Insider Information and Specific Risk…..Yours

November 28, 2012

I believe almost anyone would agree that insider information in the hands of the counter party to your trade constitutes a ridiculously acute tilt of the ” playing  field ” against you.

Illuminating the potential for abuse in this type of situation, an article in the November 27 edition of the NY Times, Business Section, indicates a new industry with a business model that assists hedge funds and other wealthy investors to find ” experts ” ( often a current or former employee of a potential investment ) to consult with them with  the goal of gaining knowledge that may influence the hedge fund’s decision to buy or sell.

Everyone knows there is a line relating to insider information that may not be crossed and officially all sides recite their awareness and adherence to ethical and legally correct behavior.  But, it seems to me, that the mere act of connecting expert and edge seeker in a fee arrangement places everyone needlessly close to a dangerously thin line.

The leading firm engaged in finding experts for a fee is Gerson-Lehrman.  Some clain this business model is tailor made for insider trading.

My question to you is this.  Isn’t there already more than enough risk for the individual investor.  Would you like to know whether the counter party to your trade has exercised an opportunity to purchase decision making information at a fee of $1,000 per hour. ?

For me, this is just an additional reason to stay away from the  specific equities  jungle and focus on SPY where macro knowledge, good mechanics and a reasonable time horizon  level the playing field.

So far during 2012 the price of SPY is up 12.5% ( $125.47 – $141.14 ).  Want more risk than owning the USA’s  top 500 market caps ! ? …Then consider sector ETFs where the potential for return is higher, but so is the risk….examples for 2012,  Brazil / EWZ  (negative 9.3% ), Utilities/ XLU ( negative 15.4% ),  Home Builders/ XHB  ( positive 54.3 % and Biotech/ FTB ( positive 39 % ).

Just one caveat….If you decide to venture into sector ETFs please observe the rule of no more than 5% of your investible capital in any one sector. 

Richard Maurice Gore

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