Big firms understand markets?

For most small investors the guys who come on TV with a slick suit are “more knowledgeable” than the guy in a dhoti. That is because as Indians we like “phoren” rather than Indian. So is our quest for knowledge.

Those people who have been long enough in the market know that one man who used to come to the “ring” to buy and sell shares or just to the BSE building as a visitor was Mr. K R Choksey. His ability and fundamental knowledge about creating wealth is legendary. He wore no suit. You must read this post by Alexander Green in a news letter to his investors. It talks about his experience at Merrill Lynch

Unmasking the Bull at Merrill Lynch

Dear Investment U Reader,

Let me tell you about the dumbest career move I ever made.

In 1999, Merrill Lynch began aggressive recruitment efforts. I really wasn’t interested. But, ironically, the more I begged off, the more money I was offered.

Unfortunately, my old firm provided the necessary nudge by informing me one day that I was prohibited from selling the shares in my pension – which had soared during the Internet mania – unless I left the firm.

Because I was one of the largest employee shareholders – and felt the technology bubble was likely to end badly – it provided a strong incentive to take Merrill’s offer.

Eventually, I did.

Big mistake. For starters, I was astonished to see that Merrill was pounding the drum for the very Internet darlings I had abandoned my old career to sell. For example, it had a “Strong Buy” on Lucent, Nortel, JDS Uniphase and Global Crossing – not to mention WorldCom, Enron and Adelphia.

I fired off a note to the analyst recommending JDS Uniphase at $150 a share. “How can you recommend a stock with such an insane valuation?”

“Valuation is only one of our metrics,” was his curt reply.

“But if that’s all wrong,” I wrote back, “what difference do the others make?”

I never heard from him again. JDS declined 99% over the next several months.

Merrill also has an unparalleled record in hiring and firing chief investment strategists. In the late 90s, Charles Clough was pushed out for being too bearish. His successor Christine Callies remained stubbornly bullish throughout the bear market that followed. That led to her being replaced by Richard Bernstein, who bragged at the market bottom in 2002 that Merrill had “the lowest equity allocation on the Street.”

Despite its blue chip image and gold-embossed brochures, Merrill reminds me of the computer HAL 9000 in Stanley Kubrick’s “2001: A Space Odyssey.” Completely calm, completely rational – and totally out of control.

I’ll never forget my first day at the firm. A broker on my floor stopped by my office to welcome me. After chatting a few minutes, he told me he had a great investment idea to share.

I told him I was all ears.

Get your clients to pull out the equity in their homes and invest it with one of our Internet and technology managers,” he said, his face beaming.

“Why would I do that?” I asked.

“Don’t you get it?” he said, looking a bit surprised. “First you get paid on the mortgage origination. Then you get paid on the assets under management every quarter. It’s brilliant.”

So brilliant, in fact, that nine years later his clients have likely paid tens of thousands of dollars in fees and lost most of the equity in their homes.

I could go on, but I’ll stop here. Merrill wasn’t my kind of place. After a few months I resigned, returning most of the big signing bonus I received.

My experience with the firm may have been atypical. I’m sure there are capable, qualified people at Merrill who are doing their best to serve their clients.

That wasn’t my experience, however. My experience was that most investors need Merrill Lynch like a fish needs a bicycle.

Of course, it’s not just Merrill. The standard line on Wall Street is that the capital markets are so complicated and your financial circumstances so unique, you can’t be trusted to run your own money. You need a professional.

But do you, really? With a little education and a bit of discipline, you can run your portfolio yourself at a fraction of the cost of using a full-service broker.

And when you manage your own money, you don’t have to worry about conflicts of interest, self-serving advice, or hidden fees and expenses.

This story is obviously Alexander’s. The story is not about Merrill. Just cut and replace this name with Bear Stenrs, Citibank, JP Morgan, or in the Indian context with names like JM, Kotak, Icici, hdfc. it really does not matter – it will all sound the same. This leads us to the story I heard at the India Equity show – “it is difficult to teach something to a person, if the learning goes against his making a living”

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2 Responses to “Big firms understand markets?”

  1. Thanks for the information. Me this theme too interests. I shall read still.

  2. Nice article…inspires me to stop being dependent on a broker and take reins in my own hands.

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