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Product Description
Fiddling with family finances can be time-consuming, frustrating, or even frightening . . . especially when you feel like you’re not qualified to make those big money decisions. But here’s an expert who says that you can learn everything you need to know to effortlessly manage money in just a few hours–and then stay on top of it all in only minutes a year.
In Life or Debt, Stacy Johnson gave you a one-week plan for freeing yourself from the tyranny of debt. Now the creator and host of the nationally syndicated news series Money Talks takes it a step further with a complete system to manage every facet of your financial life that’s remarkably quick and easy.
• Get your finances organized once and for all
• Learn to set goals, then achieve them
• Discover the only three investments you need, whether you have $50 or $50 million
• A logical way to invest that really works
• An asset allocation system so simple, all you need to know is your age
• Quick, effective, and inexpensive ways to plan your estate, income taxes, and retirement
• Understand every type of insurance and learn how to shop for it
• How, why, when, and where to buy real estate
Why spend your hard-earned paycheck on so-called experts when you can manage your money yourself–and save and invest every penny? Here is everything you need to know to get on top of your family’s finances and stay there. The clock is ticking: It’s time to take control.
Excerpt. © Reprinted by permission. All rights reserved.
1
A Tale of Two Pities
Finance is the art of passing currency from hand to hand until it finally disappears. ?Robert W. Sarnoff
It was the best of times; it was the worst of crimes. In this chapter, I?m going to pluck a few items from recent news, pretty much at random, that should serve to convince you that it?s really not safe to trust anyone else to help you with your money, no matter how well known or trusted the names may be.
If you do nothing more than watch national news on TV, you may know that Wall Street has not been acting in your best interests for some time now. Recent examples? Two of the most respected names in the financial services industry: Merrill Lynch and Salomon Smith Barney. But before I begin, I want to make something clear. I?m not telling you this because these examples are the exception. I?m telling you this because these examples are the rule. Always have been, always will be.
Let?s talk about Merrill Lynch first.
In terms of number of retail investment advisers, Merrill Lynch is one of the largest financial services firms in the world. And even when the stock market is lousy, it still makes a ton of money.Its chairman, David Komansky, was paid $16 million in 2001 while the stock market fell 7 percent that year. Of course, there?s no law against making money. That?s the backbone of capitalism. But let?s consider how some of it was made.
To fully understand this story, you?ll have to learn some basics of financial advisory firms like Merrill Lynch. These firms make money several different ways. One way is to collect commissions from little guys like you and me when we buy investments. We could go to places that charge a lot less in commissions to buy investments, but we?re willing to pay extra to ?full service? firms like Merrill Lynch because they promise that in exchange for paying them more than necessary, we?ll get something we couldn?t get at cheaper places: unbiased, expert advice. The process of exchanging our hard-earned money for their objective advice is part of the business known as ?retail brokerage.? But there?s another completely different way financial advisory firms make money. They collect huge fees from big companies when these companies raise money by selling stocks and bonds to the public. This business is called ?investment banking.?
If you?re a company that wants to raise money by selling stock to the public, a firm like Merrill is a great place to go. That?s because it has so many investment advisers who will help the stock get sold.But as you put your idea on paper, it turns out that developing your new Web site will cost $50 million, and you?ve only got 150 bucks in the bank. Where will you find the other $49,999,850? A place like Merrill Lynch. You visit its investment banking division and explain your slight cash shortfall. If your idea seems reasonable, the folks there might just offer to take your company public by selling stock. They help you issue five and a half million shares of stock and sell them for $10 each. (Notice
that although you needed only $50 million, Merrill raised $55 million for you . . . that?s because it?s charging you $5 million for its assistance.)
But how will Merrill sell millions of shares of your stock to the public when nobody outside your immediate family knows you?re alive? Simple. Its thousands of retail brokers?the advisers paid to give small investors objective advice?will do the selling. This they do by calling their many clients and advising them to buy your stock.
