Dennis Herula, a former stockbroker and hedge-fund manager who lost his securities licenses, is doing 16 years in the big house for defrauding clients out of more than $15 million. MarketWatch recently interviewed Herula and other felonious ex-lords of Wall Street, and some of their words resonate for small-time investors.
Herula doesn’t see a level playing field for day-traders. “A computer does not have to stop and think,” he says, “while individual investors trade on emotion and fear. You are going to lose. The markets aren’t fair to retail investors, particularly with the advent of computerized high-speed traders as competition. It’s like fighting a war with spears against the Air Force.
“I’ve watched a stock go down, and, in reality, if nothing has changed fundamentally about the company, you should hang on to it. However, most retail investors sell it at the bottom.”
We put that last quote in bold face because of its importance: If the fundamentals are sound, he’s saying hang on.
Herula also addresses the risk of stop-loss orders for small investors during mini-flash crashes, such as the recent fake tweet about a White House explosion. The danger is that a stop-loss order will be executed during one of these glitches, he tells MarketWatch:
“Simply put, a stop-loss order is an order to sell a stock at a price below the current market price for the purposes of protecting a profit or limiting a loss. However, in a ‘panic selling,’ when the market is taking a tumble, the stop-loss price can be reached, triggering the next sale, which could be much lower than the stop-loss price, ensuring the investor a much larger loss or price than anticipated.”
MarketWatch also received a few words of advice from Bernie Madoff, in his fifth of a 150-year sentence for running the world’s biggest Ponzi scheme:
”The best chance for the average investor is to put money in an index fund. There are lower commission rates and more professional management with these types of firms. It’s the safest and least likely place to get scammed. If you want to hold money with brokerage firms, go with major public firms. Chances are they will go with proper procedures and proper compliance.”
He suggests investors “read good books. You have to educate yourself on the market. People are very gullible. Scamming investors has been going on since the beginning of time, and I don’t think it’s going to end.”
Educate yourself on the market, read good books on investing — we’re all for that. Keeping an eye out for scammers — can’t disagree with that either, Mr. Madoff.
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