The Wall Street Casino
I am occasionally caught up in the fervor of large, rapid changes in the primary stock market indexes. And I know a variety of individuals personally who invest much thought, not to mention money, in studying and attempting to take advantage of the vagaries of the various markets and individual stock issues. I do not claim to be an expert, or even a journeyman, in detailed matters related to the stock markets. My tendency is to look at the stock markets from a distance, not from fear, but to understand the whole. It is from that perspective that I offer some thoughts to Destiny-minded people.
What is the "whole" of the stock market? Now that is a very interesting question. Do we look at the fundamental purpose for having any stock market? Do we look at the behavior of a specific market or the underlying issues that appear to affect it? Might we consider the financial structure of nations that have active markets, to understand the role of stock markets in advancing their economies? Or, is it sufficient simply to examine the effects of the stock market on the lives of the active participants, and on the lives of those who do not directly participate?
I suspect that most of us are not fascinated by macroeconomic considerations. Our interests tend to be more personalized, i.e. I want to know what I have to do to become wealthy. This kernel of truth is at the heart of all our financial considerations, for life is a financial struggle, with winners and losers. Perhaps this is a prime example of "reductionism," in which a larger environment is valued only in what can be gleaned by the individual. In short, the "whole" of the stock market does not touch on our selfish interests, only those aspects of it that presume to advance our personal wealth.
Yet I find this reality discomforting, for it reminds me of the negative aspects of different forms of gambling. And the application of law to make various ugly behaviors legal, while still fundamentally unethical, is a major part of all stock market thinking by those who are most knowledgeable about the stock markets. Likewise casinos. But wouldn't you play to win? Clearly, the law can define certain rules for operation of the stock markets and for the participants. Clearly, the law cannot cover all deceptive practices found therein. So it is with risk factors and ethical considerations in mind that I proceed.
Pundits tell us a number of interesting facts about stock market investments and they have some apparently good general advice for novices. A few of the key recommendations for common folks are: 1) Diversify your holdings, either through mutual funds or by mixing stocks and bonds to distribute risk, 2) Don't worry about short-term market variations, for your investment should be long-term, and history has proven that over the long-term stock markets increase handsomely, 3) Balance your holdings across low, medium and moderately high risk stocks based on your ability to lose some money at risk without destroying your portfolio or your future, and 4) Leave most of the investment decisions to the "experts," i.e. don't go it alone. These messages speak to an ultra-conservative approach to investing.
Well, that sage advice sure seems to cover us properly, but it blithely ignores many of the essential considerations of the individual investor. The very premise that investing should be a long-term consideration relegates the stock market to the equivalent of a pension plan. There is nothing specifically wrong with that idea other than the fact that you miss about ninety percent of the opportunity to gain significant wealth early in your life. The underlying thoughts behind the pundits message about long-term investments are aimed at making certain you do not glean the available wealth as opportunities arise, but instead give other people your money so that they can make money for themselves.
Let’s consider an alternative scenario. You do have some funds that need to be directed in the manner described by the pundits. The investment they represent is your real pension plan. You cannot depend anymore on company pension plans or on social security benefits to be sufficient for you to have a decent life in retirement. You should participate in a 401K plan or the equivalent, with a very limited amount of money (that amount which takes full advantage of your employer’s contribution but stops immediately thereafter). But what about the money that you spend today as discretionary income? You may visit casinos, or you may regularly enjoy expensive cuisine, or take vacations that cost thousands of dollars, or buy a new car every few years. You may be a clothes hound, or a boating or spectator sports enthusiast. Do you have any idea how proper short term investment of some of those discretionary funds could provide both the fun you want and considerably more money after the fact?
The point is that you can and should be a direct participant in a stock market, in which you make all your own decisions based on your personal research of a few individual companies. And you can do it all, cheaply, via the Internet. All you can possibly lose is some discretionary money, for you can initiate this process with as little as $1000. What you may gain, however, is stunning: 1) Personal knowledge about what does and doesn't work in trying to make a lot of money quickly, 2) The knowledge of the results of your personal decisions, which may cause you to abandon the 401K plan intelligently, for you can make far more money without government restrictions on when or how it can be used, and 3) The ability to vastly improve your lifestyle now, instead of thinking only about hand-to-mouth little pleasures or of long-term retirement.
I don't like casinos. I avoid them like the plague, for they are simply legalized scams. I do not waste my money on lotteries, for I understand mathematics and probability. Thus, I must examine the stock market environment critically also to ascertain whether or not I have a fair chance at making money. If the economic or market investor forces that determine stock market behavior of individual company stocks are not something I can figure out to my advantage, then I might as well go to a casino, or revert to my traditional discretionary pleasures.
So it is that we will now examine the casino or scam aspects of the stock markets. Point #1: The market is a scam designed to extract money from ignorant "investors." Point #2: The saleable value of a stock is part reality and a larger part "funny money." Point #3: Stock values, as determined by their selling price, are controlled by large investors, sometimes referred to as "Market Makers." Point #4: There are so many "investors" playing different games that there is no logical rationale for deciding a proper price at which to buy a stock. You can’t predict general market behavior, let alone that of the individual stock. Point #5: Your goal, if you decide to "play" the market, is to anticipate accurately the probable behavior of the Market Makers. This is, to say the least, a wild gamble. Point #6: In a larger sense, all the shenanigans exist within the context of a real need to collect investor capital to fund growth for businesses.
Well, what to do? If I analyse the behavior of a variety of stocks I may think that I have a formula for success. When I act according to my formula I may become a quick success, for a time. Then, for some reason unknown to me, market behavior changes and my formula becomes a disaster. Hmmm … I have learned to my chagrin that the information pumped out to people like me is essentially worthless. That is, every kilogram of words has less than one milligram of truly useful information. It doesn’t matter whether I watch CNBC® or read any of many published documents, like the Wall Street Journal®. None of them could have much useful information, for then all we commoners would jump on board and make a bunch of money. It just doesn’t happen that way.
One thing is reliable … when the market crashes, it inevitably recovers. That means I should keep my money on the sidelines until I am sure a disaster has been fully realized, and then I should put all of my money in the market buying stocks of companies that have reliably good earnings … they recover faster. Unfortunately, psychology gets in my way, for how do I know a market bottom? Once it turns around, or appears to turn around, is the increase reliable or only a blip that precedes another, larger fall? You get my point.
I conclude that only a few of us can play the market well, and those few have information not available to the ordinary "investor." Moreover, the few take commissions from using other people’s money, and they "invest" over the longer term. Even those pundits occassionally get hosed, else almost all mutual funds would be highly successful.
So it is that for the little guy, attempting to make good money reliably by "investing" in individual stocks and playing the highs and lows is essentially like visiting a Casino. You never know when the Market Makers will decide to change the rules, or when the market, as a whole, will make a significant increase or decrease in net value. Yes, you can win at this game, provided you pay very close attention at all times, and have a very itchy trigger finger. Do you have the time and the inclination to engage in that manner? If you get trapped for a few years, can you wait it out? Will you become your own worst enemy by letting Market Maker bait lead you to the poorhouse?
Scary, isn’t it?