans aren't more panicked. "

Robert Soros, son of George Soros and deputy chairman of Soros's fund, told me that my crucial mistake was to believe that the brokers and wealth managers and cable-television oracles who make up the financial services complex actually had my best interests at heart. "You think a brokerage should be a place you go to pay commissions for fair and unbiased advice, right? It's not. It never has been. Wall Street is a place where whatever can be sold will be sold. You are the consumer of their dreck. What they can sell to you, they will sell to you."

"But they told us..." "They lied. Do not for a moment think that a brokerage firm is your friend."

"So who's my friend?"

"You don't have one. This is the market."

"So, what about Chuck Schwab?"

"All brokers move products based on volume and commission."

Goldberg asked Larry Gellman, finance industry iconoclast, why Merrill had stopped calling. Gellman: "If the head of Merrill Lynch and every other investment bank had their way, no individual broker would ever recommend an individual stock or bond to a retail client again. They have gotten out of the brokering and advising business and gone all in to the "wealth management" business. The new model is to gather assets from wealthy people and then place those assets with a whole bunch of managers who will manage different pieces of it in diversified styles so you don't lose all of it at once. And, by the way, people with less than $10 million need not apply."

At a gathering of financial gurus at the Fifth Avenue apartment of Boaz Weinstein, one of the early innovators of credit default swaps, Goldberg found a veritable golden lode (or load?) of investment advice. Two friends separately and quietly suggested that Goldberg buy gold, and right now, "to guard against the massive debasement of the dollar." Then another friend approached--"You don't want to be long gold. The dollar is the currency of last resort for the entire world. There's little chance of debasement." Goldberg asked Bill Ackman, founder of Pershing Square Capital, "What is your advice right now for an investor with $50,000-$200,000 to invest?" [The wizards in the room were having difficulty calculating figures of such humble size, reacting as if I had asked Bill "I have 75 cents in my pocket. Do you think I should buy Twizzlers or a big red gumball?"]

But Ackman answered--"First, it depends on when you're going to need the money. You have to be prepared to put your money away for 5 years or more. Buy a house. I think it's a great time to buy a house. But put a 20 percent down payment, get a good mortgage...The rest put in a very broad index fund--a Wilshire 5000 type index fund..." [ Goldberg--"I think Ackman might not have been accustomed to talking to people like me, which would help explain why he sounded suspiciously like a Merrill Lynch financial adviser."]

Goldberg asked Ackman "What are the chances we're going into that death spiral?"

"We're in it!" Ackman replied. "Whether or not we're going to die is another question."

"What's the chance we're going to move to a barter economy?" Ackman: "I think it's small." I was hoping it was zero.

Cody Lundin, survivalist standing outside barefoot in shorts in a foot of snow--"The way I see it, it's all a con game Wall Street has always been an illusion. Now it's an illusion that's crumbling." Lundin advised that I try making a fire with sticks, eating mice and going without electricity for a week "to see where it hurts." Lundin himself eats mice and rats he traps at his off-the-grid passive solar house in the wilderness because "why waste protein?"

On investing, Cody said "I don't believe in the intangible economy; I believe in the tangible economy, I buy tools, food, or land. I like to be able to see what I'm buying. And I really don't like debt, so I'd rather not hav certain things than be in debt to anyone. I just feel better that I don't owe money, and I feel good knowing that I can take care of myself."

Bill Gross, bond guru founder PIMCO--"Thrift, not mouse-eating thrift, but more moderate forms of thrift--is quickly becoming the norm, as a result of society's massive over-leveraging. Risk taking went over the edge. We are inventing something new. We're very afraid. mentality for the rest oWe know from the Depression that people who lived through it didn't change their socks.mentality. For the rest of their lives they were sewing their socks. They refused to take a lot of chances. My sense is that it will take 10 or 20 years to find that spark of risk-taking in people again."

Seth Klarman, leading value investor, apostle of Benjamin Graham, author of value investing Bible "Margin of Safety"---"It's always smart to prepare for disaster. In investing that means holding disaster insurance...The overwhelming majority of people are comfortable with consensus, but successful investors tend to have a contrarian bent. They like stocks better when they're going down. People panic when when stocks are going down, so they like them less when they should like them more.