But there?s still something missing. Retail investment advisers are sales experts, but they?re rarely investment experts. They don?t have nearly enough training to examine your business plan, projections, and market analysis and reach a conclusion as to the value of your stock. That?s where a research analyst comes in. Even before the investment bankers are putting together the paperwork pertaining to your initial public offering, Merrill?s analysts are studying your business plan and profit projections. If they like what they see, they advise the investment banking people to do the deal, then they write a research report that says your stock will go up and should be bought. In fact, because these reports can have lots of big words and numbers in them, the analysts will even make the process simple by boiling down their opinion into a one- or two-word rating. For example, they?ll assign it a ?buy? rating. Or hopefully even ?aggressive buy.You raise $50 million, Merrill makes a $5 million investment banking fee, retail investment advisers earn commissions by selling stock in ineedthemoney.com, and small investors own a stock that goes to the moon, just like they were promised. But this isn?t a perfect world. What happens if Merrill?s analysts look at your business plan and decide that your idea is stupid and will never fly? If they put out a negative report on ineedthemoney.com, retail advisers won?t recommend the stock, it won?t get sold, you won?t raise the money you need, and, most important, Merrill won?t earn a $5 million investment banking fee. So there?s great pressure for analysts, who are supposed to be totally truthful and objective, to help everyone out (except you, of course) by saying good things about bad ideas. And this pressure doesn?t happen just the first time a company goes public. You?d think that once you?ve raised $50 million, you?d never need more, right? Wrong. A lot of companies find that their initial cost projections were low, or maybe they forgot they needed a heated swimming pool in the CEO?s office. So there may come a time when ineedthemoney.com raises more money with what are called secondary stock offerings, or maybe by selling bonds. Since Merrill wants this business, too, its interests will be best served by keeping your investment rating favorable. After all, would you pay the company five million bucks for a secondary offering if it had your stock rated as a ?sell?? Not likely.
It should be patently obvious from this simple explanation that any firm that cares about its customers?or its future, for that matter?should never allow an analyst to compromise his objectivity in favor of potential investment banking fees. Because if an analyst lies to small investors to earn the firm a fee, he would be committing fraud. (Here?s Webster?s definition of ?fraud?: ?intentional perversion of truth in order to induce another to part with something of value.? This precisely describes the process of lying to small investors to fatten corporate coffers.) Just as important, while allowing your analysts to commit fraud might result in short-term gain in the form of investment banking fees, it will cause long-term pain because when the recommended stocks go into the toilet, investors won?t trust your company anymore and you?ll be toast. Therefore, if you were an executive focused on either your company or your customers, you?d have a system in place to deal with the possibility of this obvious potential problem. And most companies do. If, on the other hand, you were focused on short-term profits and didn?t really give a damn whether your customers would ultimately lose money, you?d ignore these policies and allow this conflict of interest to fester, or even foster it by flat out paying your analysts to not say things that might hurt your investment banking business, and say other things that help it. You might, for example, give them bonuses based on the amount of investment banking business they helped bring to the firm.
In any case, if you were a top executive with one of these firms, since this possible conflict of interest is so obvious, the one thing you could never do is pretend that you didn?t know it existed. Or, if you had policies in place to address this conflict of interest, pretend you didn?t know they were being violated.
Now let?s step out of the classroom and into the real world. In May 2002, Merrill Lynch agreed to make civil payments totaling $100 million to settle a complaint that some of its analysts hadn?t been objective when recommending some stocks to retail investors. (Interestingly, however, none of this $100 million went to the retail investors who were hoodwinked. New York State took about half, and the rest will flow to the coffers of the other forty-nine states.) The reason New York State is getting Merrill to write such a huge check is that it did an investigation and uncovered a bunch of e-mails written by various Merrill analysts suggesting that their objectivity had been compromised. To be more specific, the analysts wrote e-mails among themselves admitting that certain stocks were losers while maintaining ?buy? ratings on them for small investors. Here?s the press release from the New York State Attorney General?s office concerning the settlement, issued April 8, 2002. I added the bold print, and the part in parenthesis followed by the word ?NOTE.?
