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John Elway's Tackle Masks a Bigger Scandal

The notion that there is a guru out there who can pick stocks or time the market has cost Americans trillions of dollars. The charade continues every day in brokerage offices across the country.
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John Elway escaped many tackles during his career as a quarterback for the Denver Broncos, but he was no match for the lure of a hedge fund manager.

The Colorado District Attorney alleges a massive Ponzi scheme by Sean Mueller, who ran a hedge fund. Elway and his business manager reportedly invested $15 million in the fund.

The alleged scheme was a garden variety fraud. New funds were used to pay existing investors and phony account statements were sent to hapless "investors". We are all too familiar with this scenario.

These high profile cases involving celebrities garner the headlines. The steady erosion of hard earned money by brokers from average investors escapes scrutiny, even though the consequences of this conduct are far more pervasive.

Over at CNBC, Cramer "educates" investors with his "lightening round". According to the network, "you say the name of a stock, and Mad Money's Jim Cramer tells you whether to buy or sell." While hard data on Cramer is hard to come by, an article in Barron's concluded "...his Mad Money stock picks have underperformed the market over the past two years."

Cramer takes his antics to colleges and universities, where the next generation of business leaders can be exposed to his brand of "investing education", which glorifies discredited notions of stock picking, manager picking and market timing. Tulane University proudly announced that Cramer will broadcast live from its A.B. Freeman School of Business on October 19, 2010 as part of the show's "Back to School Tour."

I don't know Mr. Freeman for whom this distinguished business school is named, but he should be sickened by this event. You can be assured that the University of Chicago Booth School of Business would decline the opportunity to showcase Mr. Cramer's vaudeville show.

The notion that there is a guru out there who can pick stocks or time the market has cost Americans trillions of dollars. The charade continues every day in brokerage offices across the country.

Here are some examples of how difficult it is to predict which sectors of the economy will be the next winner.

In 1997, financial stocks were up 52%. Did you buy? Too bad. In 1998 they lost 5%.

You can't lose with heath care stocks, right?

In 1990 and 1991, they were up 16% and a whopping 62%. So what happened in 1992? They lost 15%.

I could go on, but you get my point. Industrial sectors and individual stocks move in random patterns, affected by tomorrow's news. A huge industry, fueled by the media, encourages you to ignore this fact. They have done a great job and you have suffered as a consequence.

The nail in your coffin is the arbitration system run by the Financial Industry Regulatory Authority (FINRA). No matter how badly your broker treats you, you will have to submit to arbitration run by this industry organization. Your chances of any meaningful recovery are not good. A comprehensive study found most customers who participated in these arbitrations were not satisfied with the outcome and did not believe the process was fair.

The North American Securities Administrators Association supports a ban on mandatory arbitration, noting it is "inherently unfair to investors". This group includes securities administrators in all 50 states.

Until the SEC (run by the former head of FINRA!), concludes its study of this shameful process, investors can expect no meaningful redress, regardless of the misconduct of their brokers or the harm done to them.

It's a really nifty system. For everyone but you!

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

Here is the trailer for my new book, Timeless Investment Advice.

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