It's the myth that will never die.
Jim Cramer has made a career out of promoting it, as have countless other stock-picking gurus since the dawn of time.
What is this myth?
If only you "do your homework," analyze those financial statements, and listen to such-and-such a stock-picking guru, you, too, can pick stocks well enough to beat the pros.
If there's one thing that should ring out loud and clear from the recent Wall Street insider-trading bust it is that this is preposterous.
Stock trading is a zero-sum game. You cannot make money from trading without other people losing money.* In order to win the stock-picking game, therefore, you have to out-trade other traders. You have to beat the other traders by enough to offset your costs of research and trading (which are deducted from your returns). And you have to do this consistently, year after year after year.
Even without illegal inside information, your competition is intense. The hedge funds, mutual funds, and other professional traders you are competing with have, at a minimum:
* Professional analysts and traders with decades of experience who work 20 hours a day
* Huge industry Rolodexes filled with primary contacts at companies whose stocks they trade
* Research budgets that run into tens or hundreds of millions of dollars a year
* Dozens of Wall Street brokers calling all day with every scrap of info they can dig up
* Instant access to 100% of Wall Street research and analysts from hundreds of firms
* Proprietary research services that can cost hundreds of thousands of dollars a year
* High frequency trading computers that act on any market info in milliseconds
To win the stock-picking game, you have to consistently beat folks who have all of these advantages and more.
And then there's the sort of information that the busted hedge fund, Galleon, is alleged to have traded on. Yes, some of the information is clearly illegal inside information. The rest of it, however, is what is known on Wall Street as an "edge."
Most hedge funds would describe most of the information Galleon traded on as "research." Many would not trade without it -- because then they would be like all the dumb suckers who don't have an edge.
Information like Galleon's is everywhere on Wall Street. So in addition to every other advantage professionals have over you, there's also that.
On Mad Money tonight (and every night), Jim Cramer will tell you which stocks to buy -- and why. What he won't do is explain how the information he gives you will enable you to out-trade firms like Galleon.
The folks at Galleon watch Jim Cramer, too, of course -- as do the folks at most other Wall Street firms. They watch him out of the corner of their eye while they tee up trades based on much better (and much more narrowly distributed) analysis and information.
Perhaps you are one of the folks who deludes themselves into thinking that with an hour or two a day of "homework," you can out-trade Galleon. If so, Galleon is thrilled to have you in the game. As are the hundreds of other firms who make their money whipping suckers like you.
There's a saying in poker: If you don't know who the patsy is at the table, it's you.
Next time you feel like bellying up to the Wall Street poker table, therefore, ask yourself again who the sucker is. Chances are, it's not Galleon.
* Many people don't understand this. They confuse market gains and trading gains. To make money in the stock market, all you have to do is own stocks when they go up. This is NOT a zero-sum game. It's investing.
See also:
Stock Market Fools: 15 Gurus Shamed By The Rally Of The Century
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There is a distinct lack of consistent market-beating performance in mutual funds and pension funds above the cost of management fees.
ever deeper into financial problems are the media.
While, financial advertisement apart, they were and still are full with all kind of advise, ranging from
knowing best how to invest for retirement to all sort of great money chances, chances to make
a quick buck, all presented with the greatest certainty and guaranties, they should be trading
millionaires themselves, swim in money. If one takes their prepoderous claim to always knowing
best, including the ability to forecast, prophecy the future, serious, they shouldn't have any problems.
Yet interestingly media, influencing people (the market) on a grand scale, 24/7, meantime keep
carrying on wailing, whining, ranting, "You pay", eloborate on their broken business model, everybody
has to get involved in that silly business chapter like in psychiatric institutions where certain mentally
ill patients (is it paranoids?) tend to bother strangers with their problems.
And all that in hindsight of the nice list Henry made of the methods and research the financial professionals apply and have access to and make use of.
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The real problem is that we have allowed this environment to develop. We need to regulate the banks - they should not be in the stock market at all in any form. We need to stop stock manipulation and the easiest way to do that is with a 99% short term capital gains tax - really kicks the incentive in the nut$. We need to promote investment - the easiest way to do that is lower or eliminate capital gains for investments of 2 years or more. And we need to start prosecuting the insider traders - and I don't mean Martha Stewart (what a joke her prosecution was).
Do all this and we might actually start promoting and financing real businesses, and that might create real jobs and real prosperity. But then again it is easier to play on your computer placing bets all day then it is to create a real business.
When the price of stocks go up, this is called A Very Good Thing.
Why the difference?
If the price of a stock goes up it doesn't hurt anyone other than shorts because you can't consume a stock.
At least when the price of oil goes up, it makes alternative and renewable energy sources more competitive.
I would applaud a 100% sales tax on oil, and a 1% sales tax on stock transfers (with no tax on new stock issues).
Given the wrongheaded behavior by the Greenspan Fed under Bush, we may have to wait for a very "long run."
I got out a long time ago, preferring to hold only investment grade debt at intervals.