This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

An Investor's Best Protection: Understanding

A fundamental issue -- or flaw -- in the investment industry today is a lack of good communication around investing. Obscure wording, labels that don't reflect reality and more all add to the proliferation of myths. This contributes to a lack of understanding of investing principles and is a real scourge for investors, in both dollars and sense.

-- Thomas Ek, Fisher Investments vice president



NEW YORK ( TheStreet) -- Simplicity and understanding are two cornerstones of successful long-term investing, yet it truly seems much of the investment industry hasn't grasped this, doesn't agree or otherwise prefers not to operate transparently.

While one might suggest the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 targets this, we'd suggest there's ample evidence already it's wide of the mark. Communication and clarity are no more common in the law's wake, and simplicity is still often overlooked by Wall Street as being too "basic" to be of value -- despite the fact the best real protection from flawed products, bizarre strategies with no real track record of success and, yes, villains like Bernie Madoff generally isn't anything regulatory. It's common sense.

Take, for example, Mr. Madoff. Here was a man showing returns that were consistently high (equity-like) and positive, with no negativity throughout his tenure. His strategy underpinning this was based on options (anyone who's spent time in the industry knows these are likely the least understood broad investment option -- no pun intended) and stocks -- split-strike conversion -- in which a call and put were simultaneously sold around a stock or index.

Someone possessing a high degree of investment acumen would likely know simultaneously selling puts and calls around a stock or index (straddling) is unlikely to result in equity-like returns. Which was one way to know Mr. Madoff's strategy was mumbo-jumbo, a front for his illegal activities behind. But an individual investor needn't know any of that to be wary of Madoff.

All you need to see is the long history of no negativity and outsized returns. At this, your ears should perk not out of greed and attraction, but fear. You should have to be convinced beyond a shadow of a doubt the numbers are real because virtually any manager or investor, no matter how great, is going to have both good and bad years in the marketplace. (See Warren Buffett, late 1990s.)

But while Madoff's con made huge headlines, there are other ways the investment industry and press have yet to embrace clarity and simplicity. Consider: One major media outlet ranks various mutual funds on a scale called the "Riskless Return Index."

Which sounds great, until you remember there are a grand total of zero riskless funds in the world. (See "Break the Buck, Reserve Primary Fund" for an extreme example.) To earn any return over any length of time, you must accept some degree of risk.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,709.15 +247.83 1.51%
S&P 500 1,957.27 +30.16 1.56%
NASDAQ 4,460.7380 +77.8910 1.78%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs