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Education, analysis, and advice for uncertain times




Special note to reader: My relationship with Sammons Securities ended May 11, 2005. This portion of the web site is pending revision.

Last updated 31 Aug 2005


From 1995 to 2000 the US experienced its greatest stock market bubble, followed by a bear market decline that erased trillions in shareholder wealth. Then came a continuing spate of scandals. The scandals have ranged from deceptions practiced by corporations and accounting firm professionals (the implosion of Arthur Anderson being the most notorious example) to the exploitation of investors by major Wall Street firms. As an example of the former, in Sept 2002 the Public Citizen’s Congress Watch listed 20 corporations that suffered a substantial decline in shareholder wealth following anouncements that they were under federal fraud investigation, examples included: Tyco ($84 billion), Lucent ($55 billion), Worldcom ($27 billion), Enron ($25 billion), Xerox ($9.8 billion), and Qwest ($9.7 billion). According to a May 12, 2003 Forbes article “Criminalizing Capitalism,” feeling the heat of public outrage and increased government regulation, a record 330 public companies restated their earnings in the year 2002. And a June 4, 2003 Charlotte Observer article “SEC Subpoenas Chiefs at CitiGroup, Merrill,” described the $1.4 billion settlement made by the following ten Wall Street firms for allegedly misleading investors: Citigroup/Salomon Smith Barney ($400 million), Credit Suisse First Boston ($200 million), Merrill Lynch ($200 million), Morgan Stanley ($125 million), Goldman Sachs ($110 million), Lehman Brothers ($80 million), J.P. Morgan ($80 million), Bear Stearns ($80 million), UBS Warburg/PaineWebber ($80 million), and U.S. Bancorp Piper Jaffray ($32.5 million).

Massive losses in shareholder wealth, combined with losses in corporate, Wall Street, and accounting profession credibility do not exactly comprise the kind of news we need to hear at a time when America is increasingly on the ropes with ever rising balance of trade deficits and escalating federal, corporate, and personal debt. If the US Government eventually runs out its “national credit card” and resorts to hyperinflation to try to bail itself out, the appropriate metaphor might be closer to the woods set on fire rather than an ethical jungle. If the pattern shown from 2001-2003 in Argentina repeats itself here, the government and many Wall Street firms will continue to deny underlying realities right to the bitter end, and will continue to sweet talk large portions of the investing public into holding the bag.


The basic process for successful investing has not changed much since ancient times. The successful long-term investor does his homework with great thoroughness. He typically scans hundreds if not thousands of investment opportunities and gets to know many markets in detail from both a “top down” and “bottom up” perspective before making a purchase decision. He digs extra hard to get reliable, first hand information about investment prospects ahead of the crowd. He has the staying power and patience to allow opportunities to present themselves without being pressured to act in an untimely manner. He is typically a generalist, with a vast knowledge base ranging from history and political economy to the analysis of financial reports and market price behavior. Generalists tend to function more like expert craftsmen in a medieval job shop or professionals in fields such as law, medicine, consulting, and academia. They tend to be at the other end of the job spectrum than, say, automobile assembly line workers working under piece rate quotas whose positions are said to be highly specialized and functionalized.

In contrast to what they say publicly, most major Wall Street firms tend to be in a state of quiet perpetual war with outspoken, entrepreneurial generalists. Many headquarters executives and branch managers want subordinates who they can easily understand, predict, and control; people who maintain a certain corporate image and do not say anything that is too controversial. They like highly scalable cookie-cutter business models that promise fast growth and quick boosts to their cash flow and stock prices. They are forever trying to take investment-related jobs and break them down into highly functionalized specialties that can be turned into training manuals and guided by quotas and memos. Stockbrokers (or account executives or financial advisors or financial consultants or whatever the latest and most recent trendy title happens to be) are supposed to focus on selling and let analysts do their thinking for them. Analysts create the appearance of analysis while avoiding antagonizing any publicly traded corporations that could potentially become a source of corporate finance or investment banking business. They also tend to provide hot tips to fund managers first before retail brokers, since large mutual funds and hedge funds typically generate substantial commissions in their firm’s trading departments. Investment bankers generate substantial fee revenue from IPOs, secondary offerings, and debt offerings, and they pretend that they are not using their firms’ analysts to support their deal stream because of some kind of ethical “Chinese Wall,” which of course remains a continuing Wall Street joke.

