Massive Insider Trading Investigation Could Nail Wall Street's Biggest Names

Nov 22, 2010 12:20pm EST by Henry Blodget in Investing, Banking

Related: C, GS, XLF, FAZ, JPM, BAC, MS

Play VideoNow Playing

The government is reportedly close to filing charges in the largest institutional insider-trading investigation in history.
According to initial reports, the investigation could ensnare Wall Street's biggest names: Goldman Sachs, SAC Capital, Wellington, Jennison, MFS Global, Maverick, Citadel, and others. (Here's a who's who of who might get nailed.)
The investigation reportedly focuses on "expert networks" -- consulting firms that pay industry participants to share insights and information with investors. Professional investors use these networks to gather information about real-time business conditions and trends in various industries (as well as, sometimes, information that could likely be characterized as "inside" information in any other context).
No matter where the investigation ends up, the government will likely present it as a huge step toward making the market "fair" for small investors.  And the same small investors will likely view it as confirmation that the "game is rigged."
Both of these conclusions will miss a far more important point.
The REAL lesson most investors should take away from the largest institutional insider-trading investigation in history is that competition in the global financial markets is so intense that it's basically idiotic to trade.
Trading is what is known as a "zero sum game." To win, you have to beat the competition. (And you have to beat the competition by more than the amount that it costs you to trade, which is extraordinarily hard to do, especially after tax).
In our experience, most investors have no appreciation for how intense their competition is. They think, "Wow--look at all this information I have.  Look at all my trading screens. Look at all my SEC filings. Look at my charts and graphs. Look at the smart fellow on TV telling me what to buy. Look at how many of my trades have made money!"
What they miss is that their competition has all this information, too -- so it doesn't give anyone an edge. They also don't understand that, in addition to all this information, the folks they are competing with have millions and millions of dollars to spend gathering information that will never be published anywhere or appear on an screen or chart or graph.
That's where the expert networks come in.  That's where contact networks in general come in.  That's where one-on-one meetings with managements and suppliers come in.
One glance from a CEO in response to a pointed question can contain more information than 500 pages of SEC filings. One nugget of scuttlebutt about the status of an important contract can make you more money than 500 hours of studying charts and graphs.  Most small investors don't understand that their competition gets this sort of information all day long.
In short, it doesn't matter whether the trading game is played on "a level playing field" (and of course it isn't.)  The New York Jets will still destroy any high-school football team, no matter what field the game is played on.
From the perspective of small investors, the game that is played every day in the global financial markets is equivalent to the New York Jets vs. a high-school football team.  And it should be no mystery which team the small investors are playing on.
So what's the smart answer for small investors in a world in which the competition is so unbelievably intense?
Don't play the trading game.
Instead, play a game you can win.
What's that game?
Long-term investing, preferably via low-cost, tax-efficient index funds.
Unlike professional investors, small investors don't have to worry about their performance in a given week or month or year.  They can avoid the second-to-second warfare that defines the professional investment business.  They can be patient and allow Ben Graham's long-term "weighing machine" to eventually do its work.
If they do that, and keep their costs low enough, they'll outperform 75% or more of the professionals.
Just as important, they won't be willingly playing a game they are almost sure to lose.

