You Make More Money Selling Advice Than Following It

Last Updated May 20, 2010 4:24 PM EDT

Steve Forbes once said, "You make more money selling advice than following it. It's one of the things we count on in the magazine business -- along with the short memory of our readers." Goldman Sachs showed just how true that is.

According to Bloomberg, Goldman Sachs experienced trading profits for itself every single day in the first quarter. However, those following the advice didn't fare so well. Seven of the investment bank's nine "recommended top trades for 2010" have been money losers. (Though to be fair, nine of Goldman's 11 recommendations in 2009 made money.) This year:
  • If you bought the Polish zloty versus the Japanese yen, you would have lost 14 percent.
  • If you bought Chinese stocks in Hong Kong, you would have lost 9.4 percent.
  • If you traded the British pound against the New Zealand dollar, you would have lost 9.8 percent.
It's important to note that much of (if not the vast majority) Goldman's profits come from its role as a market maker -- it makes the spread between the bid and the offer when clients trade. In effect, Goldman is like a bookie, earning the vigorish. It doesn't care if you win or lose; it just needs you to bet.

There are two factors that helped contribute to Goldman's trading results:
  • First, the demise of several competitors (such as Bear Stearns and Lehman Brothers)
  • Second, the reduction in capital that investment banks are willing/able to commit to risk-taking
Both factors have likely led to reduced liquidity in markets, leading to a widening of spreads. Of course, that's good for Goldman (and the other remaining market makers), but bad for you as trading costs increase. In other words, the game of active management has gotten more expensive, making it even more of a loser's game.

Both Wall Street and the financial media need you to tune in, to trade and to pay large fees for investment advice based what the academic research has found to be the equivalent of astrology. You're best served by following this advice from Warren Buffett: "We have long felt that the only value of stock forecasters is to make fortune-tellers look good. Even now, Charlie (Munger) and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children."
  • Larry Swedroe On Twitter»

    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.

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