Not long ago, investing in stocks and mutual funds was a big minefield for investors.
And I should know. My company and I played an important role in helping to clean things up. So did other investor advocates who worked even harder on this than we did.
But some scams — old and new — continue to undermine the portfolios of countless investors, including some of the most experienced.
So today let me tell you about three investor deceptions that, fortunately, are mostly a thing of the past … plus three more that, unfortunately, are still present major threats to investors.
Past Deception #1
Manipulated Corporate Earnings
In the early 2000s, when companies reported their earnings, you didn’t know which ones were telling the truth and which were not.
I demonstrated that 31% of companies listed on U.S. stock exchanges were manipulating their earnings — by padding their sales reports, distorting the “goodwill” on their books, playing games with their stock options, and worse.
Then I named the offenders. First in print to my subscribers. Then in the media and in Washington.
It worked. The SEC and the FASB (the Federal Accounting Standards Board) took action. But what really made the difference was countless of investors like you, dumping their shares of deceptive companies and shifting to companies with honest accounting.
Now, with rare exceptions, you can trust the financial information they provide to shareholders like you and me.
Past Deception #2
Big Broker Lies and More Lies
Before, you couldn’t trust stock brokers either. I demonstrated that over ten thousand had deceived their customers.
I showed you exactly how to identify the bad ones. And investors like you rose up and rebelled. They shunned the deceptive brokers. They flocked to transparent, ethical — and low-cost — brokers.
Now, the old-style broker that calls you with a stock pitch, gives you bad advice and charges you a mint in commissions is either long gone or mostly irrelevant!
Past Deception #3
Conflicted Stock Research
Not long ago, investors were routinely given research by major Wall Street firms that were riddled with conflicts of interest. But you were either not aware of it or underestimated how bad it was.
I showed how every major bank and brokerage firm was routinely collecting huge fees from companies for their underwriting business and then putting out “strong buy” ratings for those same companies, regardless of how flimsy or how dangerous their shares actually were.
I proved it.
With some very serious statistical studies, I proved that almost ALL Wall Street stock ratings were bought and paid for by the companies they rated. I proved it first to my subscribers. Then I proved it in press conferences at the National Press Club … and then in two New York Times bestsellers that sold 140,000 copies … and finally, I did it again in my special reports that reached millions of investors.
Again, I named names: Merrill Lynch. Goldman Sachs. JP Morgan. Plus dozens more.
Unfortunately, millions of investors lost money due to that deception alone. Hundreds of thousands suffered wipe-out losses.
But ultimately — and this is the good news — the nation’s attorneys general listened and acted. The Securities and Exchange Commission did, too.
They mandated that the big brokerage firms give you stock ratings from the most accurate, third-party research organization. And for that accuracy, I’m proud to say they came to my company, Weiss Ratings, more often than any other independent firm.
But once again, it was investors like you, voting with their feet and their dollars that really made the biggest difference.
The end result: Fortunately, today, Wall Street is a more honest and transparent place for you. Today, you are empowered to get your own independent research from research companies that have no financial ties to the companies they cover.
Today, you don’t need big brokers or big broker fees. You can buy and sell on your own online, paying commissions that amount to just a few cents per share.
This is really refreshing news for me, for you and for every investor in America.
But before we say “amen,” I still have a short list of sins and sinners you need to avoid like the plague.
Current Deception #1
The traders work for big banks and brokerage firms. They get critical bits of market data minutes or even just seconds before you do. They get company releases, also just before you do. And then just those few moments of advance knowledge makes a huge difference for them.
Their supercomputers respond immediately, pumping out huge buy or sell orders directly into the exchanges with lightning speed.
So by the time you can figure out what the heck’s going on, any opportunity you might have had to profit from this news is gone.
What’s worse, by the time you jump in, they’re already jumping out, often delivering painful losses to your brokerage account — over and over again.
So how do you avoid this phenomenon that’s so thoroughly rigged against you? Just do these four things:
First, don’t try to play their game. In other words, don’t buy or sell anything based on supposedly “hot news” or “hot tips” that are, in reality, warmed over — or freezing cold — by the time you get them.
Second, ignore the intraday fluctuations they cause in the market. Recognize that most of the stuff that happens between the opening bell and the closing bell is just noise. Annoying, largely irrelevant, noise.