Merrill Lynch Stock Rating System Found Biased by Undisclosed Conflicts of Interest
State Attorney General Eliot Spitzer today announced a court order requiring immediate reforms in investment counseling by one of the nation?s oldest and largest securities firms.
The court action against Merrill Lynch was the result of an investigation by Spitzer that concluded that the firm?s supposedly independent and objective investment advice was tainted and biased by the desire to aid Merrill Lynch?s investment banking business.
Spitzer cites dramatic evidence that the firm?s stock ratings were biased and distorted in an attempt to secure and maintain lucrative contracts for investment banking services. As a result, the firm often disseminated misleading information that helped its corporate clients but harmed individual investors.
?This was a shocking betrayal of trust by one of Wall Street?s most trusted names,? Spitzer said. ?The case must be a catalyst for reform throughout the entire industry.?
Spitzer?s office uncovered a major breakdown in the supposed separation between the banking and research divisions at Merrill Lynch. In fact, analysts at Merrill Lynch helped recruit new investment banking clients and were paid to do so. The public, however, was led to believe that research analysts were independent, and that the firm?s rating system would assist them in making critical investment decisions.
As part of a quid pro quo between the firm and its investment banking clients, Merrill Lynch analysts skewed stock ratings, giving favorable coverage to preferred clients, even when those stocks were dubious investments.
This problem and other conflicts of interest are revealed by internal e-mail communications obtained during the investigation by the Attorney General?s office.
These communications show analysts privately disparaging companies while publicly recommending their stocks. For example, one analyst made highly disparaging remarks about the management of an internet company and called the company?s stock ?a piece of junk,? yet gave the company, which was a major investment banking client, the firm?s highest stock rating.
The communications show analysts complaining about pressure from Merrill Lynch?s investment banking division. For example, a senior analyst writes: ?the whole idea that we are independent of (the) banking (division) is a big lie.?
A senior manager stated: ?We are off bases in how we rate stocks and how much we bend over backwards to accommodate banking.? But nothing was done to remedy this fundamental problem.
The communications show that the problems at Merrill Lynch went far beyond a single analyst or research unit. For example, the head of the equity division wrote to analysts: ?We are once again surveying your contribution to investment banking . . . please provide complete details on your involvement . . . paying particular attention to the degree your research played a role in originating. . . . ?
And most importantly, the communications show how individual investors were harmed. A research analyst complained about giving a buy rating to a poor investment: ?I don?t think it is the right thing to do. John and Mary Smith are losing their retirement because we don?t want a client?s CEO to be mad at us.?
The court order obtained by Spitzer requires Merrill Lynch to now make disclosures to investors about its relationship with investment banking clients and provide more context for its stock ratings.
Spitzer described the court order as a preliminary step designed to protect investors while the investigation continues. He said his office has issued subpoenas to other securities firms. The nearly year long investigation is being handled by the Attorney General?s Investment Protection Bureau, under the direction of Assistant Attorney General Eric Dinallo.
Fiddling with family finances can be time-consuming, frustrating, or even frightening . . . especially when you feel like you’re not qualified to make those big money decisions. But here’s an expert who says that you can learn everything you need to know to effortlessly manage money in just a few hours–and then stay on top of it all in only minutes a year.
In Life or Debt, Stacy Johnson gave you a one-week plan for freeing yourself from the tyranny of debt. Now the creator and host of the nationally syndicated news series Money Talks takes it a step further with a complete system to manage every facet of your financial life that’s remarkably quick and easy.
