Five Wall Street Whoppers And Why You Need To Know Them

[rpannier]

Wall Street Whopper No. 1: Buy and Hold (snip)

What’s important to understand is that “Buy and Hope” is the greatest myth foisted upon the American public in the last 200 years - the need for American International Group Inc.’s (AIG) retention bonuses, notwithstanding. As millions of investors have found out the hard way, the markets can - and do - frequently go through tremendous periods of readjustment.

snip

And don’t even get me started about the conflicts of interest. The supposedly independent ratings agencies that rubber stamped everything from derivatives to high-grade debt have been in bed with the companies they’re supposed to be regulating for years. Consequently, millions of investors thought they had the “green light” to invest in supposedly safe institutions that have proven to be anything but during the past 24 months.

Wall Street Whopper No. 2: Some Debt is Good (aka: The Careful use of Debt is an Appropriate Wealth-Building Tool)

This is one of Wall Street’s biggest and most dangerous whoppers, and yet I almost hesitate to include it because of the e-mail I know it’s going to generate. But at the risk of sounding like a broken record, if you owe somebody money, you’ve still got to pay it off one day. That means any growth you attribute to debt until it’s paid off in full exists only in fantasyland. Ask General Motors Corp. (GM), Lehman Brothers Holdings Inc. (OTC: LEHMQ), or any one of the dozens of world banks that are now coping with the aftereffects of growth through the supposedly “intelligent” use of debt.

snip

Wall Street Whopper No. 3: It Pays to Diversify - The conventional wisdom used to be that if you spread your money around, you’d somehow be safer. This is no more effective than rearranging the deck chairs on the Titanic. It’s better to get off the boat.

snip

Wall Street Whopper No. 4: Your Home is an Investment - No, it’s not. At best, it’s a roof over your head that keeps you from being priced out of the local rental markets. At worst, it’s a money pit that provides you with the illusion that you’re doing something sensible with your hard-earned money - despite the fact that an entire industry would have you believe otherwise.

Research from Shiller, the Yale economist, shows that, since 1900, home prices have run sideways or even declined for long periods of time. That means that - except for two steep run-ups - one after WWII and the other as part of the late 1990s lending binge - real estate hasn’t been the winning investment everyone claims it to be. And millions of people are learning the hard way that real estate can, and does, lose value. Seems they’ve conveniently forgotten the lessons Texans in the oil patch learned in the early 1980s or that Japan experienced in the 1990s.

Wall Street Whopper No. 5: Shop ’till You Drop and Save the Economy - The U.S. government wants you to spend money. And Wall Street, together with the credit card companies, want you to save their sorry hides by helping you do just that. That’s why so much of the stimulus planning - if you can call it that - revolves around tax cuts and handouts. It’s all window dressing.

link:
http://www.moneymorning.com/2009/03/19/wall-street-whoppers/

on note: Yes, I realize the site is run by fairly conservative people. But they often have some fairly insightful critiques of the financial sector. I think this is one of them

[Arctic Dave]

1. # 4 needed to be said for some time. Your house is not an investment.

Your community is. You can have the nicest house on the block or subdivision but if no one can find work or if the rest of the neighborhood is is falling apart who will be your home?