It's not a coincidence that the ongoing economic downturn
has resulted in the collapse or exposure (really, it depends
how you look at it) of a fair share of frauds -- an
ignominious group that includes the likes of Angelo Mozilo,
Kathleen Corbet, and Bernie Madoff. As Warren Buffett has
remarked, it's only when the tide goes out that you find out
who's been swimming naked.
Just this week, however, we got to add another name to
the list: Raj Rajaratnam. The SEC alleges that Mr.
Rajaratnam, as the head of hedge fund group Galleon, engaged
in lucrative and illegal insider trading.
That's not outrageous, but this is ...
Now, I'm not naive. Crime exists in the world and that
won't ever change. But what gets my goat is the inability of
these folks to take responsibility or own up for their
actions. Like Mozilo saying it was
impossibleto anticipate the looming credit crisis
even after he sold hundreds of millions of dollars worth of
Countrywide stock, or Madoff mailing off ill-gotten valuables
in the hopes his family might keep them, or Galleon's head of
risk management saying that the firm might have to shut down
because "Too many of our clients are institutions that are
prohibited from doing business with alleged felons."
Because Galleon's problem was really that it had clients
with ethical standards.
Please.
These are the people who want your money
It's against this backdrop that, if you seek
retirement security, you're asked to entrust your retirement
savings to financial planners, money managers, and CEOs who
you may never once speak to either on the phone or in person.
Or as a recent
Charles Schwab television ad put it, "When my
broker said I make money when you make money, he neglected to
mention that he also makes money when I lose money, withdraw
money, or do nothing with my money."
Many financial professionals, in other words, are not
looking out for your best interests, and that should be a
scary realization.
What you can do about it
Yet what choice do you have? Investing is not
a game that should be played by passive, uninformed amateurs.
If you don't have the time, inclination, or wherewithal to
pick and follow stocks, then you stand to get burned just as
much as if you had invested with an unscrupulous money
manager.
For example, take a look at the following table of
stocks, which highlights their price-to-earnings and
return-on-equity ratios. Which one would you have invested in
12 months ago?
Stock
P/E (October 2008)
TTM ROE (October 2008)
Satyam Computer Services (NYSE:
SAY)
10
27%
Bidz.com (Nasdaq: BIDZ)
10
33%
Nokia (NYSE: NOK)
9
18%
GigaMedia (Nasdaq: GIGM)
8
17%
Aetna (NYSE: AET)
8
15%
GameStop (NYSE: GME)
13
18%
Rackspace Hosting (NYSE: RAX)
30
12%
The first six all look cheap and have very healthy
returns on equity. Yet it was the seventh, the seemingly
expensive laggard, that has done best of all. Take a
look:
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