Sunday, December 2, 2012

To The Missouri PowerBall Winners: Don’t Put Your Money Into Stocks!

Salutations and congrats are in order for the Hill family of Dearborn, Missouri, who were handed a giant check for $293,750,000 on Friday by Missouri Lottery officials. After state and local taxes are taken out they’ll still be left with the princely sum of: $136,585, 489. Oh, and 56 cents.

To say this family is deserving, borders on understatement. To me, if you can’t win the Big One yourself, this is the next best thing: having a family like the Hills win it – or at least half of the big payout (the other half was won by an Arizona citizen).

Mr. Hill himself had been out of work until starting a job in February at the Hillshire Brands meat processing plant where he worked a night shift. As logic would dictate, Mr. Hill promptly phoned his boss the next morning and told him he’d no longer be reporting – and to find another to take his place! Good thinking!

Of course, the issue now is what to do with all that money. Even after divvying it up and paying for the college tuition of at least 8 nephews, nieces, etc. there’ll still be plenty left.

Let’s say the Hills have $130 million left after their initial payouts to close family, for education etc. as well as traveling – to Disneyland, Ireland and Hawaii, where they indicated an interest in going in an AP story yesterday. Where’s the best place to put it? Hint: NOT in stocks! Or, I’d say, into any kind of venture or financial instrument proposed to them which they don’t fully understand.

My best advice is stick with safe money market accounts. (Obviously, also, please dismiss and chuck all "special investment offers" that arrive from any strangers! Be sure to report them to the SEC also, to maybe spare others any problems!)

Here’s a good idea of what they can earn safely – with no risk. At current money market account (not money market fund) rates, we are seeing about 0.5% interest. This means if all $130 million were put into such an account it would earn a minimum of $650,000 interest a year. That is more money than most wage earners can save in a lifetime in their 401ks, or even combined with annuities!

Of course, let us not forget that FICA protections only extend to $250,000 per account per person. Which means that the Hills would be limited to a half million in each money market. So that means dividing the money up becomes more important. First, they can put $20 million or so aside in a trust for adopted daughter Jaiden – who was adopted from China.

That leaves $110 million. Giving their two sons (Jason, aged 28 and Cody, aged 30) $30 million each, spreads the bounty out further. The two lads can now start their own businesses or start one together. Here’s an idea: Alternative energy, maybe wind or geothermal – this is where the next big energy finds will be as we head toward Peak Oil.

The remaining $50 million is there then for mom and pop to work with – maybe using $10 million to start a Foundation, giving a chunk more ($10 million) to worthy charities and keeping the rest $30 million in safe accounts: CDs, money market accounts mainly. (If all in money markets, they’d need to keep track of at least 60 accounts with a half mil each put in.)

Now, why not stocks? If you must ask, you need to get hold of the book: “Broken Markets” by Sal L. Arnuk and Joseph C. Saluzzi. The authors make the salient point (VERY salient) that not only are real humans marginalized into ‘nothings’ with modern flash trading, they can’t be involved. Whichever way they go, if they opt to play the markets (and “play” is how I describe it since it’s no different from playing the craps tables in Vegas except in the latter you at least have some chance to win) they are forced to rely on algorithms and computers which will make the trades for them. The problem is, unless one knows he has access to specific flash algorithms, and high speed computers, he is batting on a losing wicket.

In the words of Sal Arnuk, quoted in a recent WIRED magazine piece ‘Bulls’, p. 117, September, by Jerry Adler):

“By the time the ordinary investor sees a quote, it’s like looking at a star that burned out 50,000 years ago.”

The point is made in the same piece that 90 percent of quotes have to be canceled before execution. The reason? One or other flash trading outfit or trader already beat the conventional outfit, with conventional computer, to the punch. You snooze, you lose.

Worse, as the 'WIRED' author notes, in respect of the quotes:

“Many of them were never meant to be executed, they are there to test the market, to confuse or subvert competing algorithms or slow trading in a stock by clogging the system- known as quote stuffing. It may even be a different stock, but one whose trades are handled on the same server.”

This is serious stuff and we already beheld some of the adverse repercussions of this noise over signal, and effectively a ‘denial of service’ attack. Recall that Over May 5-6, 2010, there occurred the worst short interval market dump in history, with a drop of over 600 points in the DOW in just under an hour. The incident, blamed on high speed computers using algorithms that can buy and sell millions of shares in heartbeats, was dubbed "the flash crash".

That crash initiated by flash traders is a cautionary tale for all small guy investors lacking the same resources.

My advice to the Hills then, is be satisfied with the money you have, hang on to it and husband financial resources – which means staying clear of Maul Street and its sharks - who are just as desperate to part you with your new found money as they are to part seniors with their much humbler nest eggs (if the 'pukes get the Dems to cave and strip social insurance benefits as part of a "grand bargain", i.e Grand Theft).

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