Investing Is Gambling, by Definition
The necessary qualifier is that I agree with Mark Patinkin about the immoral behavior of Goldman Sachs. If I had money to invest, I would most definitely invest it elsewhere, and if I already had that money with Goldman, I’d move it. There’s a moral obligation to punish companies, in that way, and it’s the credulous person, indeed, who can trust Goldman Sachs in particular.
But truth be told, it’s a credulous person who trusts Wall Street players more than is absolutely necessary, to begin with. They’ve been greedy villains in the popular mind at least for decades. Yet, Patinkin writes:
Some have said it’s different for Goldman’s individual clients — those who give their personal portfolios to Goldman to manage.
But in truth, there are conflicts even on that level. Goldman doesn’t just put such clients into the same mix of stocks and bonds the independent broker down the block might pick. Houses like Goldman are known to push their own in-house funds on investors — including hedge funds. That’s a good deal for Goldman, since they charge a few percent in fees on the investor’s portfolio value — as well as a staggering 20 percent of profits the investor gets if the hedge fund goes up. You’d think such outsized profits would mean clients, out of fairness, get a break if the hedge fund goes down, or underperforms. Hardly. It’s a heads-they-win, tails-you-lose game. If the funds tank, the firms still take percentage fees for their bad work. And worse, clients aren’t able to get out of those bad hedge funds for months or more, since the rules lock them in for set periods. So if Goldman’s fund managers place stupid bets, as they certainly have in the recent past, investors have to keep riding them downhill.
The heads I win, tails you lose, game was written into the rules from the beginning. The problem, over the past couple of decades, is that we began to persuade ourselves that they were suspended by success. With government backing giving a sense of security to risky mortgages and with the same individual daydream that keeps people funding governments through lottery revenue, we thought we could play the investors’ game without real risk, and without the careful bet hedging and self preservation that characterizes the large firms.
If we’re to learn from current events, we must not only investigate the factors that kept us from having information that we could have used, but ponder the factors that kept us from acting on information that we already had.