• Get your finances organized once and for all
• Learn to set goals, then achieve them
• Discover the only three investments you need, whether you have $50 or $50 million
• A logical way to invest that really works
• An asset allocation system so simple, all you need to know is your age
• Quick, effective, and inexpensive ways to plan your estate, income taxes, and retirement
• Understand every type of insurance and learn how to shop for it
• How, why, when, and where to buy real estate
Why spend your hard-earned paycheck on so-called experts when you can manage your money yourself–and save and invest every penny? Here is everything you need to know to get on top of your family’s finances and stay there. The clock is ticking: It’s time to take control.
Excerpt. © Reprinted by permission. All rights reserved.
1
A Tale of Two Pities
Finance is the art of passing currency from hand to hand until it finally disappears. ?Robert W. Sarnoff
It was the best of times; it was the worst of crimes. In this chapter, I?m going to pluck a few items from recent news, pretty much at random, that should serve to convince you that it?s really not safe to trust anyone else to help you with your money, no matter how well known or trusted the names may be.
If you do nothing more than watch national news on TV, you may know that Wall Street has not been acting in your best interests for some time now. Recent examples? Two of the most respected names in the financial services industry: Merrill Lynch and Salomon Smith Barney. But before I begin, I want to make something clear. I?m not telling you this because these examples are the exception. I?m telling you this because these examples are the rule. Always have been, always will be.
Let?s talk about Merrill Lynch first.
In terms of number of retail investment advisers, Merrill Lynch is one of the largest financial services firms in the world. And even when the stock market is lousy, it still makes a ton of money.Its chairman, David Komansky, was paid $16 million in 2001 while the stock market fell 7 percent that year. Of course, there?s no law against making money. That?s the backbone of capitalism. But let?s consider how some of it was made.
To fully understand this story, you?ll have to learn some basics of financial advisory firms like Merrill Lynch. These firms make money several different ways. One way is to collect commissions from little guys like you and me when we buy investments. We could go to places that charge a lot less in commissions to buy investments, but we?re willing to pay extra to ?full service? firms like Merrill Lynch because they promise that in exchange for paying them more than necessary, we?ll get something we couldn?t get at cheaper places: unbiased, expert advice. The process of exchanging our hard-earned money for their objective advice is part of the business known as ?retail brokerage.? But there?s another completely different way financial advisory firms make money. They collect huge fees from big companies when these companies raise money by selling stocks and bonds to the public. This business is called ?investment banking.?
If you?re a company that wants to raise money by selling stock to the public, a firm like Merrill is a great place to go. That?s because it has so many investment advisers who will help the stock get sold.But as you put your idea on paper, it turns out that developing your new Web site will cost $50 million, and you?ve only got 150 bucks in the bank. Where will you find the other $49,999,850? A place like Merrill Lynch. You visit its investment banking division and explain your slight cash shortfall. If your idea seems reasonable, the folks there might just offer to take your company public by selling stock. They help you issue five and a half million shares of stock and sell them for $10 each. (Notice
that although you needed only $50 million, Merrill raised $55 million for you . . . that?s because it?s charging you $5 million for its assistance.)
But how will Merrill sell millions of shares of your stock to the public when nobody outside your immediate family knows you?re alive? Simple. Its thousands of retail brokers?the advisers paid to give small investors objective advice?will do the selling. This they do by calling their many clients and advising them to buy your stock.