source: finance.yahoo.com

Revival of Volatility Signals Historic Era in U.S. PoliticsKOKOMO, Ind.—Voters this week look set to do something not seen since the early 1950s: Oust a substantial number of sitting House lawmakers for the third election in a row. The apparent Republican resurgence suggests the country is caught in a cycle of political volatility witnessed only four times in the past century, almost all during war or economic unease. View Full Image Associated Press In Connecticut, GOP Senate candidate Linda McMahon rallied supporters. The see-saw nature of the nation's politics raises a question: How can the country solve its long-term problems—deficit spending, an underfunded Social Security system, spiraling health-care costs—when voters seem so uncertain which party should lead the charge? This fall's election has generated dozens of House races, from the suburbs of Denver and Chicago, across the South, and up the Ohio River Valley into New England, where voters who rejected Republicans in the past two elections are threatening to throw their support back to the GOP. In many cases, they're returning to the same candidates they rejected earlier. Boehner's Tea Party Problem 20:30 In an interview with WSJ's Jerry Seib, Norman Ornstein of the American Enterprise Institute and William Galston of the Brookings Institution discuss the political ramifications of a GOP-controlled House. The phenomenon is on full view in Indiana, where Democrats are fighting to keep three House seats they won in 2006. Voters in all three districts have a history, going back more than a century in some cases, of rejecting incumbents in moments of strain. "We know what we don't want better than we know what we want," said Steve Ellison, a commercial real-estate broker who hosted a campaign event in his Mishawaka home for Republican challenger Jackie Walorski, who is trying to unseat two-term Democrat Joe Donnelly in the state's Second District. "I suppose that helps explain the schizophrenia." View Full Image Getty Images In Cleveland, Rep. Dennis Kucinich (D., Ohio) pumped up the crowd waiting to hear President Obama. If Republicans win big on Tuesday, as polls suggest, it is far from clear how firm a foothold they will have. Voters hold unfavorable views of both parties. Republican leaders acknowledge they could easily be tossed in 2012, just as they were in 2006. The country has seen similar gyrations before. Financial panic in 1893 set the stage for a series of sharp swings in the 1890s. Republicans won a landslide in 1894, picking up 135 seats, but then lost 48 seats two years later, despite Republican William McKinley's triumph in the presidential race. Then, in 1910, labor unrest and divisions within the GOP cost the party 57 House seats that year and 28 in 1912. World War I and its aftermath created a period of almost continual seesawing, with only one election (1916) seeing fewer than 20 House seats changing hands. Last Weekend on the Trail View Slideshow Attack Ads Get a look at some of the ads campaigns are running to embarrass their rivals -- and vote for the most effective. View Interactive Races in 2010 See which House, Senate and governors' races are considered closest. More interactive graphics and photos A realignment similar to 1894, but to the left, came in 1932 when voters wracked by the Great Depression elected Franklin D. Roosevelt as president and tossed out 101 Republicans from the House and nine from the Senate. That election, the third in a series of big swings in party support that began in 1928, marked the start of a Democratic dominance of Congress that lasted for decades with few interruptions. But until now there has been only one other prolonged stretch—from 1946 to 1952—in which either party lost more than 20 seats. A wave of post-war strikes and President Harry Truman's low approval ratings helped Republicans gain 55 seats in 1946, and their first House majority since 1928. Two years later, voters reacted to a "do-nothing Congress" by tossing out 75 Republicans. The GOP regained the House in 1952, but lost control in the next election. That drought would hold until Republicans roared back in 1994. Some involved in politics today wonder if the current volatility will become part of the country's political fabric. Changes in the U.S. electoral map, with Republicans increasingly controlling the South and the Democrats dominant on the coasts and the industrial Midwest, plus changes in the makeup of the two parties, have deepened the country's political divide over the past 40 years, they say. Live Updates on Election Night Get breaking email alerts Follow our Twitter account. Follow updates on Facebook Complete Coverage: Campaign 2010 "You used to have clear liberal and conservative wings within each party, but that is less and less the case," said Tom Davis, a former congressman from Virginia who ran the National Republican Campaign Committee from 1998 to 2002. "Now, the parties are sharply drawn along ideological lines." The result is a larger and more restive bloc of unattached voters, razor-thin margins in presidential votes, and frequent upheavals in control of Congress. View Full Image Associated Press Voters' sharp reversals this year are in full view in Indiana, where Democrats are fighting to keep three House seats they won in 2006. Amid all this, polls show voters themselves appear uncertain over what they want from elected officials. A Zogby International poll of more than 1,000 likely independent voters last month found that more than 70% wanted candidates who are "flexible" and "not afraid to be independent of their party." But another survey, by the Allegheny College Center for Political Participation, found more than half of all registered voters wanted elected officials to shun compromise and stand firm on principle. Among likely Republican voters, those favoring no concessions topped 70%. Analysts who dissect voting trends say the swings of partisan support being seen now, particularly among independent voters, is evidence more of serial disappointment than of chronic indecisiveness. View Full Image Associated Press In Indiana's Second District, Republican challenger Jackie Walorski is trying to unseat two-term Democrat Joe Donnelly. "You don't see voters changing their minds so much as independent and moderate voters looking for the same thing and never getting it," said William Galston, a former adviser to President Bill Clinton who studies governance issues at the Brookings Institution. "So you have a series of negative elections and rejections of the status quo." The urge to reject those in power can be found this year in some unusual places. In Indiana's Second District, Mr. Donnelly, the two-term Democratic congressman, announced his re-election bid in the United Auto Workers union hall here in the car-factory town of Kokomo. And for good reason: Measures passed by President Barack Obama and the Democrats in Congress clearly saved Kokomo from bigger trouble last year. The auto bailout kept the local Chrysler, General Motors and Delphi car-parts factories afloat. The plants employ more than 6,000 people in a city of just 48,000 inhabitants. From his third-story office downtown, Mayor Greg Goodnight can point to some of the fruits of the more than $100 million in federal stimulus money the city and surrounding county have received over the past 18 months. Kokomo has newly reconfigured sidewalks, fresh rows of streetlights, repaved streets, a new bus system. "But does Obama get the credit?" asked Mr. Goodnight, a Democrat who previously served as the head of the local steel union. "No, he doesn't. People want to blame someone, and he's the president. We all want immediate results." Mr. Donnelly, in turn, is locked in a tight race against a challenger who says the auto bailout, the bank rescue and the Democrats' stimulus package were government boondoggles that have simply driven the country deeper into debt. At Jamie's Soda Fountain a few blocks from City Hall, eight of the city's leading figures come together over mugs of coffee to debate politics and the latest news. Mike Stegall, president of Community First Bank, gives Mr. Obama high marks for helping rescue the banks and the car companies last year. But he dings the president for the health-care overhaul and this summer's rewrite of the country's financial regulations. "He's selling an agenda no one really gets," Mr. Stegall said. Local UAW president Richie Boruff jumps in. "Without Obama, Kokomo would be dead, including your community bank," he said. Scott Pitcher, a local developer and the table's lone independent, says he voted for Mr. Bush in 2004 and for Mr. Obama four years later. But he isn't pleased by what has followed. "I am disappointed that there is so little confidence in the market, and I blame Obama for that," he said. The debate, like the country, gets more volatile. Voices are raised. Mr. Stegall talks of a spreading "paranoia and fear." County Attorney Lawrence Murrell, joining the group late, speaks of impending socialism and says, "We are in a fight for our nation's soul." The comment draws a protest from Mr. Boruff. Going around the table, in a town where the unemployment rate last year shot above 20% but has since dipped below 12%, four men in the group give the president a grade of D. Two give him an A. Mr. Obama comes out with an average grade of C-minus

