Wednesday, December 2, 2009

Do Not Buy List - When Are You Going To Get This?

If you are an investor, chances are that a broker or financial advisor (and I use that term very loosely) will ask you to invest in something illiquid. They will promise some kind of benefits like tax savings, high current income or great performance. The truth however is that your broker or financial advisor has a financial incentive to sell you that investment and chances are that they will make at least 8% in commissions from selling it to unsuspecting people like you.

What I thought that I would do is create a short "Do Not Buy" list to help investors. Of course, broker/dealers and their reps will hate my guts for blogging about this subject, but personally, I do not care. The investor is more important.


Private Placements
Structured Investments
Non-Publicly Traded REITS
Non-Publicly Traded Limited Partnerships
Promissory Notes
Regulation D Offerings
Exchange Traded Notes (ETN's)
Precious Metals (The physical commodity)
Floating Rate Bank Loan Mutual Funds
A Shares Mutual Funds (unless commission waived)
B Shares Mutual Funds
C Shares Mutual Funds


Private Placements - These are illiquid, not in your best interest and carry a high degree of losing your money. Generally pays the broker 8 to 12% in commission to sell it. Example - Investment in a new movie or business.

Structured Investments - These have liquidity restrictions, are not in your best interest and because of the liquidity restrictions, you have no way of getting out of a declining market. Generally pays the broker 3 to 5% in commission to sell it. People invested in these watched helplessly as their investments dropped 40 to 50% last year. Example - Dow 30 Trust.

Non-Publicly Traded REIT's - These are highly illiquid, not in your best interest and carry a high degree of losing your money. Generally pays the broker 8% to 9% in commission to sell it. Why should you buy a Non-Publicly Traded REIT when there are plenty of Publicly Traded REIT's available? The answer is that it benefits your broker. As far as I am concerned, that does not benefit you the investor, therefore there is no reason whatsoever to ever buy it. Example - pick one, any one sold by brokers.

Non-Publicly Traded Limited Partnerships - These are highly illiquid, not in your best interest and carry a high degree of losing your money. Generally pays the broker 8% to 9% in commission to sell it. Example - tax credits or equipment leasing.

Promissory Notes - These are highly illiquid, not in your best interest and carry a high degree of losing your money. Generally pays the broker 8% to 12% in commission to sell it. In almost all cases, the investor loses all their money when they invest in these promissory notes. There is no guarantee of anything. The person or entity cannot raise funds through normal lending channels, so they turn to this option. If several lenders turned them down, then why should you be the one to give them the money? Promissory Notes are a mini-Ponzi scheme in my mind. They lure investors in and pay them interest from the other investors principal, then invest the bulk in their "can't fail" business. Sounds like a ponzi scheme to me. Example - Most often, it involves some type of business venture that "can't fail."

Regulation D offerings - These are highly illiquid, not in your best interest and carry a high degree of losing your money. Lots of people get paid to sell it. it depends on each offering. Yes, you get some stock, but with restrictions and no guarantee that it will be worth anything at all. Example - stock offering of a company that "may" go public in a year or two like a bank.

Exchange Traded Notes - These are structured investments traded on an exchange. Do not confuse these with Exchange Traded Funds, because they are completely different. This is basically a basket of investments that is held for a length of time in the hope that they will mature at a higher value. They do have some liquidity features, but other alternatives are available that are better like Exchange Traded Funds. Example - India or China ETN.

Precious Metals - Have you been watching television lately? There are loads of commercials suggesting that you buy physical gold or silver. Let me ask you a question. Have you every heard of these companies before you saw their commericials on television? That is what I thought. And you were thinking about sending them a check? Come on. You can buy gold and silver in Exchange Traded Funds that are fully liquid and publicly traded. There is no need to hold the actual physical metals. Besides, if you buy the physical metals, then you will have holding fees and trust companies fees. Go with Exchange Traded Funds instead. Example - GLD, SLV.

Floating Rate Bank Loan Funds - These are mutual funds based on a pool of bank loans. They have liquidity restrictions where you cannot get out of them except a little at a time. This fact kills the deal for me. I do not like anything that I cannot only get 25% of my money out at a time. What if the returns on floating rate bank loan funds turn south? You are stuck. Dumb, dumb investment. Example - Floating Rate Bank Loan Mutual Fund.

Mutual Funds in Class A, B or C Share Classes - Mutual funds are a dying breed. More and more fund companies who refuse to go to Exchange Traded Funds will lose their assets. In the past, I would say buy no-load mutual funds instead, but now with the advent of Exchange Traded Funds, these ETF's are a much better alternative. The liquidity restrictions on these are self imposed sometimes. If you paid the upfront commission on an A share mutual fund, then you may want to give it more time to get back to even. B and C shares are starting to go away, because the fund companies cannot get the loans necessary to pay the brokers their commissions. The point is that A, B or C class shares of mutual funds benefit everyone except you! You do not need them, when ETF's present a much better alternative. Example - Class A, B or C shares mutual funds.

There is your Do Not Buy List. Most everyone that would sell you these investments on this list are brokers with a brokerage firm that earns commissions from sales. Commissions from sales benefit the firm, not you. When are you going to get this? Let me say it again. When are you going to get this? Quit buying this garbage from brokers that only benefits them and their firms. Stop it now.

If you own any of these investments already, then you may want to go see a registered investment adviser who does things in your best interest. They may be able to devise a strategy to get you out of some of this garbage before it is too late. These registered investment advisers should have no affilliation with a brokerage firm. None at all. No ifs ands or buts.