Why Traders Trump Stockbrokers

The insurers say they couldn't have known this at the time. Reviewing loans on a case-by-case basis before insuring the pool was never feasible, so instead they relied on information from the banks, which would offer representations and warranties within the insurance contracts."
-- The Bond Buyer, Feb. 18, 2011

Let's talk about bond insurers. These companies are paid a fee to insure securities. The securities are groups of loans packaged by institutions, then offered to the bond insurers for examination and approval.

The buyers and sellers of such securities are considered sophisticated investors. That's a specific designation that says they can do their own research and evaluate the risks. The key in that is "evaluate the risks."

If they chose not to examine each and every loan, and those same securities went belly-up, it was a risk they were fully aware of, and accepted the moment they accepted the fee. There is no recourse to accusations of fraud, only acceptance that they were misled.

Non-sophisticated investors -- the ones who relied on the insurance to protect their bonds -- knew that they didn't know the risks, and so paid a premium (in the form of really low yields) to have protection against their own due diligence shortcomings.

The insurance companies have now paid out billions, with billions more to come. This demonstrates two critical principles: The first is caveat emptor, or let the buyer beware. The second lesson is that if you don't understand the investment, avoid it.

How can the guy on the street comfortably invest or trade when even the big Wall Street firms lie to each other? How could anyone believe anything any of these firms say, when they are willing to deceive their colleagues?

The answer is the same as when people trade stocks based on the purchases and sales from top insiders. It's a strong indication when the CEO (or some other top executive) puts his cash on the line for his company. It should also be a key ingredient in your decisions.

(Sign up for Taipan Daily if you're interested in more of my and fellow editor Justice Litle's financial market predictions and investment commentary.)
Stockbrokers Versus Traders

I have a great many friends who are stockbrokers. All are great people. Some also happen to be outstanding stock pickers, with long impressive careers at helping others build wealth.

There are also quite a few who really stink! They're not bad people (far from it); they just should have been teachers, preachers, flight attendants or just about anything other than brokers.

So what do the great brokers and the lousy ones have in common?

They are both fully employed as "stock experts." One actually is, while the other isn't. They can even be at the same firm selling from the same list of "approved" stocks.

The difference is that one understands the risk in their firm's selections, and the other only reads from a list with a prepared opinion for each equity.

When you trade with a stockbroker, even among the elite firms, there is no real way of knowing if your salesman really gives a damn. The problem is that a stockbroker has no dog in the fight.

A broker makes money when you enter the trade and when you leave the trade. It's always fun for both when you make money, but at the end of the day, he always gets paid whether he was right or wrong.

In other words: Heads he wins, tails you lose.

If you trade regularly, full-service commissions have the potential to wipe out profits. In a bad market, the only one who feels any pain is you.
Seek Out the Best Traders

That is why it's critically important to know that your chosen advisor has skin in the game. At Taipan, they're not looking for stockbrokers from one of Wall Street's elite firms; they search for the best trader in each market.

It's this highly motivated individual who I always want with me in any market where I may invest. They're worth their weight in gold.

Our traders prove their trading expertise daily and where it counts. To our great advantage, they just happen to love to write about what they do and, more importantly, are willing to provide you the knowledge so you can learn to take advantage of their markets right along with them.

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