It’s a buyer’s market for greater fools

If there’s one thing we’ve learned from the financial crash, it’s that the efficient market hypothesis is utterly bogus. As a corollary, just as dead is the idea of buy-and-hold investing as a rational way to make money. Stock market results from Japan over the past two decades, and now America and Europe, are making it increasingly clear that the relatively steady returns of the last century were an anomaly begetting complacency.

Moreover, I’d especially be wary of long term investing in an environment with nearly 10% unemployment and an economy entirely propped up by war-level deficit spending when (a) there is no war and (b) we already have more debt* than the entire private wealth of the country. The financial system crashed because we had unsustainable levels of credit being issued, pulling future demand forward in a way that had to end sometime. So, what did we do? We simply pulled demand forward by using a bigger lever, the United States Federal Government. When debt levels became untenable for individuals and corporations, we simply shifted them to the government, an entity with a higher credit rating by dint of its ability to steal with impunity to pay its bills. But that’s the end of the line, folks, and even the US government has its (credit) limits. At the end of day, to paraphrase Charlton Heston, it’s all just people. The day of reckoning is drawing near, as the Chinese have made clear, and it won’t be pretty. I’m not predicting apocalypse, just extended tough times as we finally have to start paying the liquor bill for the long party.

So, if buy-and-hold is out, should you trade the market short term? Well, unless you’re a investment bank like Goldman Sachs, with the ability to access privileged order flow information and front run trades, you’d also have to be insane to try it. At this point, our stock markets are a farce, a rigged game for the benefit of a few elite financial firms. