The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

01 October 2011

The Vigilant Investor - A Review

Back in 1999 and 2000, I participated in an online chat room dedicated to technology and technology stocks. It was a boom time for these companies, and the ease with which their investment recommendations and suggestions rose in price made participants feel empowered. "Who needs Wall Street?," they argued. Analysts were disparaged as "analists" and Wall St excoriated for its clueless and bumbling nature.

"Empowered," they claimed; I argued otherwise. Investing done with no due diligence raises Damocles' sword over their (and your) untested, unseasoned portfolios. My efforts were futile; the party in full swing. We all know what happened next.

"Due diligence" is a term used often; unfortunately, it means different things to different people. I argue that due diligence performed by and for investors is not bound by what and when to buy, but should you buy. And under what conditions should you sell? You must know, in advance, why you bought what you own, else run the risk of a market's wrath (aka, a bear market) - wondering suddenly whether you should buy (more), hold, or sell. (And flee as fast as possible.)

Pat Huddleston is an attorney, former Enforcement Branch Chief for the SEC, and founder/CEO of Investor's Watchdog, a company that conducts fraud investigations for pension funds, endowments, family offices, and individual investors. And now author of the new book, The Vigilant Investor

Pat adds a deeper layer of meaning and intent to the term, due diligence: to protect your portfolio, your life's savings, and you from investment scams and scammers, and even yourself. In story after story, Pat discusses the cons and tricks of which you should be wary, the typical profile of the con artists (they share similar lifestyles and types), and how your own sensibilities and personality helps make you susceptible; prey to their predatory nature. Pat states unequivocally,

"I know how scams and unethical advisers begin, how they operate, what contributes to their longevity, and what tactics they use to ensnare individual and institutional investors alike.”

In one story after another, Pat tells - often with colorful prose rich in its clever use of analogies, metaphors, and similes - of how investors have been bilked of their savings, how they continue to be bilked, and likely will be bilked into perpetuity. I am reminded of an aphorism from the 1970s re limited partnerships, "At inception, the general partner has the vision, the limited partners the money; at the end, the general partner has the money, the limited partners the vision."

Not on Pat's watch, though. After each chapter, he provides checklists that help the reader and investor avoid the emotional weaknesses or scams Pat discusses in the prior pages. And, at book's closing, Pat even suggests creating and fostering associations (or networks) of vigilant investors (AVIs, in Pat's abbreviation) that could communicate and inform each other; an InterPol of sorts but of/for/by investors.

Until then, Pat shares many lessons applicable for all investors:
* Trust, sure, but always verify, verify, verify. And verify the verifiers!
* Steer well clear of charlatanry.
* Watch out for conflicts of interest.
* Do not chase return or yield.
* Create a paper trail of all communication, complaints included.
* Learn that high pressure sales tactics are near synonymous with guaranteed loss of principal. (And principles.)
* And many, many more such facts and hints to avoid scamsters.

Your increasing portfolio value has you feeling empowered? Never forget the process of due diligence: why you buy what you buy, when you buy it, who sells it to you, and why they sell it. (If the investment's destiny is for an increased value, then why sell it now, to you...?)

Pat Huddleston's, The Vigilant Investor, belongs in the libraries of all investors everywhere. Not just filed away as a reference and resource, but read and read again; pages bookmarked, sections highlighted, the book readily available. Pages 12-16 alone, in which Pat recounts the tale of the "Geritol Gang," are worth the price of admission. Highly recommended.
-- David M Gordon / The Deipnosophist

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