Ultimately, instead of creating new efficiencies from a greater division of labor, and instead of creating better economies of scale from greater size, many major Wall Street firms instead simply create greater size combined with more interdepartmental conflicts of interest and more “groupthink” within these departments. In a prolonged bull market, the large firms often get away with their attempts to leverage up their size, proprietary product volume, and market share to skim more profits. However, once a bear market settles in, many Wall Street firms suddenly get religion and then deny that they encourage their brokers to act like assembly line production workers or their analysts like Orwellian propagandists. They cover their tracks, promise that all the abuses for which they got caught will never be repeated, and then quietly await a new season where their corporate finance, derivatives trading, mergers and acquisitions, and other departments can make a killing once again.

Some specific examples of the aforementioned are as follows: In his May 10, 2003 interview with James Puplava, Frank Partnoy, a former derivatives trader for a major Wall Street firm and author of F.I.A.S.C.O. and Infectious Greed: How Deceit and Risk Corrupted the Financial Markets, described a brokerage culture in which brokers openly bragged about making huge commissions while losing clients money. Mark Dempsey, a former broker at a major Wall Street firm, is the author of Tricks of the Trade: An Insider’s Guide to Using a Stockbroker, which expose how firms tend to be much more interested in recouping overhead costs, accommodating in-house financial products, and pressuring brokers into meeting asset-gathering and commission-related quotas than they are interested in client investment performance. Lastly, there is the book: “Ahead of the Market: The Zacks Method for Spotting Stocks Early –In Any Economy.” By Mitch Zacks. According to Publisher’s Weekly, “Wall Street spends over $1 billion a year analyzing stocks. Too bad much of that analysis is garbage, says author Zacks. He should know: he’s v-p of the respected Zacks Investment Research, and he’s witnessed how the cozy relationship between companies and their investment bankers have corrupted investing over the years. Now he’s come out with not only a denunciation of sketchy analysis, but a handbook for individual investors for spotting winning stocks on their own.” David Futrelle’s Feb 8, 2002 Business 2.0 article “Rebuilding Credibility on Wall Street” (premium content archive) added to this: “Consider the results of a recent survey by Zack’s Investment Research: For the second year in a row, researchers discovered that the stocks that were least popular with analysts ultimately performed the best. Stocks with the highest percentage of “sell” ratings moved up nearly 60 percent in 2001, while stocks with the highest percentage of “buy” ratings (you guessed it) plunged more than 70 percent.”

There are other roots behind the aforementioned gross improprieties and imbalances on Wall Street, but in an effort to keep this section focused on brokerage issues, I will refer the reader to my discussion of broader social issues in my “Learning the Score” article.

One area where my practice has significantly diverged from that of the average brokerage firm involves my greater freedom to communicate with the public. I admire the open communication approach used by Prudent Bear Fund manger David Tice at www.prudentbear.com or James Puplava at www.financialsense.com and have greater freedom to help educate and awaken the public through internet, print, and electronic media.

But it goes beyond that. The average brokerage firm's business model requires an office presence for walk in business and local secretarial support. I am not necessarily tied to any of this. Technology has advanced to the point that with my lap top, wireless card, and cell phone, I have far more power at my finger tips to immediately access information, shop the national and global markets, place trades, and communicate with the public while sitting at a table with a client in an elegant restaurant than I did in 1998 in my office at Morgan Stanley adjacent to stacks of research, file drawers, a secretary and operational staff. With Microsoft Netmeeting software and a small camera that I carry in my laptop carry bag, I can have a “face to face” meeting with almost anyone, anywhere in the country, at almost any time. Indeed, I regularly converse with clients across the country and have even stayed in contact as they have traveled in Europe, Latin America, and elsewhere overseas. With the exception of certain new account and disclosure forms (which ultimately become scanned into a system and enter secure computer systems after they are signed and returned), I have the capability to operate with almost zero paper, bricks, or mortar. I prefer to send research by e-mail, post my latest thoughts on the internet, and use other means to save time and more efficiently communicate for both myself and my clients. All trade and financial data is held in the computer banks of a clearing firm, although trade confirmations and statements are routinely mailed to clients as back up courtesy copies.

America has lost approximately three quarters of its manufacturing jobs as a percentage of total employment in the last three decades, and now top-paying service jobs are rapidly disappearing offshore as well. In the long run, the key to staying up with the competition is to continually look for ways to cut costs, improve the quality of goods and services, and embrace new technologies in every way possible. Staying up with technology often involves continuous study and long learning curves, so it has to become a disciplined, almost daily commitment, much like watching ones diet and exercising regularly. Although I am an ardent student of history and remain loyal to time-tested ethical principals, on an operational level, America First Trust will likely remain focused on running lean and mean and ahead of the pack.



Flag carried by the 3rd Maryland Regiment at the Battle of Cowpens, S. Carolina, 1781

© William Fox. Sometimes William Fox offers viewpoints that are not necessarily his own to provide additional perspectives. .