You know their interests aren’t really in line with your interests.
And yet you also know these are some of the most powerful folks in investing.
So, should you follow them or bet against them?
It’s a tough question to answer.
That’s why we prefer to ignore it altogether…
Who are we talking about? We’re talking about the big investment banks – in particular, Goldman Sachs.
If you trust that Goldman’s has the average investor in mind when it makes the big strategic calls, then you’d follow their advice.
And what does the banking giant suggest investors do today?
These two reports will give you an idea. First, Goldman’s suggests you sell India, as reported by Bloomberg:
‘India’s capital outflows deepened in July, spurring Goldman Sachs Group Inc. to recommend reducing stock holdings as central bank efforts to support the rupee threaten to worsen the nation’s economic slump.‘
What should you do with your money after you sell India? Easy, the Financial Times tells you what Goldman’s says to buy:
‘Goldman Sachs Asset Management has significantly increased its exposure to European equities in anticipation of an end to the recession in Europe.
‘The US investment house had been overweight European equities by 4 per cent compared with the MSCI All Country World Index, but it recently doubled its overweight position to over 8 per cent.‘
Trouble is: can you trust the advice?
It will take a long time before Goldman Sachs wins back its reputation. After all, the trial has just ended in New York of Fabrice Tourre, an ex-Goldman Sachs trader.
The US Securities & Exchange Commission (SEC) has charged him with misleading investors.
The prosecution presented a whole bunch of evidence that suggests Tourre knew the investments he sold clients weren’t very good (and that’s putting it kindly).
Overnight, the jury found him guilty.
It’s no wonder the big investment banks have gotten a bad press. If even their biggest customers can’t trust them, why should the average investor believe what they say?
To our mind that’s one of the biggest issues with big-picture macro investing. By that, we don’t mean ‘top down’ investing of the kind we mentioned yesterday, that’s different.
By big picture macro investing we mean buying and selling an asset based on political or central bank policy decisions.
As we see it, investing at the macro level puts you at the mercy of politicians, central bankers, and perhaps most of all, the huge investment banks like Goldman Sachs.
Now, that’s not to say it’s impossible. We just prefer focussing on things at the micro level – entrepreneurs and businesses. That’s why we generally stick to individual stocks.
Of course, big macro-economic events can still impact individual stocks. You see that all the time. After all, stock market indices comprise tens or hundreds (sometimes thousands) of individual stocks.
But the benefit of targeting a stock or a number of stocks is that you have many more chances to pick a winning trade.
Furthermore, backing one big macro-economic event is just like backing an index. It means you end up over-diversifying your exposure. Take the US market and the iShares NASDAQ Biotechnology Index ETF [NASDAQ: IBB].
The main stock indices have caught all the headlines for hitting an all-time high this year. Over the past two years the S&P 500 index has gained 30.4%. That’s pretty good.
But it’s not that great compared to something like the Biotech ETF. It has gained 90.4% during the same time. Some individual stocks in that ETF have done even better.
The biotech sector is a typical sector that doesn’t always move in line with the broader economy’s fortunes. Although when it does, and if the market is in the mood for it, it can outperform the broader indices many times over.
Look, investing is like anything else, you should always know which battles to fight and from which to walk away. If you’ve got the resolve to do it, you could pit your wits against Goldman Sachs and the other investment banks in the world of macro investing. If you do, good luck. We’ll cheer for you.
Or, you could play at micro investing instead. That way you could make much bigger returns without worrying about the big bankers influencing the market one way or the other.
We know which type of investing we prefer. How about you?S
Cheers,
Kris+
From the Port Phillip Publishing Library
Special Report: The Sixth Revolution
Daily Reckoning: The Global Trend Towards Wealth Protection
Money Morning: Two Approaches to Investing…
Pursuit of Happiness: Learning to Avoid the Governments ‘Noble Wealth Trap’
Australian Small-Cap Investigator:
How to Make Big Money from Small-Cap Stocks