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Michael Brush

Company Focus6/17/2009 12:00 AM ET

The 5 biggest lies on Wall Street

These are the tenets you counted on for years, like 'buy and hold' and heed the advice of 'experts.' Keep these whoppers in mind as you plan your financial future.

By Michael Brush
MSN Money

If you had any money in stocks in the past few years, you might be feeling pretty dumb right now -- despite a big rally for much of 2009, you're still down 25% on those "investments" since the market began tumbling in October 2007.

But stop being so hard on yourself. Yes, you probably should have pulled more money out in time.

But on the other hand, you were probably suckered by any number of big lies foisted on you by Wall Street and market players who stood to profit.

Here are the five biggest lies that probably hurt you the most and will be worth remembering in the future.

Big Lie No. 1: The market will take care of everything

Remember Ronald Reagan's line, "Government isn't the solution to our problems; government is the problem"? The Gipper may have had some great political insights, but the train wreck in the market shows this one wasn't one of them.

During most of this decade, Wall Street lobbyists persuaded would-be regulators in the Bush administration to lay off. "The markets" would find the best solutions to any problems on their own.

In the free-for-all that ensued, the Wall Street Masters of the Universe made untold millions -- and left us with huge problems. The damage caused by all the tricks, scams and skullduggery has cost more than $7 trillion in market losses so far, not to mention millions of jobs and the Great Recession.

"We convinced ourselves that the inmates could regulate themselves, and obviously that was wrong," says Christopher Whalen of Institutional Risk Analytics, a financial consulting firm. "If we are going to let people buy public policy, then we are going to get stupid things."

Perhaps the biggest gaffe was allowing a multitrillion-dollar market in credit default swaps -- a kind of loan insurance -- to develop with no oversight or regulation. This was just plain dumb, and we'll continue to pay the price. Too much CDS exposure helped take down Lehman Bros. (LEHMQ, news, msgs) and American International Group (AIG, news, msgs). They lost big by insuring complex securities backed by bad home mortgage loans.

Of course, none of this could have happened if regulators hadn't looked the other way as mortgage originators handed home loans to anyone who could fog a mirror. They didn't care because the loans could be sold to Wall Street banks, repackaged as securities and sold again to investors.

"A shadow banking system developed to originate and sell mortgages outside the regulated banking system, and we ignored it," says William Isaac, a former chairman of the Federal Deposit Insurance Corp. and now head of the Secura Group, a division of national consulting firm LECG.

Even regulators who were supposed to be policing the market often did a lousy job during this "free market" era.

One example: Early this decade, a statistical wonk named Harry Markopolos had figured out that the investment vehicle that Bernard Madoff was promoting to well-heeled investors was a classic Ponzi scheme. Markopolos alerted the Securities and Exchange Commission, which failed to act until investors had lost billions. Madoff may now sit in jail, but many of those wiped out by his actions could have been spared the pain if Markopolos had been heeded.

Big Lie No. 2: The 'experts' will help you

Many of us rely on the "experts" for guidance in the market, and they failed us miserably.

Most mutual funds are down as much as the market -- or worse. The geniuses running hedge funds did little better. A few commentators managed to forecast the market disaster; most missed it.

There's a simple reason why they missed the coming carnage, says David Loeper, the CEO of Wealthcare Capital Management in Richmond, Va., and author of "Stop the Investing Rip-off: How to Avoid Being a Victim and Make More Money."

The "experts" have conflicts of interest. Mutual funds, hedge funds and brokerages want to keep you at the table so that they can continue to earn fees from your nest egg. "They don't care if you win or lose, they just want you to keep playing the game," Loeper says.

Video: Older Americans delaying retirement

They often pitch whatever is hot -- commodities and emerging markets come to mind -- at exactly the wrong time. "They'll market it until it falls apart, and then they will find something else," Loeper says.

At worst, the conflicts of interest seem downright blatant, says investor Jim Rogers. Among the biggest lies, he says, were the high-grade "AAA" stamps of approval put on faulty mortgage-backed securities by the debt ratings agencies -- which were paid big fees to rate those securities by the very banks that created them.

The media don't get a free pass either. Loeper says media outlets such as CNBC, and presumably this Web site, regularly fall short in guiding investors because their real priority is to provide entertainment -- and that they have to dumb things down too much to keep content interesting.

Continued: The myth of buy and hold

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