KOKOMO, Ind.—Voters this week look set to do something not seen since the early 1950s: Oust a substantial number of sitting House lawmakers for the third election in a row.

The apparent Republican resurgence suggests the country is caught in a cycle of political volatility witnessed only four times in the past century, almost all during war or economic unease.

View Full Image

Associated Press

In Connecticut, GOP Senate candidate Linda McMahon rallied supporters.

The see-saw nature of the nation's politics raises a question: How can the country solve its long-term problems—deficit spending, an underfunded Social Security system, spiraling health-care costs—when voters seem so uncertain which party should lead the charge?

This fall's election has generated dozens of House races, from the suburbs of Denver and Chicago, across the South, and up the Ohio River Valley into New England, where voters who rejected Republicans in the past two elections are threatening to throw their support back to the GOP. In many cases, they're returning to the same candidates they rejected earlier.

 

Boehner's Tea Party Problem

20:30

In an interview with WSJ's Jerry Seib, Norman Ornstein of the American Enterprise Institute and William Galston of the Brookings Institution discuss the political ramifications of a GOP-controlled House.

The phenomenon is on full view in Indiana, where Democrats are fighting to keep three House seats they won in 2006. Voters in all three districts have a history, going back more than a century in some cases, of rejecting incumbents in moments of strain.

"We know what we don't want better than we know what we want," said Steve Ellison, a commercial real-estate broker who hosted a campaign event in his Mishawaka home for Republican challenger Jackie Walorski, who is trying to unseat two-term Democrat Joe Donnelly in the state's Second District. "I suppose that helps explain the schizophrenia."

View Full Image

Getty Images

In Cleveland, Rep. Dennis Kucinich (D., Ohio) pumped up the crowd waiting to hear President Obama.

If Republicans win big on Tuesday, as polls suggest, it is far from clear how firm a foothold they will have. Voters hold unfavorable views of both parties. Republican leaders acknowledge they could easily be tossed in 2012, just as they were in 2006.

The country has seen similar gyrations before. Financial panic in 1893 set the stage for a series of sharp swings in the 1890s. Republicans won a landslide in 1894, picking up 135 seats, but then lost 48 seats two years later, despite Republican William McKinley's triumph in the presidential race.

Then, in 1910, labor unrest and divisions within the GOP cost the party 57 House seats that year and 28 in 1912. World War I and its aftermath created a period of almost continual seesawing, with only one election (1916) seeing fewer than 20 House seats changing hands.

Last Weekend on the Trail

View Slideshow

Attack Ads

Get a look at some of the ads campaigns are running to embarrass their rivals -- and vote for the most effective.

View Interactive

Races in 2010

See which House, Senate and governors' races are considered closest.

• More interactive graphics and photos

A realignment similar to 1894, but to the left, came in 1932 when voters wracked by the Great Depression elected Franklin D. Roosevelt as president and tossed out 101 Republicans from the House and nine from the Senate. That election, the third in a series of big swings in party support that began in 1928, marked the start of a Democratic dominance of Congress that lasted for decades with few interruptions.