One of the themes of "Margin of Safety" is that people like Goldberg aren't equipped to be investors. "No one knows what he's doing unless he's a full-time professional. As in many professions, full-time professionals have an enormous advantage. He agreed with Robert Soros that Wall Street treats the small investor not as a client but as a source of ready cash. The average person can't really trust anybody. They can't trust a broker, because the broker is interested in churning commissions. They can't trust a mutual fund, because the mutual fund is interested in gathering a lot of assets and keeping them. And now it's even worse because even the most sophisticated people have no idea what's going on."

Klarman asked Goldberg if he had a mortgage and whether the amount he owed on the mortgage exceeded what he had invested in the market and if he liquidated his stocks he could pay off his mortgage. Goldberg replied that he could. Klarman--"So you are leveraged. Why are you keeping your money in the market? It's because you think you're going to make more in the market than the interest you're paying on the mortgage? Goldberg--"Yup." Klarman, "Well, are you?" Goldberg, "Uh, no, but I'm getting the mortgage interest deduction."

Klarman, "Yes the interest is deductible. buit if you had capital gains in the market, you'd pay taxes on those. In the aftermath of this financial crisis, I think everyone needs to look deep within themselves and ask how they want to live their lives. Do they want to live close to the edge, or do they want stability? In my view, people should have a year or two of living expenses in cash if possible, and they shouldn't use leverage anywhere in their lives."

Goldberg asked Bill Gross what he should do. Gross repled "The system is rigged. It's difficult for the average investor to even conceptualize what we're talking about. For this reason I think financial advisers are still worthwhile, but the average investor can no longer pay them what they felt they were worth. You should find someone who isn't over-promising or overcharging."

Klarman--"There's enormous pressure to provide conventional advice and tremendous pressure against providing unconventional advice. Advisers only recommend what's conventionally palatable. They tend to say 60 percent stocks, 40 percent bonds, and they're not likely to move away from that, not matter how extreme valuations are. They're not likely to move away from it when the market is really high, or really low. A big part of the problem is that there isn't a perfect answer to any of this. No one can tell you how to allocate your assets 100 percent of the time. The average investor isn't getting Warren Buffett to look at his portfolio; he's getting a printout from a computer mode."

Goldberg concludes "I no longer expect to get rich. It makes me happy to realize this. It also makes it easier to give more money to charity. In retrospect, I can't imagine what led all of us to believe that we could regularly expect double-digit annual returns on our money, for doing no work. Maybe this attitude will cause me to miss the next great run-up. No matter. I'll take 3 or 4 percent gains a year, or 1 or 2, if necessary. I'll keep mre cash on hand. I'll keep a two-week supply of meals-ready-to-eat, bottled water, and lanterns in my basement. If things get bad, I'll take my family and drive west, to find Cody Lundin. And if the bottom truly falls out, I'll find a mormon and ask him, politiely, if he'll share."


Follow the above advice and you can't go wrong! Good luck!



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Comments 22 comments

ColdWarBaby 7 years ago

Interesting but insane. I wouldn't touch the market if I could.

I wish it would stop flopping around and just die. That's just me.

When Dire Straits did Money For Nothing they should have included some verses for bankers and brokers. I'm sick to death of people getting rich by being counter-productive.


Ralph Deeds profile image

Ralph Deeds 7 years ago Author

Wall Street's role in the economy has far outgrown it's legitimate function.


pgrundy 7 years ago

Ralph this is so good. I got a few good laughs out of it. Also, a great potential hub topic: "Favorite Mouse Recipes."

We certainly have changed. We spend as little as possible and are paying off our mortgage (our only outstanding debt) as fast as we can, and planning for the worst. That's what we're doing. I don't know if it's right, but I do think things are way worse than most people think. Thanks for this, it was fun.


Ralph Deeds profile image

Ralph Deeds 7 years ago Author

Thanks. Glad you enjoyed it. I wish I had the time and talent to write something original rather than doing mashups of other people's stuff! I do enjoy sharing things that I find amusing or profound.


Shadesbreath profile image

Shadesbreath 7 years ago from California

This was a great read. I normally avoid financial hubs because they hurt my tiny artist's brain. But this was fun and informative. LOL@ the dude outside in the shorts and snow, and @ the adjective "mouse-eating" in "mouse-eating thrift." That's awesome use of language right there.


Ralph Deeds profile image

Ralph Deeds 7 years ago Author

My favorite was the one that the author felt like the financiers were treating him as if he had said he had 75 cents and asked whether to buy "swizzlers or big red gumballs."


