Moral Compass by psd
A group of students at the Harvard Business School took an oath to be ethical. It was voluntary and the idea came from the students, not from the school itself. Most people who heard about this thought it was ridiculous and in some way or the other took a moral high ground and made fun of these guys (which is what I did, too). Later in the evening, this reminded me of an incident that happened a few years ago.
In India, brokerage is calculated as a percentage of the stock price. When your statement comes at the end of the month, the headline figure is the price at which you bought or sold. Within that price, there is the component of brokerage, but you need to make a little extra effort to see how much brokerage you paid.
If I manage your money and know that you are not going to make the extra effort, I could transact multiple trades for you in a month; make a small profit or loss and rack up big brokerage fees for myself.
If I have ten accounts like this, I can make a steady stream of money on the volumes and no one will ever find out what I am doing. In a bull run, a few stocks that are steadily going up will make you money (at least on paper) and you will ignore the trade volume in your other stocks. In a bear market, everyone is losing money, so you will not blame me beyond my incompetence.
I know someone who did exactly this, and got fired (eventually). I can tell you that it was not because he was unethical, but because he killed the goose that laid the golden egg. He grew in confidence and eventually the volumes became so high, that his boss said that it’s only a matter of time a customer discovered it and he fired him before that could happen.
A. Now, the question is, if you were my customer, would you get rid of me as soon as you figured out what I was doing?
Now consider this, everything is the same as above, but I am doing it out of incompetence and not out of greed. Meaning, I really do believe that I can make money for you by trading, but in reality, I am not a good trader and I am not able to make any money for you by trading. Sure, I am making a lot in brokerage for my firm, but that is just incidental.
B. Would you get rid of me now?
What if I make a lot of money for you trading, better than all the other brokers you had in your past. You know I have a consistent track record and it’s not a fluke. You take me out to celebrate; I have a little too much to drink and blurt out that all those trades I made just for the brokerages didn’t do much damage after all.
C.Would you get rid of me now?
If you had no trouble answering A & B, but had to think about C, then give the Harvard guys a break.