The Full Story Also available: The Short Story Version Find it at: mikeonthemarkets.wordpress.

com

Many investors today are feeling like this and they dont know why.

If this is their view of the pool Could you blame them?

So Im going to tell you a story that might help.

Its a fish story.
A fish story is about the one you thought you had on the hook. Then it got away from you. Sometimes money and investing feels like that. This fish story is NOT a Tall Tale.

And its a Just-So Story.

A Just So Story tells you how something got the way it did. In a way that makes you think, and chuckle, and not want to scream.

Just So You Know:

The fish in this story are investors, and the water is the market environment they swim in. I tell this story Just So you know what has happened to the pool that retirement investors have been forced to swim in. So maybe you know why you feel like something fishys going on.
So maybe you can find help navigating toward shelter.

So maybe your retirement story wont be about: The One that Got Away.

A word on sharks before we begin:

Sharks are not evil. Sharks are sharks -- they are eaters. Very efficient eating machines. When the food (in this case, money) becomes irresistible, they will show up every time.

The standard industry disclosure statements can be about as useful as the sign above.

As an investor, you want to know if its safe to go swimming here right now.
I can help. A LOT of todays trading is done via complex algorithms on remote computers.

Sharks are part of the investing ecosystem.

Some investors enjoy the risk of swimming near them, others do not. The trick is to know where they are most likely to be. And to make investment decisions based on where they are not.

I spend a lot of time working on my shark detection abilities. As the food supply multiplies (money), so do the sharks. And as investing gets more technical, it takes more tools and knowledge to just keep up with where they are.

Its what I do.

Back to the story

MIKE.

when financial markets youd recognize were born,

.AND STOCK INFORMATION WAS TRANSMITTEDLIKE THIS,

and the world was starting to look like this:

Industrial revolution (machine horsepower), modern transportation (not horses), modern communication (not Pony Express) Stocks, bonds, corporations, big banks, wildcatters, tycoons Major Immigration, Growing US middle class, early global economy,

the pool of stock market investors was small.

Photo Credit: Library of Congress, Prints & Photographs Division, Bain News Service, 1912, [reproduction number: LC-DIG-ggbain-10782]

Things caused that pool to grow really big, really fast. By the 1920s, the financial scene in America and Europe looked like this:

Then this happened:

Occupy Wall Street 1.0

The country thought, Maybe this shouldnt happen again.

So Congress did a little of this:

And gave us one of these:

The Securities Exchange Commission (SEC)s job was to police investing and weed out the rule breakers.

Glass Steagall Act

Investment Company Act

If you play in the public pool, you will have rules and you will follow them You will share your toys (information) with the public. Yes, all of it.
(Guess which future President this is!)

Commercial Investment Banks will be separate from Consumer Deposit Banks. Yes, completely No, not even a little bit Yes. We mean it

The unspoken rule for the Big Banks was this: No, you dont have to like it. What you did caused Big Problems.
Ronald Reagan

The most important part was this:

Investment Companies

Those of the pretentious double names,

were now fully separated

Such as: Morgan Stanley Goldman Sachs Bear Stearns Lehman Bros. Edward Jones Legg Mason Merrill Lynch Dean Witter

from those, who stored the cash of individuals and businesses.

Banks
Such as: Chase Manhattan Bank of America Bank of New York Barclays HSBC Citibank U.S. Bank State Street

They were also separated from insurance companies, but thats a whole different Fish Tale. Or is it?

This 1930s-model financial system looked pretty much the same for a very long time. Were talking 50-60 years.

This pool in Kansas, (a 1938 WPA project).looks remarkably like this one in Portland, OR

A pool meant a rectangle with a deep end, a shallow end, several lifeguards and enough chlorine to turn your hair green. When someone said, pool, or someone said investments, you knew what they meant.

Comparatively, there was remarkable uniformity in the financial world.

Which means: A certain set of attitudes and platitudes

(ways of thinking and talking)

followed three generations of investors to the table.

For those 50-60 years, there still werent many investors in the stock market pool. Folks funded their retirements with pensions, bank CDs, corporate bonds, or insurance. Many wouldnt own stocks because they or their parents (who lived with them) remembered The Great Depression. Oy. The investors might look a little BORED standing there on the side of the pool, but respectable, modest, even healthy. Until the mid-to-late 1980s, investments behaved generally as expected.

