Markets are generally random and efficient. This is why stock picking and market timing make no sense. However, there are exceptions to this rule.
The Securities and Exchange Commission recently filed a complaint against Brien P. Santarlas, a former attorney with the prestigious Boston law firm of Ropes & Gray.
The complaint alleges that Santarlas accessed the computer system at Ropes & Gray and tipped off Zvi Goffer, a trader at Schottenfeld Group, about acquisitions concerning two companies -- 3Com Corp. and Axcan Pharma, Inc.
Mr. Goffer used this information to make trades in the stock of these companies. He also tipped portfolio managers at two hedge funds, among others.
Ropes & Gray was not implicated in the scheme.
According to the complaint, total profits from the illegal trades aggregated $20 million. For his troubles, Santarlas was allegedly paid only $32,500 (in cash, of course).
On December 10, 2010, Santarlas (who is no longer employed at Ropes & Gray) pleaded guilty to conspiracy to commit securities fraud and to securities fraud.
I am sure many investors regarded Mr. Goffer as stock guru. According to the complaint, he was known as "the Octopussy" because he had "arms in so many sources of inside information." In reality, Mr. Goffer's alleged stock picking "skill" calls to mind the sage observation of William Bernstein who wrote, in his latest book, The Investors Manifesto, Preparing for Prosperity, Armageddon, and Everything in Between: "The reason that 'guru' is such a popular word is because 'charlatan' is so hard to spell."
The harsh reality is that stock gurus do not exist. The success of stock pickers and market timers can be attributed to either random luck or, as is alleged in the case against Mr. Goffer, the unlawful use of insider information.
It is important to keep this in mind when "financial pros" regale us with their predictions for the stock markets in 2010 or the financial media lists "hot" mutual fund managers.
It's all an elaborate con designed to separate you from your money.
Dan Solin is the author of The Smartest Retirement Book You'll Ever Read.
The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.
Follow Dan Solin on Twitter: www.twitter.com/DanSolin