The Online Investing AI Blog

Financial advisers are getting a hard rap from the media. With stories of Bernie Madoff and Allen Stanford revealing just how far some advisers will go to cheat their investors, many are questioning the whole field.

I don’t think that’s fair. I’m sure most financial advisers are honest people and work hard for their clients. However, the problem may be that there’s a false confidence from enlisting the help of a financial adviser.

Hiring an adviser does not mean that you no longer have responsibility for your own economic future. And, if you go the adviser route, your responsibility begins with the criteria you select to hire him or her.

So how do you know if your financial adviser might cheat you?

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Accelerating Technology, Business Strategy, Internet, Investing, Money, Online Investing AI, US Economy adviser, financial advisers, financial advisor, Madoff, Money, money management, Ponzi schemes

Many people were horrified by Bernie’s Madoff theft of over $50 billion of investor money. They thought that the SEC and the government would protect them from such a massive and obvious scam. It’s true that he will probably spend the rest of his life in jail. However, that won’t help the people who lost all the money.

What many people don’t know (or choose to ignore) is that the Medicare and Medicaid liabilities are 1,000 times greater than the Madoff scam. These liabilities are currently estimated at $62 trillion. It’s gotten to the point that these sums are so big that we can’t even imagine them.

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Money, US Economy debt, deficit, government, Madoff, medicaid, Medicare, politicians, ponzi scheme

Since automated trading offers so much promise for investors, it’s easy to get carried away. Being able to consistently make money with low risk is a dream that has eluded 99.99% of the people in the world. As it becomes more popular and well known, the hype will increase.

Like anything in life, there is another side to the story. We believe that Automated Trading will change the world. And, there are some things that we want to keep in mind about the technology. Here’s a couple things to watch out for as the Automated Trading revolution happens.

Greed. Greed gets the best of most people, especially those in the investment business. People like Madoff have stolen billions of dollars of investor money. I suppose the investment industry naturally attracts greedy people.

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For many people, investing means choosing what to do with their 401(k) or IRA accounts. When it’s time to make a choice, a would-be adviser chooses some mutual funds to invest in. This is the most common method of investing in America. And it’s also one of the worst.

One of the main reasons that mutual funds do not serve us as investors is because they are designed to make money for the advisor and the company that provides them. For most advisors, it’s their job to sell mutual funds. And that’s what they do. That’s how they make a living. But these mutual funds are quite poor for the people who buy them.

Although the investor takes 100% of the risk in mutual funds, on average, they only receive 20% of the profits. This means that 80% of the profits goes to the financial advisor and the company who sells the mutual fund. This money is taken away from the investor in the form of fees. The fees are described in terms of a few percent. Since a few percent sounds like a small amount of money, most people don’t even realize just how much is being taken away.

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Internet, Investing, Money advisors, control, financial success, fraud, Investing, Madoff, mutual funds, risk

As the Madoff debacle grows and receives more and more media and investor attention, all of the focus is on what the SEC should have done to protect investors. It would be great if the SEC had detected a Madoff’s fraud and shut down his operation before he took in $50 billion of investor money. But it didn’t happen that way.

Perhaps the SEC really isn’t to blame it all. Because even without Madoff’s massive fraud, most of the so-called investors would have lost a large portion of their money anyway because of the market downturn. What the media fails to tell you is that even the mutual fund investors who are not defrauded are getting a terrible deal.

Why? Because most mutual funds lose money over the long term. The so-called investor takes on 100% of the risk in the mutual fund. And for taking on the entire risk she only gets 20% of the returns. The remaining 80% is taken by the mutual fund company as fees. So what’s really happening is the mutual fund investors are paying the high salaries of the so-called “experts”. If you think about it, it’s not so different from Madoff’s Ponzi scheme.

The SEC was created after the Great Depression to protect investors. And perhaps it did. But the challenge is that it created a massive mutual fund industry that allows totally clueless “investors” to give their money away. Hopefully, after the Madoff scandal, SEC rules will be revised to allow anybody to participate in investments that are better than mutual funds.

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One question many people asking about Madoff and his scandal, is “What would motivate somebody to steal that much money?” After all, he has a successful business, plenty of money, and even a 55 foot yacht.

What motivates Madoff are the same forces that motivate every human being. And, for most traders, the dominant emotion is greed. When they think a stock might go up, the motion of greed takes over their psyche and they feel compelled to buy.

For Madoff, the motivation is the same. Only his values are different. Unlike most people, apparently he had little problem ignoring the law, lying to people, and stealing other people’s money. He has not been convicted, so it’s too early to say whether he is guilty or not. For this discussion, let’s imagine that he did not operate entirely within the bounds of the law.

So what’s the lesson from the scandal? To me, it only shows that Madoff thinks like most other traders and mutual fund managers. Expecting him to not have human emotions, and to operate with the cool, calculated efficiency of a computer would not be realistic.

But that begs an interesting question. If Madoff’s downfall was uncontrolled greed, what’s the solution? How can people be protected from the same thing happening in the future?

Investing, Money, US Economy financial planners, greed, Madoff, Money, motions, mutual funds, scandal, trading, value trust

Investors around the world are reeling from their recent losses in the stock market. Many markets around the world are down between 40% and 90%, including the US. And, to add insult to injury, the $50 billion Madoff scandal made people question the experts who are handling their money.

So that got me thinking. What if a computer could buy and sell stock, and make money in the process? The computer would not be limited by the human ego, or the powerful emotions of fear and greed. You could even trust that the computer would not steal your money!

But is it really possible? Most people see computers as simple tools, allowing them to do e-mail, or shop online. Most people think that computers are too dumb and stupid to make money in the markets. But is this really true?

Computers are getting smarter on a daily basis. Every year, you can buy a computer twice as powerful as the one last year, for the same money! And, combined with the power of the Internet, the everyday things that we use the computer for today were a fantasy pipedream just 20 years ago.

It’s been theorized that in another 15 years, the regular household computer will be as powerful as the human brain. If that’s the case, then it’s just a matter of time before computers are more powerful than humans.

So you have to wonder, what if the computer were so smart, it could make money in the stock market? What would that be like? When will computers be able to make money in the markets?

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Stock markets around the world are reeling as a result of the Madoff scandal. Madoff is alleged to have taken in over $50 billion of investors money! And, instead of investing it wisely as he had promised to do, he is accused of running a Ponzi scheme.

One of the big questions on most people’s mind is, “Where was the SEC? Isn’t it their job to protect investors from exactly this kind of fraud?” Well, the government doesn’t have any good answers for this question, but here’s one idea for you.

After the Great Depression, the SEC was created to protect so-called investors from themselves. The Great Depression was sparked by the stock market crash of 1929. Clueless investors bought stocks without understanding their underlying value, or how markets work. When millions lost large amounts of money in the crash, the government stepped in to protect them in the future.

However, it’s not the government’s job to take care of the finances of the people. Savvy investors will always make money, while the majority of investors, who are unskilled and uneducated will lose money. The government cannot prevent this from happening any more than it can prevent rain from falling.

How is this possible? Because, even when most investment managers do their job, they still lose their investors money! As I detailed in a previous post about Bill Miller, even good mutual fund are a poor investment. Virtually all mutual fund investors have lost so much money in the recent market downturn that they are disappointed at best, and completely freaked out at worst.

So what’s the solution? One solution is to control your own investments. The challenge with this strategy is that it requires skills. It requires both investing and financial ability. These abilities are not taught in school. Therefore, if you want to learn them, you will need to get educated on your own.

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