Monday, March 12, 2012

Brown, Backstage Wall Street

Joshua M. Brown of reveals “the reality behind all the false glamour, contrived accuracy, and manufactured confidence” in Backstage Wall Street: An Insider’s Guide to Knowing Who to Trust, Who to Run From, and How to Maximize Your Investments (McGraw-Hill, 2012). Brown escaped from the brokerage business in 2010 after a decade of being in “the very worst profession in all of financial services.” As he writes, “I will starve on the street before I will ever be a retail stockbroker again.” (p. 34)

By relating in graphic detail how brokers’ interests were misaligned with their clients’, Brown brings to life a story that investors may have heard before but most likely didn’t heed sufficiently. He explains how ordinary folks got involved in the stock market in the first place, how financial entrepreneurs created enticing investment products (think mutual funds and ETFs), and how stock brokers didn’t care what they sold—they just had to sell, sell, sell.

He caps off his tale with the script for the Straight-Line Pitch (also known as the Lehman Method). This “infamous but never-before-published script” has “sold thousands of stock ideas and opened millions of retail brokerage accounts over the last 50 years.” (p. 173) In a call that can last between ten minutes and two hours, the broker makes a pitch, encounters an objection, rebuts that objection, encounters another objection, rebuts that one as well, and eventually aims for the power close. The script is almost thirty pages long. He describes common objections, such as “let me call you back,” “I don’t like the market right now,” “send me some information on the stock or your firm,” or “let me speak to my wife about this.” For each objection there are at least four rebuttals. Apparently “one out of ten qualified investors will open a new account when a broker uses this pitch.” (p. 173) Frightening! By the way, men are much more receptive to the straight-line pitch than women are.

Major traditional brokerage firms no longer pitch to the small account; for the most part they’ve moved into wealth management. For some time online brokers have at least partially filled that void, catering to the do-it-yourself investor. Brown recalls the days of the frenzy, describing the “borderline psychotic” advertising campaigns of online brokers. “The central conceit of the online brokerages’ ad campaigns back then was that any schmuck could be a billionaire and that riches were only clicks away.” (p. 71) His criticism is on target. But I think he’s too kind to today’s online brokerage campaigns to enlist clients, asking for instance “who doesn’t love the E*TRADE Baby?” Me, for one. And he doesn’t mention those “trade free for 60 days” come-ons that encourage overtrading and that are designed to generate lots of commissions after the initial free period. There’s always a pitch somewhere.

Brown offers tips for staying out of “murder holes”—such demonic investment vehicles as SPACs (special-purpose acquisition corporations), Chinese reverse mergers, one-drug biotechs, and private placements. Even as you’re avoiding these murder holes, beware of other investor traps as well. My favorite is: “Brokers with thick New York accents and Boca Raton area codes. (Florida’s Homestead Act has led to a preponderance of bad guys from New York setting up shop in southern Florida; the civil courts can’t touch their property.” (p. 220)

Backstage Wall Street is a quick-paced, well-written book by someone who’s been there and done some of that. And who reformed. It’s an enjoyable and scary read.

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