Predators and Profits: 100+ Ways for Investors to Protect Their Nest Eggs

By Martin Howell, foreword by
John Bogle
Reuters Books; $24.95; 304 pages;
ISBN 0131402447
Reviewed by Jay Sanders, CPA

Although Predators and Profits is fast, enjoyable, and reads much like a Hollywood tell-all, it also represents an important postmortem on the recent stock market bust, replete with 170 warnings organized into 15 chapters. Its message is inescapable: Be warned!

The author states the book’s purpose in the introduction: “This is a book of warnings, alarm bells and cautionary tales. It is based around a system of red flags.”

Howell implores us to understand the compensation dynamics among the Wall Street players: the listed companies, their publicists, the investment banks, brokerage firms, analysts, mutual funds, pension funds, and the press. These dynamics are material, and fraught with actual and potential conflicts of interest.

The book dramatically illustrates these conflicts, both the obvious and not so obvious. Among the obvious are the porous Chinese walls between investment banks and their brokerage affiliates, stock analysts and the companies they cover, and media that may be less independent than thought. Particularly interesting among the not-so-obvious is the soft-cost compensation arrangement between mutual funds and brokerage firms. Soft costs are the services provided to funds by brokerage firms in exchange for trading commissions; for example, funds get the bulk of their investment research from the brokers they execute trades with. Worse, there is evidence that funds routinely use this buying power to pressure both analysts and credit rating agencies to withhold, or release later, negative reports on securities they hold. This observation, coupled with the statement from the revered John Bogle, founder of the Vanguard Group, that the mutual fund industry has gone from a stock-owning to a stock-renting model, should give pause.

While the book is both entertaining and educational, many of the red flags are relevant only for analysts. For CPAs, the overriding message is to take heed: Get smarter about what happened and what it means. Evaluate investments from a post-bust perspective, and focus on where to go from here, and how. It means revisiting investment fundamentals (returns are likely to be lower for an extended period) and becoming knowledgeable and wary about the relationship dynamics of Wall Street.

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