Third, invest based exclusively on solid company information. The true value of each company. The actual, fundamental merits of its business and its finances.
Fourth, resolve to own only the best of the best. Buy companies that are at the absolute peak of the charts in terms of their solid balance sheets, earnings growth, liquidity and other key factors. Hold them as long as they continue to lead the pack. And then sell them unapologetically when their fundamentals deteriorate.
Current Deception #2
Research for Hire
That still includes some of the research coming from big brokers and banks.
But mostly, I’m talking about firms that actually specialize in deceiving investors with research for hire.
Here’s the scam in a nutshell:
The research-for-hire firm collects a fat check from a company listed on the exchanges. It writes up the company, singing its praises and sends the report to hundreds of thousands of unsuspecting investors.
The investors buy the stock as it’s rising or peaking. Then, as the marketing campaign ends, the investor buying dries up, the stock plunges, and investors lose fortunes. Or worse, they get stuck holding a stock that’s very hard to sell.
That’s the scheme. Now here’s how to avoid this scheme …
1. Whenever you get a company research report in your mail or your email, always look for a box of legal text.
2. If it says the mailing was paid for by the company that’s hyped in the report, that’s it! You’ve been forewarned! It’s the research-for-hire payola scam.
3. Never buy that stock. And if you happen to own it, use their scheme as an opportunity to get out. Go online or call your broker. Then proceed to sell every last share you own!
The image above gives you some real samples of research-for-hire reports that I’ve received in the mail myself.
Current Deception #3
Load Mutual Funds
These are mutual funds that charge sales fees (called “loads”).
Even if the funds’ past net performance is good, these fees could make it far more difficult for you to earn a decent return on your money going forward. And they lock you in to investments that can sometimes turn sour.
The only reason this problem is not at the top of my list is because, after years of hearing folks like me railing against these funds, and after years of experience with far better alternatives, most investors — and many mutual fund companies themselves — have finally gotten a lot wiser.
So today, these load funds have lost 64% of their business to no-load mutual funds.
Should you strictly rely on no-load mutual funds?
Well, not exactly because no-load mutual funds also have problems you may want to avoid.
Yes, they are definitely an improvement! They have lower costs. And they’re less rigid.
But they are still NOT the best vehicles for a flexible, fluid investment portfolio.
For four different reasons:
1. Hidden investments. It’s still virtually impossible to know what they’re doing with your money today. By the time you do get the information, it will probably be grossly outdated.
2. Hidden trap. Except for a few exceptional mutual funds, even if the stock market is crashing, you’ll still have to wait until after the close of trading to get out.
3. Extra fees. They charge you for their marketing costs.
This aspect kind of reminds me of the lawyer who calls you to nag you about your unpaid legal bill. You spend an hour on the phone with him, trying to dispute some of the charges. Then, to your utter dismay, you get a second bill charging you for the time you wasted haggling about the first bill.
Mutual funds actually do something similar. They take up your time with sales pitches, brochures and ads. They get you to invest in their shares. Then they charge you for their sales pitches, brochures and ads.
How do they get away with that?
Simple. It’s all “perfectly legal,” disclosed in the fine print under the cryptic heading “12(b)1 fees.”
4. The locks you find on the door. When you buy into no-load mutual funds, you figure that “no load” means you can sell out whenever you want with no cost and no hassle.
No cost? Maybe.
No hassle? Rarely!
Although these funds don’t charge you for trading, most do make it very difficult for you to trade. Even if it’s one of their own funds, they don’t let you switch from one fund to another more than a set number of times per month or per quarter.
This is why even no-load mutual funds have been losing a lot of business — to Exchange-Traded Funds (ETFs).
Unlike mutual funds, ETFs …
* Tell you exactly what they’re doing with your money right now …
* Let you buy or sell any time during the regular trading day …
* Charge no marketing fees, and …
* Allow you to get out — or switch — any time you like with no hassles and no restrictions.
Each ETF focuses on a particular index, representing the broad market, an industry sector, an asset class, or even an investing style. Then all the ETF manager does is to buy the investments in that particular area with that particular style with the goal of duplicating as closely as possible the price movements in that particular index.
