10-08-2013, 09:16 PM
Chapter 2: The Nature of Wall Street Works Against Investors
I’m not going to dwell on Chapter 2 for long, as I think it covers ground pretty well understood by this crowd. The premise of Chapter 2 is that because Wall Street is involved in almost all of your stock investing activities, it is wise to understand its dangers.
While Wall Street performs many important functions, Klarman says, “it frequently is plagued by conflicts of interest and a short-term orientation. Investors need not condemn Wall Street for this as long as they remain aware of it and act with cautious skepticism in any interactions they may have.”
The balance of the chapter is essentially a cautionary tale about watching out for the dangers posed by fees, commissions, conflicts of interest, and the dangerously short-term focus of most Wall Streeters. The chapter also makes some interesting points about the bullish bias of both Wall Street and its regulators. Klarman also devotes some pages to investing fads, concluding that “the stock market frequently attributes a Coca-Cola multiple to a Cabbage Patch concept.”
I was planning to comment that this chapter made the book feel dated, for example it did not anticipate how online brokerages would change fees and retail investor activity. But the further I read, the more I came to appreciate the out-of-date nature as an advantage. It was refreshing and valuable to read examples that pre-dated the dot-com mania and other more recent events that seem to dominate discussion these days.
Favorite quote from the chapter, discussing IPOs:
Twitter, anyone?
I’m not going to dwell on Chapter 2 for long, as I think it covers ground pretty well understood by this crowd. The premise of Chapter 2 is that because Wall Street is involved in almost all of your stock investing activities, it is wise to understand its dangers.
While Wall Street performs many important functions, Klarman says, “it frequently is plagued by conflicts of interest and a short-term orientation. Investors need not condemn Wall Street for this as long as they remain aware of it and act with cautious skepticism in any interactions they may have.”
The balance of the chapter is essentially a cautionary tale about watching out for the dangers posed by fees, commissions, conflicts of interest, and the dangerously short-term focus of most Wall Streeters. The chapter also makes some interesting points about the bullish bias of both Wall Street and its regulators. Klarman also devotes some pages to investing fads, concluding that “the stock market frequently attributes a Coca-Cola multiple to a Cabbage Patch concept.”
I was planning to comment that this chapter made the book feel dated, for example it did not anticipate how online brokerages would change fees and retail investor activity. But the further I read, the more I came to appreciate the out-of-date nature as an advantage. It was refreshing and valuable to read examples that pre-dated the dot-com mania and other more recent events that seem to dominate discussion these days.
Favorite quote from the chapter, discussing IPOs:
Quote:Gone are the days (if they ever existed) when a new issue was a collaborative effort in which a business that was long on prospects but short on capital could meet investors with capital in hand but with few good outlets for it. Today the initial public offering market is where hopes and dreams are capitalized at high multiples. Indeed, the underwriting of a new security may well be an overpriced or ill-conceived transaction, frequently involving the shuffling of assets through "financial engineering" rather than the raising of capital to finance a business's internal growth.
Twitter, anyone?