I have been inundated by questions from investors who read my column after viewing the gut-wrenching movie, Inside Job. Their main concern: avoiding scams.
The Dow has gained some 6,000 points since the bottom in 2008 -- up 7.1 percent this year -- encouraging a more positive mood. But many investors remain on the sidelines, shaken, rattled and rolled by the multi-trillion dollar plunge two years ago.
My best selling book, Ruthless: How Enraged Investors Reclaimed Their Investments and Beat Wall Street, gives investors insight to one of the biggest money market scams in history. Our team of "economic commandos" reclaimed $200 billion and are clawing back $136 billion still frozen by banks and brokerages such as Oppenheimer & Company, Raymond James, TD Ameritrade, Pimco, Blackrock, and Charles Schwab, among others. These weasels claim they, not their clients, are victims of a money fund sold as completely safe, liquid, better than Treasury bonds -- the next best thing to being in heaven.
Yet the fund turned out to be one of the most deceptive ploys ever invented by Wall Street. It was -- and remains -- a financial wrecking ball that continues to decimate lives, charities and churches, municipal projects; it has savaged the jobs market and forced the shuttering of hospital wings, museums, and a host of other cultural and social entities. Not long ago, I received a phone call from a man who spent his life building a business. He has been reduced to living in a tent! Count one for the scammers.
So to all investors who are righteously furious and gun shy, I offer the following tips on how to avoid being conned by your broker:
1. Your broker calls to sell a hot new financial product:
Don't jump in with an enthusiastic, "Okay! Count me in!" Do investigate. Go online. Use "Yahoo Finance" or other reputable sites to check out the product. Get back to your broker with hard questions. Test the broker's actual knowledge of the product. Follow this "hot new item" online for at least a week before making a decision. One of the biggest mistakes investors make is to trust but not verify. When it comes to financial services and Wall Street, trust no one.
2. You are told in advance about a new company coming into the market. These are usually "Initial Public Offerings," (IPO). Your broker invites you to buy in ahead of the offering, the incentive being you don't have to pay a commission.
Don't think you're saving big bucks avoiding a commission. This is a typical ploy to "make a market" in the IPO. Your broker has already made money by running the offering. IPO prices often drop within 24-48 hours after they've hit the market.
Do check the stock after it's up and running. Watch price movements for at least five days. Remember: No one does you a "favor" by selling you stock. The broker makes his numbers and you walk away with the risk.
3. You get a hot tip from a friend about the next "Big Thing."
Don't buy it. If your friend knows about a new stock, most of the profit has already been pocketed by insiders. Do exercise skepticism. That hot new item may be a total scam or part of a bubble. Watch price fluctuations. Caution is your friend. If the product appears for real, buy little bites at a time. Incremental buying is a way to test profit and limit downside.
4. Your broker calls pushing a complex "structured" product.
Don't fall for the hype. Nine times out of 10 that's exactly what you're hearing. Do remember: If it's "structured" it's a derivative -- junk!
5. Your broker has "special knowledge" about a product and you're being let in on it.
Don't bite. Selling insider knowledge is against the law. Do call the bluff and consider switching brokers.
6. The market is on a tear and you're feeling bullet-proof.
Don't let greed overrule common sense. You are never bullet-proof. Do ask yourself: "How much do I stand to lose?" This is question number one. Your quest for profit is an aphrodisiac. Your chances of losing are highest at this point of passionate certainty.
7. A broker promises consistent high returns. "This baby never loses money," is the typical cliché.
Don't fall for it. Do remember Bernie Madoff. He never lost a dime -- until he lost it all! Keep in mind an old Wall Street saying: "Bulls make money, bears make money -- pigs get slaughtered!"