“If you don’t know who’s the sucker in the poker game, it’s you,” experienced players tell dewy-eyed newbies. True enough − and not only in card games. It’s also a fact of life in the capital market.
Investment guru Warren Buffett, currently the third-richest man in the world, has written an annual letter to investors since 1988 in which he describes a character called “Mr. Market.” Buffett consistently warns: If you don’t have a broader understanding than other people and can’t price your investments better than Mr. Market, this is not the game for you.
We must each study our investments and ask ourselves: Do I really understand what I’m doing? Am I confident that I understand more than the others? Who’s the sucker in the capital market? Is it ... me?
After a decade in which a few dozen people sucked in billions upon billions of shekels, a sorry picture is becoming starkly clear: The Israeli capital market has turned into a machine that transfers money from a multitude of small savers who understand nothing, whatever they may think, to a handful of super-rich people who understand exactly how the market works.
This is no longer a gut feeling. Israel’s gross domestic product has grown nicely in recent years, in per-capita terms as well, yet the middle class’ living standards haven’t changed. If the average Israeli’s living standards and wealth have risen at all, it’s by less than the increase in GDP.
The inescapable conclusion is that the fruits of growth have gone to somebody else, and this somebody else is the thin stratum of the super-rich. Their main venue for soaking the rest of the nation was the capital market.
The methods by which the capital market moved money from your bank account to theirs are many and myriad.
There are fees that are perfectly open and known, such as management fees on mutual funds, and there are concealed ones.
There are the gigantic salaries to executives and controlling shareholders and there are insider transactions, for instance when a controlling shareholder sells some horrible asset to the public company he controls for an inflated price. He benefits, but the company and its minority shareholders may suffer egregious financial harm.
There are share issues; the public buys a piece of a company, but sometimes at an inflated price. There are bond issues; the buyer doesn’t receive ownership, he’s lending money to the company, which may or not pay him back. When the company doesn’t pay back some of that money, it’s called a haircut, which has become quite a habit of late.
There are other methods too, all based on the fact that the owners know the state of the companies they run very well, while the public knows only the dry-as-dust information in the financial statements (or rumors from Shmulik’s cousin’s neighbor who works in accounting there).
That’s how these people know when it’s time to get out of a bad asset, even as the public is pouring into it. When the market turns down and the public panics and flees, they buy up the best merchandise on the cheap.
If we return to our poker metaphor, the Israeli capital market is like a game in which the controlling shareholders, their friends at the investment houses and institutional investors are playing with six cards while the public is playing with four, one hand tied behind its back and a mirror behind it.
This isn’t a good game to play, at least not for kicks. But there’s a problem. The government stopped issuing special bonds to pension funds 20 years ago, so Israelis have nowhere else to invest their money. They have no choices. Their savings are in the capital market. Usually our money is invested there without us having any say in the matter, by whichever pension fund, provident fund or other vehicle we chose.
What would you do if you were forced to take part in a poker game when you knew perfectly well that you were a guppy and the other players were sharks? You would probably pass often, trying to participate as little as possible.
Well, let’s take our metaphor back to investments.
Don’t try to “manage” your portfolio and don’t let anybody else do it for you. Don’t get into “managed” mutual funds, where some investment manager picks and chooses financial assets. Don’t try to beat the market by buying and selling. It won’t work. Mr. Market is cleverer than you. Put your efforts into reducing fees. Remember, everything is negotiable, even if the guy facing you is wearing a suit and tie and purrs, “I’m sorry but that’s the bank’s minimum charge.”
Don’t blindly accept that over time, stocks beat bonds. It isn’t true. Over the last 30 years, American stocks have underperformed bonds. Most of your assets should be invested by index − you don’t pick individual stocks, you pick an index. For example, you can buy every security on that index through exchange-traded notes (teudot sal).
That’s the least bad scenario, which, over time, will gain you more than most investment houses could.
Remember that every transaction costs money. Every time you buy and sell securities, it costs you fees. Do as little churning as possible; every action costs you and is another opportunity to make a mistake. With every action the chance is greater than 50% that you’re doing something foolish. Don’t be afraid to do nothing and get low interest. It’s better than losing money.
And do your homework. Read the reports. Learn. Make your investment adviser’s life a nightmare with questions, requests, inquiries and haggling. You may never be a shark, but at least don’t be the biggest sucker at the table.
This article was originally published in TheMarker Magazine’s December issue in Hebrew.
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