No Skin in the Game? No Way.

From the Baltimore Clubhouse – Skin in the Game.

That’s the title of the book I’m now in the middle of. It wasn’t my choice – I’m in a book club, and one of the other guys (yes, it’s a men’s book club) picked it. 

But I like it. A lot.

The author is Nassim Nicholas Taleb. If that name sounds familiar, it’s because he wrote a famous book – The Black Swan – that was published in 2007. It was about the tendency of traders and investors to discount the possibility of a rare event that has the potential to bring down both them and the system. (A black swan is a good metaphor for such an event, as Europeans considered it a mythical creature for 1,500 years before one was spotted around 1700 in Australia.)

Talk about prescient!

The book (and its perfect timing – a year before the 2008 financial crisis) turned Taleb, who was once an options trader, into a bit of a prophet as well as a public philosopher.

If that last part doesn’t win you over, rest assured that Taleb is pretty wary of public philosophers and other intellectuals – as well as academics, central bankers, other public officials, Wall Street banks, and on and on. He doesn’t trust anyone, really, who has influence over society without having any skin in the game.

Basically – and this simplifies it a bit – Taleb says we should only trust the advice of people who have a personal stake in the matter they’re advising on. It sounds about right to me.

That brings me to Wall Street. One of Taleb’s favorite punching bags – and there are a lot of them in this book – is Robert Rubin, the Goldman Sachs executive, turned Secretary of the Treasury in the Clinton administration, turned Citigroup executive.

Rubin is emblematic of the guy who makes a lot of money without taking on any risk. According to Bloomberg, Rubin made some $126 million at Citigroup in the eight years leading up to the financial crisis. When the bank had to be rescued by the federal government (aka taxpayers like you and me) to the tune of $45 billion, Rubin kept his money and claimed he couldn’t have foreseen the rare event that pushed Citigroup to insolvency.

“Heads he wins, tails he shouts ‘Black Swan,’” writes Taleb.

Of course, Rubin is hardly the only one to have profited massively without taking on risk. He’s just possibly the biggest and best known.

Wall Street is rampant – can I say lousy? – with advisors who purport to have the best interests of you (the client) in mind, yet are thinking only about their own commissions and bonuses. They have no skin in the game when it comes to your financial welfare. If your portfolio loses, well, no skin off their back.

Solutions to this problem have been tossed around. While we at The Oxford Club are not big fans of unnecessary regulation, there was one proposed law we liked. In early 2016, the Department of Labor proposed a fiduciary rule. It states that a financial advisor must act in clients’ best interests. Unfortunately, President Donald Trump opposed the law, and a court subsequently overturned it.

Absent that law, the solution, according to Chief Income Strategist Marc Lichtenfeld, is to “manage your money yourself. If you own a diversified portfolio of stocks and index funds, your costs will be ultra-low, and you’ll know that the person who cares most about your money is the one making the decisions.”

Marc is right. Wall Street doesn’t care about you or your money. That’s why many people, once they experience the big financial firms, really want nothing to do with them (unless of course they’re the ones getting the bonuses!).

This reminds me of The Oxford Club Macro Strategist Eric Fry. He used to work for a Wall Street hedge fund but packed up and left when he got sick of it.

Every time I see him, Eric emphasizes that you can’t trust Wall Street advisors or analysts due the massive conflicts of interest between what’s good for them and what’s good for you.

(Stay tuned… Eric will be holding a free, live webinar on Wednesday, August 1. You’ll hear more about how to claim your spot in the next few days.)

Anyway, I have to recommend Skin in the Game. It’s about much more than the financial industry. Taleb skips around industries, philosophies, governments and religions – anywhere he sees “hidden asymmetries” where one party bears all the risk or has a much bigger stake than the other… and the dangers therein.

It’ll make you rethink the way you interact with a lot of people, not least your financial advisor.

Good investing,

Matt