Don’t Get Taken By Goldman Sachs
Do you ever get the feeling you’re trading on yesterday’s news? Well, that’s exactly what’s happening if you’re getting financial research from Goldman Sachs.
This story is absolutely shocking. It’s been all over the financial media and hit the cover of yesterday’s Wall Street Journal.
Goldman’s been holding “trading huddles” for their preferred clients. In these meetings, preferred clients receive short-term trading ideas from research analysts. Often the ideas were counter to the long-term advice given to regular customers.
Rest assured, Goldman’s preferred clients aren’t your average investors. They don’t have a few thousand, or even a few million dollars. I’m guessing you need a hundred million dollar account (or more) to get preferred status.
The bottom line is, what Goldman’s doing is illegal. It’s against the law for analysts to publish opinions that are at odds with their real opinion. Remember all the bad research during the dot com boom? That’s where this law came from. In my book, this lumps Goldman in with Bernie Madoff. It puts them in the same league as pump and dump penny stock pushers.
They’re nothing but a scam.
Now the SEC and FINRA (Financial Industry Regulatory Agency) are launching investigations of the “trading huddles”. Who knows what will come of it, but I’m guessing a slap on the wrist.
As an editor for a top notch financial publication, I couldn’t imagine lying to subscribers. I couldn’t sleep at night knowing I wasn’t putting out first rate research. Or even worse, pitting one group of clients against another. But that’s exactly what Goldman is doing.
And this isn’t the first time regulators are looking at Goldman.
Earlier this year, they caught the attention of the SEC with “high-frequency trading”. This scam is a real beauty. It’s essentially insider trading with super-computers. Instead of insider financial knowledge, they have insider knowledge of how trades are filled.
In a nut shell, they use super computers running complex algorithms to front-run orders from regular and institutional investors. They’re able to scalp pennies off of every transaction. It may not seem like much, but high-frequency trading sometimes accounts for half of all trades on any given day.
It’s no wonder this is now an eye-popping $20 billion a year scam. And Goldman’s estimated to have 20% of the business. A little quick math will tell you that’s $4 billion a year.
They’re gaming the system at the expense of regular investors (like you and me).
To be honest, I don’t know if I should be angry or happy about stories like this. Don’t get me wrong, I’m disgusted by the dishonest dealings on Wall Street.
On the one hand, this story could turn people away from financial research or investing all together. Nothing can crush a dream quicker than learning the deck is stacked against you. On the other, it could turn people to smaller firms for financial research. For regular investors, it’s always better to be the big fish in a small pond.
How can you protect yourself from dishonest research?
First, understand how the company makes money. If there’s a conflict of interest, it’s time to start being skeptical. Goldman caters to lots of ultra-wealthy people. If you’re not one of them, assume the research you get might be old.
Second, seek out relationships with independent research organizations. There are a number of them out there run by honest people. They work hard to generate good profitable trade ideas. We hope Hyperion Financial is at the top of your list.
And finally, use common sense. If you don’t feel like your research is top notch, look for new providers or do more yourself.
Remember, Wall Street’s filled with people trying to scam you out of your money. Do your own research and always look out for yourself. No one cares for your money more than you!
Category: Stocks
