"He who blames others has a long way to go on his journey. He who blames himself is halfway there. He who blames no one has arrived."
-- Chinese proverb

I am a frequent reader of email and letters from many non professional investors. Every now and again, something will give me pause. Such was the case of a 04/12/2002 letter (Mad as Hell and Not Going to Take It Anymore) from a frustrated investor, published on the web in mid April.

Much of what this gentleman was complaining about is unequivocally true: There is corruption on Wall Street; Many analysts have conflicts of interest; Much of the media amounted to little more than a cheerleading squad throughout the '90s. But none of this is breaking news.

Perhaps the difference is a matter of degree: the avarice and brazenness of the thieves (yes, these people are thieves) were more grotesque this go around. There were certainly professionals in positions of trust -- analysts, brokers, money managers -- who abused their fiduciary obligations. Net based media (including this and other websites) certainly did a better job of eventually revealing much of the dirt than their mainstream brethren.

One thing in this April 12th rant that fascinated me most about all that is wrong with Wall Street was the subtext; It revealed an entirely different set of issues, which all boil down to this: What about the personal responsibility of the investor? Why does he have no apparent part in the entire debacle?

Please don't get me wrong: I certainly do not want the role of apologist for the Street. There is simply WAY too much about Wall Street, the SEC and NASD that warrants immediate and dramatic changes. This was pretty much impossible prior to the new campaign finance reform law. That's the silver lining of the Enron debacle: the corrupting influence of the system of legalized bribery that was campaign finance has now been altered -- mostly for the better.

The intersection of these two spheres was when Congress "invited" a few analysts to be grilled on this conflict of interest. Can you imagine anything more Ironic than that? Members of Congress questioning analysts on the corrupting influence of money! Sheesh!

The absurdity of the situation was utterly unparalleled. "Bought and paid for" congressmen questioning the "paid for and bought" analysts about the payors and buyers. Truly unbelievable. Perhaps Congress feared that the analysts were horning in on their territory. If it wasn't so pathetic, it would have been funny.

Regardless of the goings on in the D.C. circus, there still exists the issue of how the portfolios of individual investors were slain. Did they fall on their own swords, or were they beheaded by someone else? Perhaps there was some combination of the two . . .

Yet I continue to be struck by the not uncommon -- and exceedingly dangerous -- combination of naivete and hubris of that April 12th letter.

A truism: This is an exceedingly tough game. Not just the most recent churning, rangebound market, but the entire business. Its as hard and can be as frustrating as anything you can do for living (as I say that, I have been having a decent year -- not great, but decent -- and I'm thankful that).

Many people thought that the era of 1995 - 2000 meant that we all had a constitutional right to get rich in the market. The Bull fooled many people into thinking they were stock market geniuses. Despite the challenges presented by trading or investing, very few individuals even hesitate to consider whether they have the skill set, discipline, time, strategy and capitalization to enter into the most competitive gladiator ring on planet Earth.

For most people, that belief is naive and eventually self destructive.

Charles Ellis once gave one of the most succinct explanations of how tough the game is under the best of circumstances. Ellis, who oversees the $10 billion endowment fund at Yale University, observed:

"Watch a pro football game, and it's obvious the guys on the field are far faster, stronger and more willing to bear and inflict pain than you are. Surely you would say, 'I don't want to play against those guys!'

Well, 90 percent of stock market volume is done by institutions, and half of that is done by the world's 50 largest investment firms, deeply committed, vastly well prepared -- the smartest sons of bitches in the world working their tails off all day long. You know what? I don't want to play against those guys either."

That's a brutal -- and absolutely true -- observation. Yet many individuals stepped out onto the field of battle with the Pros, and their retirement accounts and investment monies got mangled.

Brazen audacity and reckless folly often meet with such an end.

I am sorry to be the bearer of bad news, but here it is: it was mostly their own fault. Those who were either underskilled or overconfident in their abilities suffered the consequences.

Call this tough love, but here is the harsh reality: The latest hand wringing by individuals over the internet analyst scandal or the Enron debacle or the corrupting of the accounting industry amounts mostly to this: a refusal to accept responsibility for their own errors and arrogance and greed.

