September 20th, 2010 — Investing
When you invest, whether it is in mutual funds, ETFs, or stocks, you learn about diversification. It’s a “good thing” they tell you. But what exactly does this word mean? Wikipedia defines diversification as “reducing risk by investing in a variety of assets.”
Words change over time. For example, the little three-letter word “let” once meant “hinder” After a long enough time it turned into its opposite “go ahead”. I’d suggest that “diversification” too has changed into something completely opposite to what it meant in the past.
There’s a reason for that. Beneath the word, “diversification,” there are many new kinds of risk at work. Let’s look at just three of these risks.
Concentration risk
This risk applies to the dangers of putting all your eggs in one basket. Unfortunately, things in the markets have gotten so complicated, you may not realize you’re putting your eggs in one basket when you invest. This is particularly true of investing in ETFs.
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September 8th, 2010 — Investing
The “Madoff twist”
How do Wall Street insiders, smart brokers, and big investors get caught by Ponzi schemes like Bernard Madoff’s?
According to John Kay in the Financial Times columnist, “the fraudster hints at impropriety, but implies that the target will be the beneficiary rather than the victim.” Kay calls this the “Madoff twist.” (FT 3/18/09 p. 9)
I doubt Madoff invented this twist. This kind of trap is set by a lot of unscrupulous people, whether or not they are actual “con men.” The idea is to sell the victim the idea: “we’re smarter than that poor dope.” This works by creating a sense of belonging, superiority, and being privileged to have inside information.
The “having inside information twist”
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September 1st, 2010 — Investing
Wall Street has coined the name for retail investors: ‘dumb money‘. And, as headlines like “Investors resist the siren call of equities” suggest, Wall Street is now surprised that retail investors are fleeing the market in droves? Who’s dumb?
Retail investors have lost confidence. They feel manipulated by brokers and betrayed by the market. Clearly the government hopes that more regulation will help. It won’t.
Regulation doesn’t build confidence; regulation prevents confidence from slipping away. It’s a bit late for that! What builds investor confidence is success. Success cements an “I can do it!” attitude.
What pari-mutuel betting means for investor confidence
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