One of the biggest delusions many small investors suffer from--from casual mom-and-pops to full-time day-traders--is that the market is something like a level playing field.
It's not, of course.
The average institutional investor has resources and information that the average small investor can only dream of.
- Multi-million-dollar research budgets
- Full-time traders and analysts with years of experience and relationships all over the industry
- One-on-one and group meetings with the managements of several hundred companies a year
- Deep networks of industry contacts that help them sniff out any hint of fundamental change
- 30 brokerage firms calling them all day long with every tidbit of information they unearth
- Quantitative and technical models that allow them to analyze more in seconds than a casual investor can analyze in a year
- Instant trading execution, sometimes provided by computers co-located at trading exchanges
- And so on...
What they also have, as everyone was reminded this morning when news broke that Goldman Sachs director Rajat Gupta is under investigation for passing inside info to Galleon's Raj Rajaratnam, is friends.
It doesn't matter how vigilant the SEC gets. There is simply no way to police facial expressions and body language. When you're at a cocktail party with your buddy who knows what is going on inside a particular company, you don't have to be a mind-reader to get a good sense of it yourself.
The buddy doesn't need to tell you anything specific. The buddy doesn't need to pass you secret confidential documents. The buddy doesn't need to give you hand signals. All the buddy has to do is look at you in a certain way. To paraphrase the old saying, a facial impression is worth 1000 words (and it also has the convenient feature of not being persuasive evidence in court).
Facial expressions don't have to just come from buddies, of course. When you're meeting one-on-one with a CEO, you can learn more from the way a CEO responds to a startling question than you can from a thousand page SEC filing. And no one will ever complain that you've been given material non-public information--even though that's just what you've been given.
Unless all personal contact between executives of companies and investors or agents of investors is banned (which it obviously can't and won't be), this type of information will continue to provide professionals with a valuable edge. And only a tiny portion of it will ever be declared illegal or prosecuted--in part because it's not against the law.
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