Calling it Out

A few years ago, I was having a severe case of a running cold. After days of torment, I finally decided to go for a specialist who I hoped would know and treat me better. The Doctor took one look at me and prescribed a CT Scan. This was to be done at a specific facility which meant a kick-back, but suffering as I was, I decided to get it done.

CT Scans are expensive and used only when the Doctor suspects something serious after the patient has been treated and not responding to usual therapies. But here I was taking a CT scan even before taking any medicine. The CT Scan came out clean and I was then prescribed a dose of antiBiotics. Few days later, the cold and the headache vanished. But for me, I lost trust in the Doctor who is very famous and continues to be recommended by friends.

In the United States, Millions are unemployed and unlike in India where they need to worry about where their next meal will come from, most are getting paid more as Unemployment Benefits than what they used to earn before COVID took away the jobs.

With Americans being more exposed to the Stock Markets than others, it hasn’t been a surprise to see huge activity by new traders who are betting the unemployment money which many consider as a freebie in order to try and make more.

Enter Dave Portnoy. Before Covid, David Scott Portnoy was a blogger, and founder of the satirical sports and pop culture blog Barstool Sports. Today, he is New York Times calls it, “Captain on the Day Traders”. 

His claim to fame though – calling Warren Buffett and I quote ““washed up” investor who’s no longer relevant.”. This after calling him a Idiot for selling Airlines stocks which he supposedly loaded up on and made a great deal of money.

On Twitter, his word now reaches to 1.5 Million followers many of whom I am sure have no clue about how markets work or what kind of risk it is to buy bankrupt or close to bankruptcy companies, but there is a belief that this new age of traders are now able to move the price of stocks to the extent that a Bankrupt Hertz is trying to sell 1 Billion worth of what will soon be Worthless stock to the new age traders.

A chart says a thousand words and here is one such chart

In a way, this is not too different from what we have been seeing in India especially with regard to Options with claims of profits that should make anyone swoon and promises of teaching you the holy grail for a low cost 25K + GST.

When I bought Franklin Funds, it was not without knowing the risk though I never imagined that they would need to shut down the fund to ensure orderly payment. Today, it’s fantastic to talk and write about how investors were blindsided by the fund manager. What has been missing though is any fund manager coming out before or even after in the open and saying what needed to be said. Maybe they are afraid of “Virtue Signalling” given the bad state of many of their own Credit Funds.

Finance is a domain where there is a direct observable cost. It’s why advisors are said to observe fiduciary duty when it comes to advising – both for clients and for the general public thereof. 

What is measured as “Investor Gap” – the return gap between what the fund produces and what the investor is able to capture is basically the cost paid by investors due to misleading advice. One of the observations of my time when I was a stock broker has been that people who lose money following bad advice basically quit the markets. In other words, they throw the baby with the bathwater.

We all make bad decisions and there isn’t anyone who doesn’t get it wrong. Investors buy the wrong stocks, Fund managers bet on the wrong sector, Planners recommend investing in the wrong assets. The key is not to be sure never to make a wrong decision for you will make wrong calls, but to take the good and the bad with equanimity.  

Buying bankrupt company stock is a bad decision, advising people to buy such stock is fraud. As Morgan Housel writes,  

“Experiencing something that makes you stare ruin in the face and question whether you’ll survive can permanently reset your expectations and change behaviors that were previously ingrained” 

Morgan Housel

Fraudulent advice shatters not just dreams and hopes but future financial comfort of many. Makes calling out all the more essential. Trust is the key to success both from an advisory point of view and the client point of view. Misuse of Trust though can mean a heavy price for the client though it may or may not impact the advisor. It’s unfortunate how much it’s loaded against the small investor and in favor of the large advisor / fund manager. 

Before I end, one small piece of advice – don’t use leverage – especially in the financial markets at least till you have experience of a decade or more. This means No Options or Futures. Leverage is the biggest killer of small clients who hope to make it big but end up losing everything they have and more. Don’t short circuit your journey into a world of business and knowledge by trying too hard too early.