Taking Back the Investing Game

Ah, summertime. The perfect reflection point for a fellow like me whose passions include baseball and investing.

Balloting has begun for the All-Star Game, that midseason classic offering every fan the chance to gaze optimistically toward the second half of the season, no matter how lousy the hometown team's record is.

Likewise, Wall Street throttles back to a civilized pace before making what investors hope will be a strong second-half run.

But unlike past summers, these are dark days for a couple of America's favorite pastimes.

Recently I began thinking about the connections between baseball and investing when watching a game at Chicago's Wrigley Field, one of the most wonderful playing fields in the world. I was sitting with real Cub fans who love the game, but don't have any use for baseball as a business.

Late in the game, as the Houston Astros changed pitchers, my thoughts turned to baseball commissioner Bud Selig and Securities and Exchange Commission head Harvey Pitt. A little odd, I'll admit, but not as outlandish as it seems.

Selig and Pitt

Selig is presiding over an industry with falling attendance.

Pitt is facing what amounts to a buyers strike by individual investors.

Many of the fans who buy the tickets that pay the bills for Selig's industry think the very playing field is unfair. Does anybody really believe that Kansas City, Tampa Bay or Pittsburgh has a realistic chance to go to the World Series this year?

Many of the investors who pay the commissions that pay the bills for Pitt's industry think the paying field is unfair as well. Does anybody think individual investors got a fair shake from Wall Street firms pushing investment banking clients?

Selig, the former owner of the Milwaukee Brewers (the team owner now is his daughter), faces mortal conflicts of interest as he tries to iron out an agreement with the players union over a new contract and picks which teams will survive and which will fold -- for the good of all baseball.

Pitt, former accounting industry lobbyist and proponent of accounting industry self-regulation, faces equally intense conflicts of interest as he decides how much new regulation is enough -- and whether to ask for more money to enforce the new rules.

Laughable Solutions

Selig and Pitt have both proposed laughable plans for fixing their respective problems. They expect baseball fans and individual investors to swallow these fixes because, in their arrogance, they believe we don't have any place else to go. If we want our baseball games, if we want to invest, we have to play by their rules because they, after all, own the game, right?

Well, you know what? They're wrong. As true baseball fans know, the game is bigger than Major League Baseball. The game lives in all my memories of games I've seen and games I've played. It lives in the Little League games that take over the parks where I live on summer weekends and in the pickup games my son and his friends play wherever they can find a spare blade of grass.

And if I want to watch professional baseball but don't want to shell out $65 for a seat that lets me actually see the players (and if I don't want to be deafened by ads for Lexus and Mitsubishi between innings), I can go to a minor league game. My best baseball memory of last year, in fact, is watching the catcher for the minor league Staten Island Yankees decoy a runner for the Brooklyn Cyclones into slowing down as he neared home. The runner was out at the plate on a perfect relay from left field.

As for investing, the institutions of Wall Street need individual investors more than we need them. We don't have to play by rules that aren't fair and with institutions we don't trust.

Wall Street's Disconnect

Wall Street obviously doesn't get this yet. Just look at the responses from Merrill Lynch (MER Quote), Morgan Stanley Dean Witter (MWD Quote) and Citigroup's (C Quote) Salomon Smith Barney to New York Attorney General Eliot Spitzer's investigation into conflicts of interest at investment firms.

Merrill Lynch fought tooth and nail to avoid admitting any wrongdoing, as if that legal tactic was going to restore investor trust. Smith Barney moved to adopt the structural changes that were part of Merrill's agreement with Spitzer, as if that kind of self-policing would restore investor trust. And Morgan Stanley has responded to news stories that Spitzer is going after its high-profile Internet analyst Mary Meeker by saying that Meeker's e-mails don't show her touting stocks in public that she disparaged in private, as if that technical defense would restore investor trust.

The only proactive response I've seen from Wall Street has been the rollout of new marketing campaigns that attempt to sell more advice to high-net-worth investors. If you didn't like the advice you got from your broker, how about dishing out an extra fee to get more of the same from a "personal-investment consultant?" Work for you?

I'm not holding my breath while the regulators and the Wall Street firms (where many of the regulators once worked) fix the problem. Part of the reason investors -- me included -- are in this mess is that we trusted others to watch out for our best interests, forgetting that no one is as motivated to watch over our money as we are.

Instead, it's time for individual investors to take back the game. And the way to do that is to speak with our money, since that's the language Wall Street understands best.

Four Founding Principles

Don't do business with financial firms whose self-interest runs contrary to your interests as an investor. Can you think of any reason to do your investing through a firm that puts growing its investment banking business ahead of growing the portfolio of the individual investors who buy into its deals?

Can you think of any reason to do your investing with a firm that values the short-term commissions generated by churning a portfolio above the long-term gains that come with keeping a customer for life?

Can you think of any reason to invest with a firm that believes its job is selling you investment products rather than growing the value of your investments?

Do business with financial firms that make their money by charging reasonable fees for truly valuable services. The only way investors will drive conflicts of interests out of business is by being willing to pay for the services we truly need. If "free" research is hopelessly biased because it is paid for by investment banking fees and trading commissions, then end the conflict by agreeing to pay for solid independent research. There will be a brief window in the post-bust environment for individual investors to prove there is a market for the kind for independent information that we all say we want. Don't forget the current financial businesses -- Vanguard among mutual fund companies -- that already live by this ethos.

Don't buy shares of companies that display arrogant cultures. If you own shares in such companies, sell them as you can afford to do so -- and let the companies know why you're selling. Recently I've argued that companies that grossly overpay their officers (and especially those that cut worker jobs and pensions while they do so) aren't good investments. Excessive management compensation is one of the clearest pieces of evidence that a company's internal controls aren't up to the job of running the company well (and by that I mean in the interests of shareholders). And companies that don't understand the importance of their own workers in gaining and then keeping a competitive advantage are working under an often-fatal handicap. But don't just sell your shares quietly -- make some noise about it. Tell the company what you find objectionable and give them concrete suggestions for change. Maybe even a deadline for making visible progress. And then if the response is inadequate, carry out your threat to sell.

Demand that the professionals who manage your money -- if you invest in the financial markets through mutual funds or similar vehicles -- speak out, too. Investors - both individual and institutional -- encouraged the excesses in accounting and executive compensation and the breakdown in corporate governance that we're all paying for by our silence and complacency. If individual investors are going to take back the game from those who have abused it, it's only right that we demand that the institutional investors whose fees we pay do the same. And if you see a mutual fund or some other financial institution that manages part of your money indifferent to these concerns -- or, even worse, on the wrong side of these issues -- put them on notice and then send them packing if they won't join the fight.

Your Email

If you can think of any other strategies for taking back the game, email them to me. As always, I'll preserve confidence and anonymity. When I've got enough to advance this column's suggestions, I'll revisit the topic. I don't think the issue is going away soon in this financial market.

In my next column, I'm going to tackle the transition from talking the talk -- as I've done here -- to walking the walk when it comes to making real world decisions about what to do with stocks that violate one of these four principles. (Violation of the third rule is especially egregious.) I'm going to use two stocks from Jubak's Picks, Merrill Lynch and E*Trade Group (ET Quote), as my real-world examples of how these ideas play out in practice.

In the meantime, I'm going out to the park and pitch a little batting practice. Play ball!