Take the S&P 500 ETF — SPY, for example — it owns a basket of S&P 500 stocks that’s designed to match, as closely as possible, the ups and downs of the S&P 500 index.
Health care ETFs do the same thing. They own a portfolio of health care companies. Oil industry ETFs own the shares of oil producers and so on.
And today there are hundreds of actively traded, liquid ETFs available to you as investors.
They cover …
* Every major market index — such as the Dow Jones Industrials, the S&P 500, Nasdaq Composite, and many more.
* Every popular investing style — such as large caps, small caps, growth, value, etc., and …
* Every major industry sector — like technology, financials, biotech, and so forth.
* Every major region of the world — stock indexes that represent Europe, Pacific Rim, emerging markets, etc.
Plus they also cover countries …
* Every major industrial country — stock indexes, representing Canada, France, Germany, Japan, the UK, etc.
* Every major emerging market country — stock indexes of Brazil, Russia, India, China, South Africa and many more.
* And here’s one of the most important aspects: There are ETFs for every major ASSET class — not just stocks, but also gold or silver bullion, crude oil … bonds, real estate and more.
There are ETFs for rising markets and ETFs for falling markets.
There are even ETFs for inflation and ETFs for deflation.
I’d like to cover these in more depth at some future time. For now, though, let’s talk about the advantage of ETFs as a whole.
Advantage #1. Unlike mutual funds which very often underperform the stock market, ETFs are designed to simply MATCH the market or the index.
Advantage #2. Unlike mutual funds, each ETF trades just like an ordinary stock. That’s why you don’t have to wait until the end of the day to buy or sell. You can do so immediately in any brokerage account at any time during the trading day.
Advantage #3. Also unlike mutual funds, you can protect your profits — or cut your losses — with stop-loss orders.
Advantage #4. You get deeply discounted commissions and other facilities — at online platforms like Fidelity Investments, Charles Schwab and TD Ameritrade. By the way, those are three that I use all the time.
Advantage #5. ETFs allow you to easily diversify your wealth across several asset classes.
Advantage #6. With ETFs, you can also profit from FALLING markets — that’s true whether in stocks or some other asset class. You never have to play with options, never speculate on futures, never have to open a margin account or hold short positions.
Those are the six key advantages of ETFs. So now let’s look at some of the disadvantages or rather the mistakes investors make when trading ETFs and how you can avoid them …
The first mistake is overtrading.
It’s so easy to buy and sell ETFs and the commission costs are so low, some investors wind up over doing it and trading TOO frequently.
That’s the same mistake I talked about earlier, remember when I talked about program trading? With program trading you’re likely to lose if you try to compete in that game. Aim instead to catch the broad, sweeping trends in the market. Don’t sweat the small stuff.
Here’s the second mistake investors make when trading ETFs:
They unknowingly buy ETFs that are on the “endangered list.” You see, not all ETFs attract enough investors to be successful or viable. They have few investors. And what’s worse, many of those investors wind up leaving. What happens if you’re stuck in an endangered ETF?
You get saddled with a bigger and bigger share of cost of maintenance of the ETFs!
How do you avoid getting trapped into one of these endangered ETFs? For starters, be sure to avoid the ETFs listed at: http://cdn.moneyandmarkets.com/reports/mup/launch/files/Endangered-ETFs.pdf.
The third mistake is a similar situation. Even if the ETF is not on the endangered list, it may still not have enough trading volume.
The solution is very simple. I recommend that you trade exclusively ETFs that have an average daily trading volume of at least 100,000 shares per day, minimum.
How do you find out? Well, most online brokerages provide this information. Simply search for the ETF you’re considering and look for the “trading volume” information.
Here’s the fourth mistake investors make: They ignore a very important fact. That is that some ETF managers do NOT always match the price movements of the underlying investments.
This is especially true for leveraged ETFs — that claim they can double or even triple your profit potential.
How do you avoid this problem? Well, invest only — or mostly — in non-leveraged ETFs. (There are a couple exceptions to this rule: Short-term trades. And asset classes that are so stable that it barely moves in price, those are possible exceptions for using leveraged ETFs.)
We’ve covered a lot of crucial points today. Suffice it to say, if you just avoid the traps we’ve discussed, you have a far better shot at creating the richer, more secure retirement you deserve.
Good luck and God bless!