Iðunn 7 years ago

who is coldwarbaby and why do they have my pol? ralph, I won't have any need to comment to you anymore on pol. :p


Ralph Deeds profile image

Ralph Deeds 7 years ago Author

I guess we're an afinity group or some such thing. A HubPages menage a trois perhaps.


Iðunn 7 years ago

it might accidently restore some trust in human being's common sense. :O


stocknequities 7 years ago

Ralph,

great articles. If you get a chance check out my site. You may find it interesting.

http://hubpages.com/hub/stocknequities


Iðunn 7 years ago

ralph, are you watching the gov sanford, sc debacle? fascinating breaking news.


Ralph Deeds profile image

Ralph Deeds 7 years ago Author

He's trying to outdoo Sarkozy and Jimmy Swaggart all rolled into one. Weird!


Iðunn 7 years ago

his apology was remarkably bland.

my understanding is that the family money is his wife's and she made a public statement requiring him to grovel for an unspecified length of time and she might reconsider the separation. I'm riveted.


Iðunn 7 years ago

bringing us back to topic (ponzi schemes and the stock market), madoff is going to be sentenced on monday. they will probably give him a $50 fine and some probation. the news is holding out for the 150 year sentence and the 'victims' are going to speak but I have faith in the american system that rewards thieves and punishes losers. I think he'll walk.


Ralph Deeds profile image

Ralph Deeds 7 years ago Author

Well, I doubt that he'll walk. I think they'll throw the book at him. We'll see.


Iðunn 7 years ago

indeed.

I'm seeing some interesting and diverse macroeconomic data that indicates another rather large drop for the market soon, probably well back under 8000 for the Dow in the next couple of months, barring anything unforeseen.

could be wrong, but I'm watching for that. either I'm wrong or the media is because the media keeps saying we've hit economic bottom and are headed back up. I know we haven't though, we haven't even really begun the credit card defaults and housing is still falling, jobs are still being shed and so I've been on my toes watching macro news lately.


Iðunn 7 years ago


Iðunn 7 years ago

preliminary judgements today (likely to be appealed):

Madoff ordered to forfeit over $170 billion

"By TOM McELROY, Associated Press Writer Tom Mcelroy, Associated Press Writer – 13 mins ago

NEW YORK – Disgraced financier Bernard Madoff must forfeit $170 billion, a federal judge ordered Friday.

U.S. District Judge Denny Chin entered a preliminary order of forfeiture, and Acting U.S. Attorney Lev Dassin released a copy of the order Friday night. Madoff was ordered to give up his interests in all property, including real estate, investments, cars and boats...

...The government also settled claims against Madoff's wife, according to Friday's order. Under the arrangement, the government obtained Ruth Madoff's interest in all property, including more than $80 million of property to which she had claimed was hers, prosecutors said.

The order makes it clear, though, that nothing precludes other departments or entities from seeking to recover additional funds.

A call to Madoff's lawyer, Ira Sorkin, after hours Friday was not immediately returned."


Iðunn 7 years ago

looks like you might be right they are actually going to throw the book at him. this couldn't have happened under the Bush Admin. go bama!

on the other hand, it isn't settled at all yet by the appeals and countersuits etc and by the time it comes down to it far far in the future when less public eyes are on it, the situation might be a far far different thing.

nice opening move, though.


Ralph Deeds profile image

Ralph Deeds 7 years ago Author

Chasing small fry S.E.C. let Madoff get away Joe Nocera in the NYT 6-27-09

http://www.nytimes.com/2009/06/27/business/27nocer...


Iðunn 7 years ago

“quantitative metrics”  indeed.  I'd believe that.  Kind of like cops being required to issue a specific number of tickets whether people break the law by speeding or not.

of interest, I watched the bernanke speech in congress regarding H.R. 1207

Bernanke fearmongers that Fed audit would be ‘takeover’ by Congress, trigger economic collapse

http://www.infowars.com/bernanke-congress-audit-wo...

I'm torn.  I'm not sure if it's worse to have the crooked Fed watching after monetary policy or crooked Congress.  O.O 

Still, it's a pretty weird threat and it's pretty weird for him to hint at it.  He's more or less saying 'if you dare to audit the Fed, we'll take the whole country down with us'.  creepy.


Peggy W profile image

Peggy W 7 years ago from Houston, Texas

Madoff will undoubtedly spend the rest of his life in prison and should! Small consolation for all those who lost their life savings.

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