But there?s still something missing. Retail investment advisers are sales experts, but they?re rarely investment experts. They don?t have nearly enough training to examine your business plan, projections, and market analysis and reach a conclusion as to the value of your stock. That?s where a research analyst comes in. Even before the investment bankers are putting together the paperwork pertaining to your initial public offering, Merrill?s analysts are studying your business plan and profit projections. If they like what they see, they advise the investment banking people to do the deal, then they write a research report that says your stock will go up and should be bought. In fact, because these reports can have lots of big words and numbers in them, the analysts will even make the process simple by boiling down their opinion into a one- or two-word rating. For example, they?ll assign it a ?buy? rating. Or hopefully even ?aggressive buy.You raise $50 million, Merrill makes a $5 million investment banking fee, retail investment advisers earn commissions by selling stock in ineedthemoney.com, and small investors own a stock that goes to the moon, just like they were promised. But this isn?t a perfect world. What happens if Merrill?s analysts look at your business plan and decide that your idea is stupid and will never fly? If they put out a negative report on ineedthemoney.com, retail advisers won?t recommend the stock, it won?t get sold, you won?t raise the money you need, and, most important, Merrill won?t earn a $5 million investment banking fee. So there?s great pressure for analysts, who are supposed to be totally truthful and objective, to help everyone out (except you, of course) by saying good things about bad ideas. And this pressure doesn?t happen just the first time a company goes public. You?d think that once you?ve raised $50 million, you?d never need more, right? Wrong. A lot of companies find that their initial cost projections were low, or maybe they forgot they needed a heated swimming pool in the CEO?s office. So there may come a time when ineedthemoney.com raises more money with what are called secondary stock offerings, or maybe by selling bonds. Since Merrill wants this business, too, its interests will be best served by keeping your investment rating favorable. After all, would you pay the company five million bucks for a secondary offering if it had your stock rated as a ?sell?? Not likely.
It should be patently obvious from this simple explanation that any firm that cares about its customers?or its future, for that matter?should never allow an analyst to compromise his objectivity in favor of potential investment banking fees. Because if an analyst lies to small investors to earn the firm a fee, he would be committing fraud. (Here?s Webster?s definition of ?fraud?: ?intentional perversion of truth in order to induce another to part with something of value.? This precisely describes the process of lying to small investors to fatten corporate coffers.) Just as important, while allowing your analysts to commit fraud might result in short-term gain in the form of investment banking fees, it will cause long-term pain because when the recommended stocks go into the toilet, investors won?t trust your company anymore and you?ll be toast. Therefore, if you were an executive focused on either your company or your customers, you?d have a system in place to deal with the possibility of this obvious potential problem. And most companies do. If, on the other hand, you were focused on short-term profits and didn?t really give a damn whether your customers would ultimately lose money, you?d ignore these policies and allow this conflict of interest to fester, or even foster it by flat out paying your analysts to not say things that might hurt your investment banking business, and say other things that help it. You might, for example, give them bonuses based on the amount of investment banking business they helped bring to the firm.
In any case, if you were a top executive with one of these firms, since this possible conflict of interest is so obvious, the one thing you could never do is pretend that you didn?t know it existed. Or, if you had policies in place to address this conflict of interest, pretend you didn?t know they were being violated.
Now let?s step out of the classroom and into the real world. In May 2002, Merrill Lynch agreed to make civil payments totaling $100 million to settle a complaint that some of its analysts hadn?t been objective when recommending some stocks to retail investors. (Interestingly, however, none of this $100 million went to the retail investors who were hoodwinked. New York State took about half, and the rest will flow to the coffers of the other forty-nine states.) The reason New York State is getting Merrill to write such a huge check is that it did an investigation and uncovered a bunch of e-mails written by various Merrill analysts suggesting that their objectivity had been compromised. To be more specific, the analysts wrote e-mails among themselves admitting that certain stocks were losers while maintaining ?buy? ratings on them for small investors. Here?s the press release from the New York State Attorney General?s office concerning the settlement, issued April 8, 2002. I added the bold print, and the part in parenthesis followed by the word ?NOTE.?
Merrill Lynch Stock Rating System Found Biased by Undisclosed Conflicts of Interest
State Attorney General Eliot Spitzer today announced a court order requiring immediate reforms in investment counseling by one of the nation?s oldest and largest securities firms.
The court action against Merrill Lynch was the result of an investigation by Spitzer that concluded that the firm?s supposedly independent and objective investment advice was tainted and biased by the desire to aid Merrill Lynch?s investment banking business.
Spitzer cites dramatic evidence that the firm?s stock ratings were biased and distorted in an attempt to secure and maintain lucrative contracts for investment banking services. As a result, the firm often disseminated misleading information that helped its corporate clients but harmed individual investors.
