The Only Lasting Advantage You Have Over Big Money
By now anyone with any interest in stocks has heard about the David vs Goliath Reddit activism against big Wall Street money. It is indeed incredible that a band of small investors could have brought any major hedge fund to its knees, let alone to the verge of bankruptcy.
Good for them, I say.
But…
It’s not good for us small investors overall
Like with any mob, it has been infiltrated by the ‘other side’
Wall Street wouldn’t be Wall Street if it just rolled over and let the masses stomp all over it. While a bunch of short-sellers have indeed been rocked, there are plenty of others who have taken long positions to opportunistically make money off this people’s rally.
And because they have privileged access to order flow, they are in the best position to get out with a handsome profit before the inevitable price collapse. Ultimately the small guys will be the main losers, like always.
Therefore, activism is just a short step away from pump-and-dump
Pump and dump schemes are where market manipulators try to spark a rally in under-performing, small-cap stocks by making a series of well-timed, large purchases to ‘pump’’ the price up. This prompts small investors to pile onto the stock in the hop of making a quick buck.
The sudden surge of money boosts the stock price even further, and the manipulator rides the trend all the way to the top before dumping their substantial initial holdings and sending the stock price crashing back to earth. It’s a story as old as the stock market, and quite illegal.
And that’s where this Reddit activism should be cause for concern. The next such ‘activist’ rally could well be market manipulation, just with new tools that regulations can’t yet protect against.
And sawtooth stock surges could have unintended consequences for the companies in play
While it may not always be apparent, the stock market exists after all to provide capital to businesses. It’s the way growing and mature companies raise money — by selling shares in their business to the public in exchange for cash. In addition, employees at these companies might also be compensated via company stock. So this kind of whiplash-inducing market movement could well cause real people a lot of harm for no fault or participation of their own.
That’s why regulators will step in sooner rather than later
Because of the above, a combination of politicians, regulators (and possibly lobbyists from the afore-mentioned Big Money) are joining forces to try and eliminate the possibility of future such ‘we the people’ social-media-fuelled stock surges.
And so…
Hedge Funds will maintain their hegemony
(Sorry, just had to slide in a pun!)
Despite Reddit, when it comes to momentum trading Wall Street holds all the cards. And once the regulator is done regulating, they will hold them as firmly as ever before.
- They have armies of experts: Even a small bitty fund has dozens of analysts who spend 18 hours a day for years researching specific sectors. It is their business to know every little stock-price influencing detail about a company, often before it is broadly covered in the news
- They have unfettered access to information: They have Bloomberg terminals, every possible data and news source and journalists, sector experts and CEOs on speed dial. You and I have Yahoo Finance and maybe a subscription to a stock screener.
- They have privileged access to order flows: Trading platforms can’t execute your trades on their own. Instead they work with market-making partners to execute their trades. Since these millions of trades can be quite lucrative, major Wall Street firms pay good money to trading platforms to route their trades to them rather than others. And then they might use that information to raise prices in real time or even trade against you (!)
- They have supercomputers trading at light speed: Finally, these firms have sophisticated algorithms that automatically place trades based on market movements. These trades are placed in nanoseconds and conveyed to stock exchanges via dedicated fibre-optic lines at the speed of light. Between when you fill out the order form and click Submit, they have likely traded away some of your potential profit thousands of times
For all these reasons, I believe it is pretty pointless to try and day-trade your way to wealth. The odds are stacked too heavily against you. Sure, you you may win a few — but you will lose a lot too and the sheer effort of doing all this work might just not be worth it.
After all, the entire premise of stock investing is to have your money work for you. If you’re ending up spending so much time, why not make this your actual job?
If you instead want to truly make passive income…
Take advantage of the one thing you have that Big Money doesn’t
Wall Street is compensated on two things:
- Making more money than other people
- In the shortest possible time
It is a rare fund manager that is allowed the luxury of lagging the market while they wait to make the big gain on their investment. And therein lies their Achilles heel.
Wall Street is not paid to be patient
Wall Street after all is in the business of making money for their clients. And their clients are not the patient types. They want to see above-market returns year after year and get very nervous if a fund manager performs below-market even for a quarter, no matter how well-thought out his investment thesis is for the long term.
And that’s the one thing you have that even the best fund managers don’t have. Time.
- Time to research the best companies
- Time to wait for them to sell at a low price
- And time to hold them — for years or perhaps even decades while they deliver your target returns over the long term
So take your time
You don’t need hundreds of stock picks to achieve financial freedom. Just a few, or perhaps even one judicious pick (Amazon, anyone?)
So take your time to choose the best and save up every penny you can for that one shot — or a few — that you will certainly get.
And when the day comes when the stock is heavily discounted, buy, baby, buy. Go all in! Buy like it’s a warehouse sale on Black Friday — or the Nasdaq on March 2020.
And then sit back. Shut your laptop. Light a cigar.
Because you’ve just beaten Big Money.
And they will never again beat you.
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I am not a certified financial planner or finance professional and this article expresses my personal opinions only. Despite my best efforts, not all information may be accurate. Please consult with a financial professional and exercise your own judgement before making any significant financial decisions.
