Before the Big Bust happens, here are a few cautionary words for the hoi polloi:
One of the reasons for the existence of the stock market is to provide a vehicle for the liquidity of investments by investors in corporations.
But another reason for the existence of the stock market is to provide a casino for gambling and for the movement of capital from the pockets of small gambler "investors" to the pockets of big gambler "investors" -- thus, the common name for the New York Stock Exchange -- Las Vegas East. The process is often called "fleecing the lambs" by those who work the casino.
A special type of big gambler is a so-called "hedge fund" manager -- an individual or group that supposedly pays careful attention to the market to optimize returns on invested or gambled capital -- a mix of their own capital and other people's capital. One prominent hedge fund, for example, apparently achieves as much as a 30 percent return on capital for its clients.
Now how is it possible to achieve a 30 percent return on capital across the board? Can it be accomplished merely by careful analysis? Probably not. The most clever and scientific honest analysis of the stock market has never produced such a return for a large portfolio.
In contrast, the easiest way to get a 30 percent return on "invested" capital is to have inside information about mergers, deals, losses, profits, and so on. In the old days, inside information was transmitted from insiders to outsiders one on one. But in these days of new technology, that's becoming most unlikely, too inefficient, too dangerous. All one needs, for example, is a plant of a micro-bug in a conference room or hotel room or even on an unaware corporate individual to record conversations presumed to be secret. Given the amount of money involved, it's reasonable to assume that every possible technological means will be used to obtain inside information about corporations whose stocks are bought by money managers. We already assume corporate-to-corporate technological espionage because there has been evidence for it. In this new century, it seems wise to assume money-manager-to-corporate technological espionage simply because the stakes are so high and the technology available.
There will be a bust. As soon as most of the small-gambler capital has been transferred to the big gamblers by the small gamblers buying the stocks owned by the big gamblers, the market will collapse, the big gamblers will go into the market to buy again, and the cycle will as usual be repeated.
Meanwhile, anyone who believes modern technology is not being used by "outsiders" to acquire inside information relevant to buying and selling stocks by the outsiders may be living in a dream world where greed is absent, ethics rules Wall Street, and money never trumps morality.
So if you're part of the hoi polloi be warned. You're free to enter the casino, but be aware there are people who have inside information about which wheels to play -- and you don't.