Monday, November 7, 2011

Jon Corzine & MF Global-It's Easier With Other Peoples Money

For MF Global And Jon Corzine Shows:
It’s easier to make big bets with other people’s money
                                                                                                   by: Brendan Magee
                                                                                                            11/7/11
It’s hard to imagine how a brokerage firm with a 230 year history could allow $633 million in client’s money go unaccounted for, but that is what happened at MF Global, the firm that Jon Corzine resigned as the CEO of last Friday. This is a huge story, but  if we focus solely on the investigation into criminal activities, we are going to miss the real lesson for investors. The lesson is, what was missing between MF Global and their investors that more than likely would have averted this travesty?

So how did this catastrophe get started? It got started by extremely risky investments apparently pushed for and authorized by Corzine. He not only invested in European countries that had huge debt problems, he borrowed and put up more in collateral than MF Global had  to buy the bonds of these countries. Even though there were rampant rumors that countries like Greece, Italy, and Portugal were going to default on their debt obligations, Corzine believed that the stronger countries like Germany would not allow that to happen. Thus the firm invested in and was holding $6.3 billion in European debt.

As it turned out Corzine’s crystal ball had a crack in it and the value of their bonds plunged. When the banks came a calling for their money MF Global declared bankruptcy. Corzine took the high road though, he resigned before the announcement was made public. This is the mess that investors, investigators, and 2800 employees are left to deal with.

This mess points out the need for investors to have a clear understanding of who their investment firm is, what they stand for, and what they will or will not do. How do you get to the point where you know all this? It’s by having a Core Covenant in place. This covenant needs to be agreed to and signed by the investor, the firm you’re doing business with, and investment advisor. Without it the investor has no idea who they are doing business with and how they are going to operate.

For example, a covenant could say the firm will not do anything with a client’s money that they would not want done to theirs. I cannot imagine for a second that John Corzine would mortgage his home, cars, bank accounts, etc., invest that money in extremely risky investments, and stand the very real chance of being left broke based on nothing more than a belief. Simply put, a firm agrees it won’t expose your money to risks it wouldn’t want to take with theirs.

I cannot imagine Corzine would do business with a bank who does not maintain accurate records of where his money is at all times. I can’t imagine that Corzine would do business with a firm whose CEO says that when the going gets tough, “I’m heading for the hills and leaving you to deal with the mess that I created.” Simply put we’ll watch after your money as if it were ours.

Lastly, under no circumstances will we engage in any activities that we consider to be gambling or speculative.  With that Corzine could not have taken a position based what he thought Germany, France, or Great Britain would do in terms of European debt. That would be market timing and would have been avoided.  All this, if expressed, agreed to, and lived up to in a Core Covenant and would have prevented this disaster.

 Had Corzine had a Core Covenant, we probably don’t have an ongoing FBI investigation costing tax payers a fortune. Corzine is still employed as the CEO of MF Global,  and last but certainly not the least, investors of MF Global wouldn’t be in a panic right now.

Of course, why bother with all this when it‘s not your money.

Brendan Magee is the founder and president of Inevitable Wealth Coaching. With questions, comments, or suggestions call 610-446-4322 or e-mail to Brendan@coachgee.com.




Wednesday, November 2, 2011

If Your Broker Knows It's A Fact, Not A Speculation

If Your Broker Knows What’s Going To Happen, It’s Not A Prediction
                                                                                                               Brendan Magee, 11/2/2011

I received an e-mail solicitation from a stock research and trading firm known as WealthMakers. The tag line said, “ Know exactly what will happen before and after each stock’s earnings announcement.” WealthMakers gave two example of how well their technology works.

One of which works as follows: (To spare you the redundancy, I’ll show just one of them)

On September 28th, 2011, their prediction was that Baker Hughes Incorporated (BHI) would go up from its current price of $57.75 per share before its earnings report came. Investors should take a position to buy long. That means the investor is speculation the price of the stock will go up. As it turned out they were correct and if the investor took their advice they made a profit of 15.65%. The investor would have made out even better had they heeded WealtMaker’s next report on the 31st of September. The stock would fall after the earnings report came out because this stock’s price usually falls after the earnings report comes out. So take a position that the stock will fall.This is known as a short sale, speculating the price of the stock is going down.

An investor would have made another 11.20% on the short sale. All tolled  for the month, the investor would have had 26.85% profit from following this advice. Claims like this are designed to do one thing to investors, seduce us into buying their programs. The unspoken promise is follow our lead and you will become wealthy. They are not too unlike the betting services we see every week in sports pages or on cable t.v. They tell you how the week before they were so successful in knowing in advance which teams were going to win and cover the spread. Just listen to us and we’ll make you rich!

I read a little more about what get out of WealthMaker’s services and the more I read the more questions I had. Again, the claim is, you will know exactly what is going to happen to a company’s stock before and after that company’s earnings reports come out.

The first claim is that as an investment advisor, I will be able to generate leads and clients by issuing white labeled predictions as press releases.  Here lies the first of several problem with WealthMakers claims. Why would we want to disguise a statement as news when it really isn't?
Secondly, If I  know exactly what is going to happen why would I call it a “prediction?” Wouldn’t be a fact? Third, if I know what nobody else knows and my exclusive knowledge is what is going to generate my huge profits, why would I share it with everybody else? Won’t my returns and that of my clients go down or disappear all together if everyone goes out and buys the stock?

Another question arises when WealthMaker claims there will be no doubt about what will happen to a stock using just two examples. How many predictions do they make in a month? How many of them are producing the results of the two stocks shown? If I made fifteen bets each week on pro football games and one or two came through, that doesn’t speak very highly for my handicapping skills.

Another question is, if I could produce returns of 26.58% per month, why would I share that knowledge with the public for between $29 and $49 per month? Sure fire results like that would command significantly more in price, wouldn’t they? Better yet, why wouldn’t I just trade for myself alone and relieve myself of the labor and costs of sending out all that information?

I also have to ask, is WealthMaker executing all the trades they are recommending and keeping all the trading costs? If so, are all the trade recommendations for my benefit or WealthMaker’s profitability?

The final question is this. Depending upon service I sign up for with WealthMakers I am going to get between two and ten predictions per day. If WealthMakers knows for fact what is going to happen with stocks,  why would I need more than one prediction? Why couldn’t they give me the one that is going to perform the best that day, week, or month and leave it at that?

The answer is, neither WealtMakers nor anyone else knows exactly what is going to happen in the stock market tomorrow, or the next day, or the next year. WealthMaker is admitting as much in their advertisement, but they hope you fall for the false promises of wealth alluded to in their advertisements. When you see advertisements like these simply delete and ignore them.

Brendan Magee is the founder and president of inevitable Wealth Coaching. With questions or comments call 610-446-4322 or e-mail Brendan@coachgee.com.