Moral of Insider-Trading Bust: Only Fools Try to Beat the Street
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
Follow Henry Blodget on Twitter: www.twitter.com/hblodget
Robert Reich: Breaking Up the Big Banks, and Why Congress Won't Do It
Two ideas are floating around Washington regarding how to handle 'too big to fail' banks, but only one is supported by the Treasury and the White House. Unfortunately, it's the wrong one.
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You make a good point. Trading stocks is for brokers, but yet there are tons are websites and tv shows devoting to selling the idea that you can beat the pros yourself. With research you can make good decisions about investments, which you should watch and very occasionally should move when the market changes.
Reality of the street, cross Goldman and you go down.
Investing ain't what it used to be, and many folks got suckered on it, myself included. There was a time you could invest in a variety of large cap companies and be confident that there was steady if slow growth or at at least a safe investment. That has not been true for a long time. Unfortunately Wall St. figured out how to suck investors dry by diluting shares, acquisitions, split offs and the like while CEO's and boards drained the companies with bonuses, stock options, bond issues, cuts in R&D, etc... The vast majority of the blue chips from 40 years ago are not worth anywhere near what they were or should be. People like me that were brought up with a buy and hold "investment" mentality got beat. The stock market, as we've seen, has turned into a game rewarding the biggest players, not the investors.
One group of market participants who interestingly have not made money and instead are
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.
I do pretty well in the market; this article is generally false. If you study the right things, you will make money.
do you trade or invest? Blodget correctly distinguishes the two.
I generally trade. You really cannot buy and hold stocks. I have tried a lot of different systems but the one at Investor's Business Daily is the best one I have found. Up an average of 30% over a 4.5 year term even after 2008. I made some mistakes but am doing well.
www.investors.com
to sign up for a free two week trial.
I generally trade. You really cannot buy and hold stocks. I have tried a lot of different systems but the one at Investor's Business Daily is the best one I have found. Up an average of 30% over a 4.5 year term even after 2008. I made some mistakes but am doing well.
Please keep believing this - it will help me and my clients make money.
Ah the difference between gambling and investing. Another advantage not mentioned is the ability of very large banks to borrow directly from the Fed at .05% interest and pour enormous amounts of money into a stock or commodity forcing the price up, thus guaranteeing a profit.
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.
Good analysis. I think your ideas are succinct and workable. They would stabilize Wall Street and turn our economy into what is called a "Capitalist" system. However, as we know, the people who now make billions in the rigged casino called Wall Street have more on their side than just lobbyists in Washington. They have salted the entire financial regulation bureaucracy with people who hope to make their own fortunes there one day and they will never allow sweeping regulations like this to happen. It would take, well, leadership in Washington backed up by the White House, something like FDR did during his administration. Sadly we have lost much more than liberalism since the 1930's. We have lost the vision of America that allowed leaders of the past to build their brave coalitions. Obama is a good man but he is not a leader. I don't know where leaders come from, or why they appear when they do, but I am waiting, waiting...
Fanned. Ver well said. But there is still a chance that President Obama will wake up to the fierce actions that are required in this crucial moment in history. If he fails on health care and Wall Street regulation there will be a new political party in the United States that will form very slowly out of the communication of the Internet. It may take years, but it will form and eventually win in the elections of this country for the next 100 years. Right now we are a nation in the Age of Incompetence. That is the last 100 years. But it is now going to start to change through the incredible power of the Internet. The Bloggers are now the New York Times and the WSJ combined. Nobody can deny this. It has already happened. Game over.
If an investment bank forced the price of a commodity/stock up using borrowed cash from the Fed they would be stuck owning it because the second they try to unload it they would be putting likely equal downward pressure on the commodity/stock. Doesn't work.
They know how to distribute, like they are doing now.
"Another advantage not mentioned is the ability of very large banks to borrow directly from the Fed at .05% interest..."
...which they can then use to buy Federal government bonds at a higher rate of interest, thus getting paid by us to borrow our money and loan it back to us.
If that's not insane, there is no such thing as insanity.
No wonder they laugh at us.
It's most people's 401ks
Yep. They (including me) were indeed the 401K suckers at the table along with the dunces running the Big Pension Funds who got suckered by the "AAA" credit ratings on crap.
When the price of oil goes up, this is called A Very Bad Thing.
When the price of stocks go up, this is called A Very Good Thing.
Why the difference?
Its a difference in perspective. Who's ox is being gored? Maybe.
Oil is a commodity that is used to make the economy work, so even though some are investing in oil, others are buying it to consume it. If the price of oil goes up, it raises the price on goods that need oil (virtually everything given that transportation cost is important for most everything) which is inflationary.
If the price of a stock goes up it doesn't hurt anyone other than shorts because you can't consume a stock.
When the price of stocks goes up and up and up, it diverts wealth from investment into speculation. We are reaping the whirlwind of that diversion, as we turn from a production economy into a gambling economy.
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).
Its the bell curve. The bell curve indicates that a small percentage of winners will occur in Las Vegas, just as it addresses the stock picking guru winners. Some of the winners at stock picking are smart enough to get out of the betting business before the odds change and become business commentators or Jim Cramers. They're changing hats like a carnival huckster.
Oops, I meant Henry.
Thanks for posting this Jim. For anyone who doesn't know what you wrote, it's essential information. For those who do already, it's a worthwhile reminder.
Well said. As we all know, "in the short term the market is a voting machine. In the long run it is a weighing machine."
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.
If you don't know who the patsy is at the table, it's your 401K.
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