Of course, the system has an embarrassing wealth of problems -- but that's not what caused the most damage to most of these investors.

As part of my job, I review 100s of portfolios each month. I see the same fundamental errors time and again: Little diversification, over reliance on margin, no stop loss strategy, no risk management, no discipline, an addiction to tech, and a long only bias.

Note that accounting or analyst or IPO or banking scandals are not impacting their holdings. The portfolios are not overladen with what I call the "accounting stocks" -- Enron (ENRNQ), Tyco (TYC), Xerox (XRX). There is not an outrageous amount of dot com disasters in them. Sure, I see some Yahoo (YHOO), America On-Line (AOL), and a few glory stocks from days gone by. But these are not where the bulk of the decrease in asset value came from.

What caused most of the losses I review is simply an inadequate skillset. This is true for individuals, as well as many stock brokers. Some of the idiocy I see from the "alleged" pros is as bad as what the market "dabblers" have done.

Consider this: If you have anything more than the simplest of tax forms, what do you do: You pay a professional to do your taxes. If you are accused of a felony, you get the best damn lawyer you can afford. Need heart surgery? Do you ask your friends at cocktail parties what's the best way to crack open a chest cavity, or which ribspreader they like best? No, you find the best @*#%ing heart man you can, and let him try to save your life.

It should be the same in the market, but its not. People committed months if not years of hard earned income to investments based on cocktail party chatter or astrolgers. There was not much due diligence performed by a lot of investors. Idle rumor mongering in an on line chat room is not the equivalent of hard core, in depth research.

The web has certainly leveled the playing field in terms of access to data and financial information. But there is a huge difference between "information" and "knowledge," between "facts" and "wisdom." Just because someone hands you a bat doesn't mean you can hit a home run against Roger Clemens. The explosion of web based market data may have given everyone similar tools, but it did not grant them an equal ability to use those tools.

I'm sure that some people will disregard all of this as self interested blather. After all, my firm earns their way by having people pay us a fee to manage their money.

Still, even the most cynical amongst us must admit that it is outrageous folly to imagine that, in just a few hours a week, you can best the world's sharpest, best equipped, fastest traders. This is the not so secret problem with the online trading business model. Its also why Schwab set up their "trusted investor advisory." They know the frequent online trader eventually grinds most of his assets away. Its why E*Trade (ET) has diversified into other financial services. Their most skilled and talented traders eventually go pro (direct access), while the rest (90%+) hack up their capital.

I keep coming back to my short list of the fundamental portfolio mistakes I see. Before you decide to trade/invest your own money, ask yourself these simple questions: What is my strategy? Do I have the requisite discipline to stick with this strategy when it inevitably hits a rough patch? What will I do if things get worse before they get better? Do I have the skill set to explore my theories, backtest them, and refine them before I put my hard earned cash at risk? Speaking of cash, am I sufficiently capitalized to see myself through this? How much time and effort am I willing to commit to this brutal bloodsport?

I will leave you with one final point to ponder: Buried in that disappointed investor's rant, was the following:

"Wall Street has long scoffed and laughed at the small investor. Much of that scorn has been deserved, as evidenced by the way we fed the mania of the late 1990s. We paid ridiculous prices for IPOs with laughable business plans . . . In short, the small investor is bailing out on Wall Street, and not even an improving economy is likely to stop him."

As this writer suggests, the small investor may indeed, bail on Wall Street. In fact, they always do. Unfortunately, you can count on them doing so at the bottom of the cycle. In fact, general disgust with Wall Street by the public invariably marks the bottom -- just as their unrequited love meant that the top was at hand.

Fear and greed, greed and fear. Hey, that's just human nature.

And these two emotions are only the tip of the iceberg. An astute observer can also see denial, blame casting, arrogance, naivete, hubris, overconfidence -- and sometimes, even worse things.

The market can be a window into men's souls. Peer in, but be forewarned -- you may not like what you see . . .

Barry L. Ritholtz
April 18, 2002

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