The stock broker is on the telephone. Will you invest $10,000 in his recommendation? This is a question more and more Americans are bound to hear as the stock market -- long neglected -- comes back into the limelight. As the market makes headlines, and neighbors and friends talk of "killings" they made in the market, the temptation to plunk down that $10,000 will become greater and greater.
But, before you hand over your $10,000 to the broker, consider the following:
* A group of 250 to 300 investors recently lost a major portion of their $2 million to $3 million when an investment adviser, Michael Starbuck Inc. & Associates, suffered large losses in the options markets. The investors had been led to believe that they would receive returns as high as 30 to 35 percent per year.
* Another group of 1,000 investors sent in at least $500,000 to Comvest, a fund based in Saugus, Mass., which implied in its advertising that investing in commodities would at least help investors keep pace with inflation. The company lost all of the money in the fast-paced commodity markets.
* First Jersey Securities has sold speculative over-the- counter stocks to more than 65,000 customers, many of whom ultimately lost money on them. First Jersey is currently the subject of a Securities and Exchange Commission (SEC) investigation, including its alleged "boiler room" type of selling operations. First Jersey, for its part, denies any wrongdoing.
What these examples are saying is simply that investors must weigh the risks as well as the rewards. Every month the SEC, the Commodities Futures Trading Commission (CFTC), and other regulatory agencies receive calls from people who have lost money in the markets. And with the recent rise in the volume on the New York Stock Exchange as well as the active involvement of many investors new to Wall Street, it is important to think before investing.
This is not to say that every broker on the phone is out to lose money for their customers. In the case of Mr. Starbuck and Comvest, there apparently is no fraud involved in their losses. Rather, it seems the markets mainly turned against them before they could react.
Still, Ann Stansbury, an attorney in the SEC's Office of Consumer Affairs, says, "Investors ought to get as much information about a company as they can if they don't know about it before they invest. Get an annual report or a prospectus from the company's last offering. Ask for the brokerage house's latest research report on the company, and ask how much the commission is going to be if you buy the stock."
Another consumer expert, Jane Bryant Quinn, who writes a column for Newsweek, told the Monitor, "So many investors think money is lying around on the streets on Wall Street and all you have to do is to pick it up."
Ms. Quinn adamantly states, "You have to take responsibility for your own money. . . . Making money is meticulous work. You must read and take the trouble to learn and to find out who the good advisers are." She points out that when looking for a new car, a shopper talks to many different car dealers -- not just one. However, she adds, "If a broker walks up to someone at a party and says, 'I make people rich,' they tend to give him their money."
Ms. Quinn says it's important to remember:
* When dealing in commodities, often the brokers are as knowledgeable as the customers -- which is not very informed. Rather, she states, the brokers get their information from their main office which sends out taped messages such as "Now is the time to sell cotton." But, she says, "The time to sell cotton might have been 24 hours earlier."
* If you are going to get involved with the options market, warns Ms. Quinn, be aware that options are among the favorite speculative devices of the brokers because they are assured a quick round-trip commission. "Remember, there are more losers than winners in the options markets, and the brokerage house always wins," she states.
* And, finally, Ms. Quinn finds that there are "not as many opportunities to lose your money in stocks as in options or commodities," although she agrees that in the past some investors have also been fleeced in the stock market.
Andrew Tobias, author of the best selling book, "The Only Investment Guide You'll Ever Need," likewise advises people to stay away from commodities, antique cars, wine, autographs, stamps, coins, diamonds, and art. He reasons, "First, you are competing against the experts." And, secondly, the selling price for many of these items after they have been purchased is not the same as the appreciated buying price. For example, art galleries often take one-third to one-half of the retail price as their commission to sell a work of art. Thus, if a painting appreciates by 50 percent, you would break even when you sell it.
Mr. Tobias also advises people to stay away from gold (which pays no interest), Broadway shows, commemorative medallions, and chain letters.
And, bankers likewise counsel caution. For example, Hans Ziegler, a vice-president of Manufacturer's Hanover Trust Company's trust division, says the bank invests only an individual's funds after a detailed analysis of each client and the client's current lifestyle and tolerance for risk. The bank tries to establish "a mutually acceptable rate of return," although it adds it can make no guarantees. The most risky investments it makes are in the stock market and the least risky are very-short-term bonds. Before actually investing a client's money, the bank shows the individual a potential portfolio.
Another trust officer, Tony Tsu, a vice-president at Citibank's private banking division, says he will not invest any of his division's $500 million in options, commodities, or art. Instead, he sticks to traditional well-researched efforts in the stock, bond, and tax-exempt markets. Again, before investing any money, the bank interviews its clients to determine their financial needs and "risk tolerance." The most risk the bank will take involves investing in the stock market.
Lest anyone think that investing in the stock market is not profitable, it's worth noting that Mr. Ziegler's "special equity fund" had a 50 percent return in 1979. And Mr. Tsu's growth stock fund had a return of 53.8 percent last year.
Certainly, many untrained individuals find it difficult to weigh risk. For example, Mr. Starbuck, in his partnerships, told investors that of most investments they could make, his carried the "lowest degree of risk." Mr. Starbuck's firm was playing the fast-moving options markets. Although he claimed to be hedging his bets by having 50 percent of his funds in options that would go up in value if the market rose and 50 percent in options that would go down if the market declined, he still managed to lose money.
Mr. Starbuck was advised by his attorney, Bert L. Gusrae, not to comment to the press. Mr. Starbuck could not be reached for this story, but, in an earlier conversation with one of his investors, he said the only time his investors would lose money would be when the market rapidly changed direction. This happened, he told the investor, only once every six months. When asked if his fund would be suitable for retired persons, he replied affirmatively.Under the worst of market conditions, he stated, the investors could only expect to lose 20 percent of their money. However, normally, he told the investor, his fund would return 30 to 35 percent. Earlier, he had shown the investor statements that indicated previous investors had received up to 90 percent on their money.
The attorney for the receiver, Robert Brundige of Sage, Gray, Todd & Sims in New York, said the firm was currently having the account audited to determine how much of the funds were left. He said the law firm had asked investors in the fund to step forward with any information they might have about the fund so the receiver could determine if any wrongdoing was involved.
About $500,000 remains of the funds -- a portion of which will be returned to the investors after lawyer and auditors fees.
In the case of Comvest, the Saugus, Mass., firm, the fast- paced commodities markets sapped the fund of its assets. In December, the CFTC asked a Boston judge to appoint a receiver, but this request was denied. An investigator at the CFTC says that there are no funds left at Comvest.