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Being Wrong Before Does Not Stop Wall Street

“Two things are infinite: the universe and human stupidity; and I am not sure about the universe.” Albert Einstein

At the beginning of February, I wrote that, “There is little, if any, doubt that we are entering a recessionary cycle.” The consensus then was absolutely not, that we would avoid a recession. Now the debate is how long and how deep.

Meanwhile, in Washington the key oil executives told Congress they know oil prices are hurting consumers but deflected any blame, arguing that their profits, $123 billion last year, were in line with other industries. I am not sure what other industries they were referring to but from an investment standpoint, I would certainly like to know.

A comment by Rep. Emanuel Cleaver to the executives summed up the average investor’s opinion of not only the oil industry but also of Wall Street. He said, “Your approval rating is lower than ours and that means you are down low. Whatever happened to shame?”

Forget shame, often times Wall Street’s major players are unwavering proof of Einstein’s observation of human stupidity. A case in point is John Meriwether. You may recall that Meriwether is best known as the founder of Long-Term Capital Management.

In 1998, LTCM lost $4 billion of investor money while creating the epicenter of a global financial crisis, a crisis that would have brought our financial system to its knees had the Fed not umpired a Wall Street financed bailout. As a side note, Bear Stearns was the only holdout. The Street can have a long memory at times.

That crisis also led to Congressional hearings, only then it was on the dangers of hedge funds and the freewheeling pools of money created by wealthy investors, who along with pension funds and other institutions, trade heavily and rely on leverage to increase returns. Now there is a familiar chord.

Undaunted, Meriwether and partners have continued doing business and their largest fund is down 28 percent this year, according to the Wall Street Journal, and once again leverage is at the heart of their troubles. The fund had $14.90 in borrowings for every $1 of equity. Yet, investors have given him over a billion dollars to manage, for which the return was 5.6 percent last year.

However, Meriwether is in good company. Platinum Grove Asset Management, run by LTCM alumnus Myron Scholes (Nobel prize winner, Black Scholes option model), lost 13 percent in March, putting it down 10 percent for the year.

Interestingly, the Street’s major players are really no different from the average investor. While pension funds and municipalities throw around considerably larger sums of money, they too often fall victim to greed, taking as gospel whatever the so called “experts” tell them.

Many of these experts utilize a black box approach to investing, meaning what they do is proprietary. Investors are expected to turn over funds without knowing the investments or methodology being employed. Individual investors are subjected to the same sort nonsense.

How often have you seen an offering whereby for a fee, generally in the $600 per year range, you will be told what to buy or sell, and when with the promise that you can beat any market, anytime. The methodology of course is proprietary. Nuts.

A month ago I wrote that anyone could achieve a dividend yield above 6 percent. As proof, I offered up seven Canadian energy investment trusts, along with 15 other high yielding stocks. You can find the list at www.RuddReport.com.

For the month of March, the seven Canadians listed had an average overall capital appreciation of 0.89 percent, with an average combined dividend yield of 11.88 percent. The symbols are: AAV, BTE, ERF, HTE, PDS, PVX and PWE.

Although Congressional hearings et al are unlikely to have any lasting effect with regard to oil prices, at least you can take some of the pain away with prudent investing in the energy sector.