But until now there has been only one other prolonged stretch—from 1946 to 1952—in which either party lost more than 20 seats. A wave of post-war strikes and President Harry Truman's low approval ratings helped Republicans gain 55 seats in 1946, and their first House majority since 1928.

Two years later, voters reacted to a "do-nothing Congress" by tossing out 75 Republicans. The GOP regained the House in 1952, but lost control in the next election. That drought would hold until Republicans roared back in 1994.

Some involved in politics today wonder if the current volatility will become part of the country's political fabric. Changes in the U.S. electoral map, with Republicans increasingly controlling the South and the Democrats dominant on the coasts and the industrial Midwest, plus changes in the makeup of the two parties, have deepened the country's political divide over the past 40 years, they say.

Live Updates on Election Night

• Get breaking email alerts
• Follow our Twitter account.
• Follow updates on Facebook
• Complete Coverage: Campaign 2010

"You used to have clear liberal and conservative wings within each party, but that is less and less the case," said Tom Davis, a former congressman from Virginia who ran the National Republican Campaign Committee from 1998 to 2002. "Now, the parties are sharply drawn along ideological lines."

The result is a larger and more restive bloc of unattached voters, razor-thin margins in presidential votes, and frequent upheavals in control of Congress.

View Full Image

Associated Press

Voters' sharp reversals this year are in full view in Indiana, where Democrats are fighting to keep three House seats they won in 2006.

Amid all this, polls show voters themselves appear uncertain over what they want from elected officials. A Zogby International poll of more than 1,000 likely independent voters last month found that more than 70% wanted candidates who are "flexible" and "not afraid to be independent of their party."

But another survey, by the Allegheny College Center for Political Participation, found more than half of all registered voters wanted elected officials to shun compromise and stand firm on principle. Among likely Republican voters, those favoring no concessions topped 70%.

Analysts who dissect voting trends say the swings of partisan support being seen now, particularly among independent voters, is evidence more of serial disappointment than of chronic indecisiveness.

View Full Image

Associated Press

In Indiana's Second District, Republican challenger Jackie Walorski is trying to unseat two-term Democrat Joe Donnelly.

"You don't see voters changing their minds so much as independent and moderate voters looking for the same thing and never getting it," said William Galston, a former adviser to President Bill Clinton who studies governance issues at the Brookings Institution. "So you have a series of negative elections and rejections of the status quo."

The urge to reject those in power can be found this year in some unusual places. In Indiana's Second District, Mr. Donnelly, the two-term Democratic congressman, announced his re-election bid in the United Auto Workers union hall here in the car-factory town of Kokomo.

And for good reason: Measures passed by President Barack Obama and the Democrats in Congress clearly saved Kokomo from bigger trouble last year. The auto bailout kept the local Chrysler, General Motors and Delphi car-parts factories afloat. The plants employ more than 6,000 people in a city of just 48,000 inhabitants.

From his third-story office downtown, Mayor Greg Goodnight can point to some of the fruits of the more than $100 million in federal stimulus money the city and surrounding county have received over the past 18 months. Kokomo has newly reconfigured sidewalks, fresh rows of streetlights, repaved streets, a new bus system.

"But does Obama get the credit?" asked Mr. Goodnight, a Democrat who previously served as the head of the local steel union. "No, he doesn't. People want to blame someone, and he's the president. We all want immediate results."

Mr. Donnelly, in turn, is locked in a tight race against a challenger who says the auto bailout, the bank rescue and the Democrats' stimulus package were government boondoggles that have simply driven the country deeper into debt.

At Jamie's Soda Fountain a few blocks from City Hall, eight of the city's leading figures come together over mugs of coffee to debate politics and the latest news.

Mike Stegall, president of Community First Bank, gives Mr. Obama high marks for helping rescue the banks and the car companies last year. But he dings the president for the health-care overhaul and this summer's rewrite of the country's financial regulations. "He's selling an agenda no one really gets," Mr. Stegall said.

Local UAW president Richie Boruff jumps in. "Without Obama, Kokomo would be dead, including your community bank," he said.

Scott Pitcher, a local developer and the table's lone independent, says he voted for Mr. Bush in 2004 and for Mr. Obama four years later. But he isn't pleased by what has followed. "I am disappointed that there is so little confidence in the market, and I blame Obama for that," he said.

The debate, like the country, gets more volatile. Voices are raised. Mr. Stegall talks of a spreading "paranoia and fear." County Attorney Lawrence Murrell, joining the group late, speaks of impending socialism and says, "We are in a fight for our nation's soul." The comment draws a protest from Mr. Boruff.

Going around the table, in a town where the unemployment rate last year shot above 20% but has since dipped below 12%, four men in the group give the president a grade of D. Two give him an A. Mr. Obama comes out with an average grade of C-minus.