BEWARE THE NET-WORTH TRANSFERENCE SCHEME

Wall Street is a financial product machine.

It makes products, then "sells" them to you and I for a commission. Sometimes it sells them outright. That's one commission. Sometimes it sells that it will manage the bet for you. That's many commissions for a long time. Better still, Wall Street often gets it up front -- long before you earn a nickel.

The odds are stacked against you. Yet it's amazing how many of us fall for their sales pitch.

There are lessons for us all:

1. When an area of investing gets too popular, it gets overpriced and ripe for a fall. This means you have to be nimble. Grab a small profit. Moves your stops up. Set a tight stop loss. And get out.

2. The problem then is "How do you put your new cash money to work?" That's one of Wall Street's great myths. There's no such thing as "putting your money to work." That's their euphemism for gambling. There is absolutely nothing wrong with having your money in cash. Follow an old tired aphorism: "When in doubt, stay out."

3. That means you have to be ultra-patient. It means super-patient. Cash is good. It's as good as money, and in many respects, better than happiness. Money will buy happiness. Happiness won't buy money.

4. It's perfectly reasonable to make only one trade a year. A friend invested $1 million in a company he felt comfortable with because his people had done the due diligence. In a few months (after one year and a day have elapsed) his investment will be worth $1.6 million.

5. When information is imperfect, that's your advantage. There are too many smart people with more information on public things -- like stocks and commodities -- than you will have. Even if you devoted your life to studying that area. Stick with stuff five people know something about. Only five people. The apartment building across the road. The company you're the only buyer of. Stay away from crowds. I recommend you read "The Wisdom of Crowds" by James Surowiecki and "Extraordinary Popular Delusions and the Madness of Crowds"by Charles MacKay.

6. Don't buy into a fund of funds. They're sold by Wall Street because of "diversification." But .... you don't know what you're buying into. Your fund of funds may buy into a Amaranth, with heavy energy exposure, which you may not want.

7. Don't buy into vehicles with a long lock-up period. That severely limits your flexibility.

8. And don't buy into vehicles where you don't know what your brilliant management is doing.

READ:

• Reverse convertibles are back. Buyer beware. (WSJ)
  
• Questions You Should Ask About Your Investments.
• Questions to Ask a Financial Advisor
• 11 reasons passive investors let Wall Street steal their money
• 8 questions to ask before hiring a financial planner