Sellwood Park Pool, circa 1935, where my grandparents probably swam.

And then a sea change occurred.

More people started investing in stocks. Why now? In 1981, Congress passed a law saying everybody could have an Individual Retirement Account (IRA), not just those who didnt have a pension at their job. You could buy stocks in your new IRA. More folks bought Mutual Funds too, which are made up of stocks. Remember Janus? Or Fidelity Magellan? Or Vanguard? Its easy to forget how new and exciting it was to finally have a chance to participate in the stock market.

Many retail-oriented brokers who sold stocks and Mutual Funds opened up shop. They didnt just cater to the wealthy like Those of the Pretentious Double Names. The Baby Boomers were in their 30-Somethings. Just starting to save for retirement.

Heady times were a brewin. Sound familiar?

But there were still rules, right?

In 1999, Congress repealed The Glass Steagall Act. Investment Companies, Deposit Banks, and Insurance Companies could once again officially join under a single corporate umbrella called a Bank Holding Company.

Glass Steagall Act

Bank Holding Companies are Very Big Fish.

If other reporters used my metaphor, youd hear them call Bank Holding Companies Too-Big-to-Fail-Fish, or-- Systemically Important Fish.

I call them other things.

These guys had been setting things up and testing the waters for more than a decade anyway, so they were ready and raring to go.

The investment environment today is closer to this.

These newfangled Water Parks (we dont call them pools anymore) have sprung up all over the worldtheyre a HUGE attraction. The water parks are like the Bank Holding Companies. Investors have more and trickier ways to Jump In than theyve had since before the Great Depression. Its important to understand: It only looks like separate pools, but they are all connected somewhere.

It no longer costs 50 cents to swim all day.

Asia cracked way open for trade at this time. Rapid, cheap communication followed. Since then, we have very nearly achieved a Global Economy. Whether we want to admit that or not.

Theres a whole lot more of us.

Were all swimming in the same financial water.

Now that we know about the pool, lets talk about who and what is in there alongside our investments.

Some investors have created oases-places most of us will never get to swim at.
Hedge funds fit in this category.

Hedge funds are big buyers of stock. You must be an accredited investor to own shares in a hedge fund.
Accredited persons have a net worth of at least $1 million (your house doesnt count), or joint income of $300,o00.

IPOs are another type of oasis.

When a corporation splits itself into pieces (or shares) that people can buy, its called an Initial Public Offering (IPO) or going public. Investment Banks usually run the show and receive a fee. For their troubles, they sometimes also get first right to buy the IPO for themselves or offer shares to their favorite people. Then on the IPO date, these early investors are allowed to sell their shares on the the secondary market (you and I call it The Stock Market) for what the rest of us are willing to pay to own them.
Some IPOs are about raising money to grow the company. Other IPOs are more about founders and funders recouping earlier investments (and a little extra for their troubles). Sometimes theres not a great deal of value left once they do so. When this happens in an actual swimming pool, they blow the whistle and everybody has to get out. All IPOs get hyped into a feeding frenzy. It can be hard to tell the froth from companies with good fundamentals. The dot.com bubble is the poster child for this. Companies with little value sold for a lot of dollars. Its generally safer to see if a new stock will sink or swim a little before you buy it.

Too bad this didnt have one of these

Vonage IPO: raised: $531 million

May 06 IPO price: One month later: Dec. 2011: $17.00 $ 8.75 $ 2.38
Wikipedia-Vonage Yahoo Finance-(VG)

Heres another oasis. It is a very exclusive pool.

The authors of the rulebook arent subject to the rules.
After the crisis hit, Congress created a HUGE new bureaucracy to protect investing and banking consumers. One of the Senators who put his name on this bureaucracy received preferential treatment from one of the lenders at the center of the housing crisis. Companies such as that lender employ lobbyists. Lobbyists spend money to influence lawmakers. There is a $100/yr. limit on direct lobbyist gifts to lawmakers. Id presume the perks the Senator received were worth more.

