Wall Street's Financial Chicanery, and How You Can Avoid It

Wall Street gets a bad rap. Much of it is deserved. But not necessarily for the reasons you might expect.

You see, to many, Wall Street’s suit-clad warriors appear to be nothing more than money-sucking leeches… draining the pockets of Americans’ hard-earned dollars through their fees, commissions and kick-backs.

Whether this is a fair characterization or not, Wall Street’s worst give haters plenty of ammo. Martin Scorsese’s The Wolf of Wall Street epitomized the greed-driven, ethics-bending (and raunchy) culture of 1990s Wall Street.

The film grossed nearly $400 million at the box office, giving Scorsese his biggest “winner” to date while confirming that people, in general, love a good villain.

“Is that really what it was like?” my wife asked me, after we watched the movie.

Upon realizing she was not being sarcastic, I replied: “Yup… still is, to some extent.”

Sure, Wall Street is now more heavily regulated than it was during Jordan Belfort’s golden years. But is that enough?

Just last week, the United States Justice Department vowed to fine Wall Street banks something like $5.8 billion for rigging currency and interest rate markets.

A long scroll of instant message conversations confirmed the manipulation was coordinated by many Wall Street insiders. And the most arrogant of the bunch even went as far to pontificate:

“If you ain’t cheating, you ain’t trying.”

You get the picture… this is the “worst of the worst” of Wall Street’s notoriously bad actors.

But there’s another, less overtly sinister aspect of this story.

“What’s good for me is…”

Dan Ariely, Ph.D. is a psychology and behavioral economics professor at Duke University. His extensive research on dishonesty provided the framework for a newly-released documentary titled Dishonesty: The Truth About Lies.

Basically, Dr. Ariely concluded that “dishonesty is almost always caused by a conflict of interest.”

When such conflicts arise, it’s common to want to please both sides of the situation, even when that’s impossible.

The “right” thing to do is to respond with complete honesty. Sure, you might not get what you want, but at least you were honest.

But that’s an uncomfortable scenario for many. So the natural defense mechanism, of some, is to lie… to tell both parties: “Don’t worry… I’ll give you both exactly what you want… there’s no conflict here…”

Whatever justification the liar provides may be well-intentioned. They don’t want to hurt either party’s feelings or interests… but it’s still a lie.

As I see it, this construct might work well to explain the oft-cited disconnect between “Wall Street” and “Main Street” — outside of Wall Street’s most purposeful and villainous cheats.

You see, I actually believe that a majority of individuals who work in the Wall Street machine are good people.

They’re ambitious and hard-working. They’re analytical and detail-oriented. They’re problem-solvers!

These traits, in and of themselves, are good things. And when focused toward a respectable goal they can produce great, meaningful results.

The problem comes when Wall Street’s goal is not well-aligned with investors’ goal… a la conflicts of interest.

Arguably, regulators have tried their hardest to properly align the interests of investors and Wall Street.

For instance, Registered Investment Advisors (RIAs) are held to a higher standard than brokerage firms, in that they have a fiduciary duty to their clients. This means they must act solely in their client’s best interest.

Fiduciary duty prevents these advisors from putting clients into a high-fee product, when a low-fee product is more suitable for the client.

That’s a great start… but I believe individual investors need to take one additional step to ensure they’re in a “no conflicts” relationship with their investments.

To be frank, this final step requires a fair amount of trial-and-error… and a great deal of work and determination.

What is this step?

Simply put: As an investor, you have to “find yourself.”

By this, I mean you must clearly define who you are as an investor.

Are you aggressive or conservative?

Are you looking for income or capital appreciation?

Do you believe in diversification, or concentrated investments?

How do you react to losses? Do you have discipline, or are you quick to panic?

How much time can you make available to actively manage your portfolio?

There are dozens of questions like this. The point is, only YOU can decide what will work for YOU.

Personally, this is a journey I’ve been trekking for years…

I’ve learned I’m more successful operating “systematic” strategies than discretionary ones.

I’ve learned I’m better as an active trader than a passive investor.

I’ve learned I get better results when I’m able to quantify my probability of success, rather than assume my subjective feelings are a reliable gauge.

All told, I’ve learned — through the process of trial-and-error — what works for me (and what doesn’t).

To bring this home… my message today is simple: Take ownership of your investment strategy.

Make the commitment to figure out what works for YOU, because only you can determine that.

Wall Street — whether villain or saint, biased or unbiased — can’t tell us the investment strategy best suited to you.

And in many ways… this is the ethos of Dent Research.

Our goal is to offer you a wide variety of unique investment strategies. We do this because we know that not every investment strategy will be a “perfect fit” for every investor. It isn’t necessary.

If we can provide an environment in which you can explore a number of approaches, allowing you to ultimately settle on a few that are well-suited for YOUR needs… then we’ve met our goal.

And I promise you this… once you’ve found an investment approach that fits you like a glove, you’ll be too successful to bother worrying about the wolves on Wall Street… and you’ll no longer feel like the sheep.