Fed Up with Wall Street Shenanigans

Fifty years from now, a generation of middle-school children will learn the ins and out of this economic disaster. They will learn about millions of arrogant, self-absorbed investors – both on Wall Street and Joe Schmos with e*Trade accounts – that lost their shirts by placing dumb bets on common equities, junk bonds, real estate, and even bank CDs.

If you don’t want to be lumped in with this group, listen up… You need to understand something about the investment world. It feeds on your interest and greed. Without these two things, the people that are running the show – yes, the same people that drove it into the ground – don’t make any money.

Think about this for a second. When you hear about “investment opportunities,” does the person speaking know how to decipher every line of a balance sheet or income statement? Can that person understand “Wall Street Speak”? If so, does that person get paid on the basis that his or her “investment opportunity” trade more often?

My point is… brokers profit from you trading often, most of your friends that day trade probably don’t know a lick about a discounted cash flow model, and your early edition of the Wall Street Journal is full of advertisements from these same “investment opportunities” it is featuring on the front page. Get it now? Your interests don’t align with the things you hear about investments.

You can be best friends with a banker, but do you think the CD you just tied your money up in will outpace inflation? [Remember we have a 10-digit budget deficit in the U.S.]

Even here in the investment newsletter industry, we have our share of pushers. At Agora Financial, we aren’t allowed to invest in our own recommendations. We are the minority, when it comes to conflict of interest. Unfortunately, such conflicts do exist elsewhere.

I don’t mean to scare you. I don’t mean to intimidate you. I just wanted to set up what the rest of the world considers too boring to even discuss.

It’s a type of investment that may not be sexy. It may not be popular in message boards. But it does make a select few tons of money with next to no risk.

I’m talking about enormous yields, limited and known downside, and investor benefits above and beyond what most investment managers will ever advise their customers to buy.

This is the kind of investment that Warren Buffet takes advantage of every chance he gets. In fact, investments like these are about the only thing the kept the old bat afloat last year.

You hear about sweetheart deals and how investor elites practically get away with murder on Wall Street. One of the investments I’m about to show you is the exact tool they use. In fact, Berkshire Hathaway – Buffett’s investment company – can count the gains from these investments as assets even before they arrive in its trading account.

You can’t do that with the gains you expect from the shares of Google you bought when it IPOed 5 years ago. Those gains are non-existent until you sell your shares. And when you do sell, the government will tax the hell out of your gains.

Berkshire Hathaway’s investment, on the other hand, counts as real income, and is taxed at a relatively small flat rate. Beat that, stock market!

Alright, I’m done hyping… I’m talking about preferred stock. It’s the only kind of equity that is considered fixed income. Meaning, holders of preferred shares can expect – and claim – the interest from these shares as future assets.

While this may sound boring or “unsexy,” this is how the rich – like Warren Buffett – stay rich and even grow their wealth. It’s also how folks like you and me bank a few extra bucks when you can’t even count on your Google shares to increase in value.

I know from being a long-time reader of Whiskey that there’s a good chance you’re a gold bug. So am I. But do I think gold will pay me quarterly paychecks that are taxed at a flat dividend rate? Hell no!

Even when you cash out the gold you’ve been storing since the 1970s for massive gains, you will pay equally massive income tax on it [Well, some of you will—Ed.]. Dividends, which are how these preferred shares pay out, are currently taxed at a flat 15%. Average income tax is around 39%-40%. You can do the math.

Unfortunately, the people supposedly in charge of discussing opportunities like these are busy pushing more exciting “opportunities” like the “Next Microsoft” or whatever company just bought an ad in their paper.

I’m not saying there’s no room in your well-balanced portfolio for great opportunities you hear about on the 7th green at your local golf course. I’m just saying, the ones you should be hearing about just aren’t sexy enough.

Jim Nelson

May 12, 2009

The Daily Reckoning