Try Googling this phrase: Congress exempt from insider trading laws Its illuminating.
Photo Credit: Library of Congress, Prints & Photographs Division, Theodor Horydczak Collection, [reproduction number, LC-H812-T-M04-079]

Also in the water is a class of swimmer called Institutional Investors*.

They make very big waves.

They do not turn on a dime.

Pension Funds (both Public and Private) Mutual Funds Endowment Funds Foreign Governments (sovereign wealth funds) Insurance Companies ...and of course, the aforementioned Bank Holding Companies who also invest.

Heres another oasis: Dark Pools.

Yes, its really called that.

Institutional Investors (the whales) trade more and more often on private exchanges called Dark Pools. Its just like it sounds. Nobody knows whos trading, how much, or why.
These Dark Pools trade the same stocks you and I own and rely on. Truly Free Trade only happens if both sides have equal access to information. If big deals happen in back rooms, the rest of us dont have that information. We cannot see the full picture of supply and demand.

It is tempting to say Dark Pools are evil, but they are not illegal and are in fact growing. You might say, But
everybody knows secret backroom deals happen, its just part of the game. Id say, just because something is legal, doesnt make it right. Dark Pools are like cartels. They create pricing inaccuracies.

Who else is in the water?

Heres a word:

If the Discovery Channel did a show on these guys, youd see Hedge Fund Managers, High Frequency Traders, and Investment Bankers. Also, Mergers and Acquisitions Guys like Gordon Greed is Good Gecko from the movie Wall Street, or Real Estate magnates like Donald Youre Fired! Trump.

These guys are Triathlete Level Investors

with investing muscles that look like this.

They look like this in Lycra.

Most of us shouldnt go near Lycra.

This is the Donald J. Trump Sharkskin suit. You can buy it at Macys

This is Donald J. Trump. His suits are made by Brioni of Italy. I dont think you can find them at Macys.

Fun Fact:
International Men of Mystery also wear Brioni.

I suspect this is what individual investors look like to a shark.

Why does this picture come up when I Google stockbroker?

This is the car I drive. Sometimes to the beach. I never thought Id drive one of these. But the kids can sit far enough apart that they cant touch each other. I value that.

I was once told by a Pretentiously Double Named One:

W ere not in the money storage business. W ere in the money movement business.
[insert nervous laughter]

Which made me wonder: How much movement? And whos making the waves?

But these guys have always been around. What are ya gonna do?

Just keep swimming?

Finding Nemo is a Registered Trademark of Disney/Pixar. Pixar was Steve Jobs brainchild after Apple kicked him out. I miss Steve.

But I digress

My point is: This is the environment in the investment pool you and your stockbroker grew up with.
Individual Investor

U$ Dollar
The Dow is at ___

See the orange dots at 1999?

Thats where The Banks were deregulated. Dont forget, theyd been testing the waters since the late 80s to the early 90s. And when did stocks get popular? Early-mid 80s.

786 K

2.1 M

3.2 M

12.2 M

46.8 M

163.9 M

1.08 B

2.01 B

4.79 B

This is a chart of the Dow Jones Industrial Average. An index of 30 important US companies. I got the chart from Yahoo Finance which is free. You can use it too.

Shares of stock traded daily

Todays reality is much more like this:

Markets are experiencing record volatility. It will probably be with us for awhile.

Click the charts for more info.

The big chart above shows the Standard & Poors 500 Index from January through October of 2011. Some consider The S&P a better representation of the economy than the Dow. Its been around since 1950. The very cool graph icons are from: www.sireasgallery.com

So you could be forgiven for feeling like this:

Isnt this is a fine kettle of fish?

Some investors get a kick out of wave-running and shark-avoidanceand thats OK.

Others? Not so much. And thats OK too.

If thinking about all this makes you green around the gills, I want you to know that theres, ummm . other fish in the sea.

I know of investments with reasonable returns and (I believe) a better chance of avoiding the price waves that whales create and sharks love. These investments make a lot of my clients more comfortable. In my next article, Ill tell you what those investments are and how you can get them.

Check out the next page to find out how to make sure you get the rest of the story

Even money can be fun.

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Fin
scuse my French.