?This was a shocking betrayal of trust by one of Wall Street?s most trusted names,? Spitzer said. ?The case must be a catalyst for reform throughout the entire industry.?
Spitzer?s office uncovered a major breakdown in the supposed separation between the banking and research divisions at Merrill Lynch. In fact, analysts at Merrill Lynch helped recruit new investment banking clients and were paid to do so. The public, however, was led to believe that research analysts were independent, and that the firm?s rating system would assist them in making critical investment decisions.
As part of a quid pro quo between the firm and its investment banking clients, Merrill Lynch analysts skewed stock ratings, giving favorable coverage to preferred clients, even when those stocks were dubious investments.
This problem and other conflicts of interest are revealed by internal e-mail communications obtained during the investigation by the Attorney General?s office.
These communications show analysts privately disparaging companies while publicly recommending their stocks. For example, one analyst made highly disparaging remarks about the management of an internet company and called the company?s stock ?a piece of junk,? yet gave the company, which was a major investment banking client, the firm?s highest stock rating.
The communications show analysts complaining about pressure from Merrill Lynch?s investment banking division. For example, a senior analyst writes: ?the whole idea that we are independent of (the) banking (division) is a big lie.?
A senior manager stated: ?We are off bases in how we rate stocks and how much we bend over backwards to accommodate banking.? But nothing was done to remedy this fundamental problem.
The communications show that the problems at Merrill Lynch went far beyond a single analyst or research unit. For example, the head of the equity division wrote to analysts: ?We are once again surveying your contribution to investment banking . . . please provide complete details on your involvement . . . paying particular attention to the degree your research played a role in originating. . . . ?
And most importantly, the communications show how individual investors were harmed. A research analyst complained about giving a buy rating to a poor investment: ?I don?t think it is the right thing to do. John and Mary Smith are losing their retirement because we don?t want a client?s CEO to be mad at us.?
The court order obtained by Spitzer requires Merrill Lynch to now make disclosures to investors about its relationship with investment banking clients and provide more context for its stock ratings.
Spitzer described the court order as a preliminary step designed to protect investors while the investigation continues. He said his office has issued subpoenas to other securities firms. The nearly year long investigation is being handled by the Attorney General?s Investment Protection Bureau, under the direction of Assistant Attorney General Eric Dinallo.
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Inside This Book
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First Sentence:
In this chapter, I'm going to pluck a few items from recent news, pretty much at random, that should serve to convince you that it's really not safe to trust anyone else to help you with your money, no matter how well known or trusted the names may be. Read the first page Key Phrases - Capitalized Phrases (CAPs): (learn more)
Merrill Lynch, Uncle Sam, Social Security, Wall Street, New York, Stupid Investment Tricks, Smart Money, Salomon Smith Barney, Jerry Springer, John Hancock, Mae West, United States, Henry Blodget, Las Vegas, Winning the Loser's Game, General Motors, Liberty Mutual, Understanding Investments, University of Louisville New!
Concordance | Text Stats Browse Sample Pages:
Front Cover | Table of Contents | First Pages | Index | Back Cover | Surprise Me!
In this chapter, I'm going to pluck a few items from recent news, pretty much at random, that should serve to convince you that it's really not safe to trust anyone else to help you with your money, no matter how well known or trusted the names may be. Read the first page Key Phrases - Capitalized Phrases (CAPs): (learn more)
Merrill Lynch, Uncle Sam, Social Security, Wall Street, New York, Stupid Investment Tricks, Smart Money, Salomon Smith Barney, Jerry Springer, John Hancock, Mae West, United States, Henry Blodget, Las Vegas, Winning the Loser's Game, General Motors, Liberty Mutual, Understanding Investments, University of Louisville New!
Concordance | Text Stats Browse Sample Pages:
Front Cover | Table of Contents | First Pages | Index | Back Cover | Surprise Me!
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