Who will arrest the investment police?

arrest clown

An unsurprising story surfaced a couple of days ago… SEC attorneys are under investigation for insider trading!

If you can’t truly value that exclamation point I just used, let me help you. The Securities & Exchange Commission (SEC) is a government organization that was formed to convince us that investing in the stock market was safe. Part of their role is to make sure people don’t use their non-public knowledge to make profitable investments in the stock market (yeah, right). This is called “insider trading”. In business, this is known as “doing business”. In real estate, non-public knowledge can turn a peon into a mogul overnight. But in the stock market it is a crime and we give the SEC billions of our dollars to make sure it doesn’t happen.

But, whoops, SEC attorneys are doing it themselves. And a lot. One of the two SEC attorneys currently under FBI investigation made 247 stock trades between January 2006 and January 2008. She said, in her defense, “…it’s my main hobby.”

This is the perfect opportunity for the misinformed to identify themselves by saying, “We need to issue more regulations, policies, memos, and procedures to fix this!” If those were your initial thoughts, step back for a moment and consider this:

Here’s what the securities laws and the SEC are not doing:

  • Avoiding Madoffs, Stanfords, and countless other scandals
  • Avoiding stock market crashes, unpredictable and violent swings
  • Protecting investors’ investments

Here’s what the securites laws and the SEC are doing:

  • Breaking their own laws in their own offices while being paid salaries from our tax money
  • Oppressing small entrepreneurs by keeping the costs of promoting investments publicly in the millions of dollars
  • Enticing Americans to skip their due diligence and invest in things that they don’t understand because the government will keep them safe

Think about that last point for a second. Imagine there are no securities laws. It would be transparent, clear, and obvious that an investor would need to do his due diligence before making an investment. Many average people would not be interested in educating themselves in the skill of investing and would keep most of their money in cash or gold. Both have outperformed the stock market over the last 10 years.

In such a case, sophisticated investors would make a point to understand an investment before buying it. As a result, all of the bad investments like subprime mortgage-backed securities would have never been successfully sold. This lack of a secondary market for stupid mortgages would have helped keep the real estate bubble from happening on such a grand scale. Simply put, regulation cannot be expected to solve problems created by regulation. And now this point is being driven home as we are slapped in the face with the news of regulators not following regulations themselves.

Perhaps we should go back to imagining that securities laws didn’t exist and act as if. If you are unwilling to develop the skill of investing, keep your money in cash or gold (preferably the latter if you want to preserve its value). If you are a skilled or learning investor, invest in what can be understood: real estate, private companies, and anything that hasn’t been repackaged and injected with financial steroids on Wall Street.

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