In the late 90’s, one of my best friends finally finished his graduate program and was in search of a job in finance. The result of all of his hard work was a new gig as a financial advisor at Goldman Sachs, one of the biggest names on Wall Street.
Though he didn’t stay long, he learned almost everything there is to know about the financial industry. Some of those things helped him later on in life, but most of them just made him skeptical about what role Wall Street plays in our society.
They are supposed to make money for all of us, but in his experience, this is not the case. Instead, only three groups make real money in the markets. Everyone else makes a meager amount or outright loses.
The following are those three groups.
The first group is the key employees which receive company stock. The way this works is that some people are given stock in the company as a bonus on top of their salary. Of course, the company doesn’t have to buy those shares at market price, so they can give out almost as many as they want.
If you are the recipient, you could sell these shares for a massive payday. This is one of the best and easiest ways to make money on Wall Street. These employees don’t take on any risk in the market but get to reap all the rewards.
The next group that makes money on Wall Street is the financial advisers and portfolio managers. You’d think that these people would lose money when the markets are weak, and especially when they manage investors’ money carelessly, but this is not the case. Instead, they get paid no matter what.
The reason is that they make money by taking a percentage of your portfolio. They do this no matter how good or bad your investments perform, so they are not taking on any risk for themselves when investing your money.
Here’s how it works in a favorable market:
- You invest $1,000,000 in a hedge fund.
- Your manager toys around with your portfolio but doesn’t earn you any more than the market is gaining on its own.
- You gain a considerable amount of value on your investment, and it rises to $1,250,000 in value.
- Your manager takes 1% of that sum, meaning a $12,500 payday.
That’s not too bad. You gain quite a bit of value, and they take a cut.
Where it gets sinister is when you
lose money in an unfavorable market.
Here’s how that works:
- You invest $1,000,000 in a hedge fund.
- Your manager cannot save you from a market downturn.
- You lose 25%, bringing your total asset value to $750,000
- Your manager takes 1% of the sum, meaning a $7,500 payday.
Now imagine that on the scale of a major fund. They could be playing around with billions of dollars and taking a cut no matter what. No matter what happens to your money, the manager or advisor wins. In favorable markets, they win big, and in unfavorable conditions, they still win.
Even worse, these managers rarely take any blame. If the market crashes, they claim that nobody saw it coming, which means no responsibility for them. On the other hand, if the market is good, they can take full credit for their supposed management skills. Just like our first group, this group also invests no money in the markets.
The last type of person that makes money on Wall Street is financial analysts. What they do is make the stock market look mystical and complicated. Once you believe this, they convince you to follow their analysis, which they claim is the key to earning massive profits. What they don’t tell you is that their conclusions are often wrong, and when they are, it’s your money that is on the line.
One example that sticks out in my mind is when an analyst at my friend’s company, Goldman Sachs, “got hot” in 1999. For a while, her picks were excellent, and her analysis was spot on. Soon, my friend was pushing her choices on all of his clients, claiming that they were in for incredible growth in no time. A year later, many of her strongest “buy” recommendations were entirely out of business. The result was the clients losing incredible amounts of money. I imagined this delayed retirements and caused substantial frustration for those clients.
My friend even personally knew some of these investors, as they had been his friends and family. He sold them on a dream, and it ended up being a nightmare. But what happened to the analyst? Nothing. She was undoubtedly embarrassed, but she kept her job and kept on making money as she always did.
The grand scheme of Wall Street and markets is there are very few people that make serious money. Unfortunately, those people are not mainstream investors. Instead, they are those who work inside the system.
First, Wall Street sells you on the dream of growing your portfolio with complex trading systems which no one can explain.
Next, once they have your money, they shave a bit off of the top every year whether you win or lose.
Lastly, they often end up losing your money, and there is no punishment for them when they do. The best way to make money on Wall Street is to work within it, and for most of us, that is not possible.
Before you invest, make sure others do not profit unless you do and most of all, only invest in things you can understand.