The Biggest Investing Ripoff of the Last 100 Years

by | Mar 7, 2015 | Archives

You are looking at the biggest investing ripoff of the last 100 years.  Since the 2009 recession, interest rates for the US dollar have been almost zero.  This tactic purportedly stimulates the economy.  Guess what?  Zero interest helps the rich and hurts the middle class, but there is ample evidence that suggests that low interest rates do not boost a nation’s economy.

interest rate  chart

Click on images to enlarge.   Interest rates from the Federal Reserve website (1)

One of the best examples of this strategy’s failure is the Japanese government’s creation of  a low interest rate tactic beginning in early 1990s.  The chart below shows that the Japanese yen interest rates have been almost at zero for 15 years.

interest rate  chart

Japanese yen interest rates at (2)

Is this a great example to follow?  The Japanese Stock Market chart below shows that Japanese shares have not recovered much in the decade and a half of low yen interest.

interest rate  chart

Nikkei 225 chart at (3)

Europe has also joined in on the game.  Some European countries have issued bonds with negative interest!

Who benefits most from low and zero interest rates? 

Governments and big business gain because the cost of their debt drops and stays low.  Big borrowers tend to borrow more.  (Why not when it costs nothing?)  The middle class man in the street and small business finds it harder to get loans.

Owners of big business also gain because low interest rates force savers to become equity investors.  This drives up the price of shares and makes the big shareholders incredibly rich.  Higher share prices inflate balance sheets, allows them to borrow even more and provides liquidity to unload overpriced shares!

The financial industry also gains because low interest rates drive small investors into  overpriced mutual funds like a flock of sheep… where the wolves are waiting.

Who are the wolves?

A New York Times article “Americans Aren’t Saving Enough for Retirement, but One Change Could Help” by Eduardo Porter shows how the investment industry is ripping off small investors.  The article states that more than half of all American households will not have enough retirement income to maintain the living standards they were accustomed to before retirement.

The article says: On average, a typical working family in the anteroom of retirement — headed by somebody 55 to 64 years old — has only about $104,000 in retirement savings, according to the Federal Reserve’s Survey of Consumer Finances.

Then the article gets to the real problem when it says (bolds are mine):  The standard prescription is that Americans should put more money aside in investments. The recommendation, however, glosses over a critical driver of unpreparedness: Wall Street is bleeding savers dry.

Here is an excerpt: “Everybody’s big focus is that we have to save more,” said John C. Bogle, founder and former chief executive of Vanguard, the investment management colossus. “A greater part of the problem is the failure of investors to earn their fair share of market returns.”  A research paper by Mr. Bogle published in Financial Analysts Journal makes the case. Actively managed mutual funds, in which many workers invest their retirement savings, are enormously costly.

The article explains that low cost index funds offer  greater potential for profit than managed funds. then it says:  “Wall Street makes no money on low-cost index funds,” said David F. Swensen, who runs the investment portfolio for Yale. “That is the problem.”  Sendhil Mullainathan of Harvard and colleagues from M.I.T. and the University of Hamburg sent “mystery shoppers” to visit financial advisers. They found that advisers mostly recommended investment strategies that fit their own financial interests. They reinforced their clients’ misguided biases, encouraging them to chase returns and advising against low-cost options like low-fee index funds.  “It is superslimy,” noted Kent Smetters, an expert on finance at the University of Pennsylvania’s Wharton School.

How can we avoid getting ripped off?

Step one is understanding how Wall Street is ripping us off.  We began looking at this problem  at the beginning of this year and recommended reading two books, “Dark Pools” and “Flash Boys”.

dark pool

The book “Dark Pools” By Scott Patterson shows why the big financial institutions are stealing.  Patterson is author of the New York Times best-selling book, “The Quants”. and a staff reporter for The Wall Street Journal, where he writes about the government’s regulation of the financial industry.

“Dark Pools” explains a problem created by high-speed traders, called high-frequency traders that has been spreading across Wall Street.  These traders jump in and out of stocks in microseconds (millionths of a second).  These and dark pools which are sub-markets that mask buy and sell orders from public view, allow insiders to skim spreads off each stock order.

Learn more about “Dark Pools” by Scott Patterson at

The second book on the same subject is, “Flash Boys – A Wall Street Revolt”.  The book looks at the huge problem of how most of the big banks and Wall Street brokers systematically rip off their customers again and again.  The book shows the advice that many financial advisers and institutions give is designed to make them, not you or me, financially secure.

flash boys

Next look for contrasts and trends that create value.

Third, create a strategy that expects 7% to 10% annual return in the stock market as a function of global nominal GDP growth and long term earnings growth plus risk premium.  We must either increase risk or trust luck to attain higher growth.  Risk is our partner…for better or for worse.

The strategy should have the following qualities:

* Does not care too much about day to day volatility.  The short term process of buying and selling takes too much time and leaves too little time to analyze and forecast.

*  Invests in inexpensive equities that are paying a reasonable return.

*  Has a higher priority on numbers rather than good stories.

* Does not count on extraordinary returns. Be realistic.

* Is repeatable. Good shares can be found again and again.

Once the strategy is set:

* Turn on the auto pilot and normally add to our position.  Most of us do this best with dollar cost averaging.

* Do not let our feelings created by short term volatility influence us too much.

* Do not panic during short term change.

* Do not underexpose ourselves for the long term.

* Know that a period of high returns will be followed by a period of low returns and vice versa.

* Do not fall in love with a stock…the feeling is never mutual.

* Sell our losers and let our winners run.

* Always evaluate shares we hold with the same critical eye as if we do not hold them.  Ask, “Would we have acquired it today?”

Finally, accept the fact that we know less than we think we do…and that’s OK.  Risk is your friend or alibi for expecting higher returns.  We learn as we go and can keep evolving our strategy.  We add restructuring stories to our portfolio by listening to those who disagree with us. This expands our horizons.

However we need to use our logic to filter the advice.  The consensus may be wrong…truth is not created through repletion of an error.

Low interest rates are a huge problem for many but problems create opportunity.  History suggests that stock markets are the best way to increase wealth and protect the purchasing power of our savings.  The stampede into US shares creates good value in Europe and emerging markets so those who have value strategies can increase profits now.


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(1) Federal Reserve Economic Charts

(2) Trading Economics Yen Interest Rate Chart

(3) Nikkei 225 Chart at

(4) New York Times:  Americans Aren’t Saving Enough for Retirement, but One Change Could Help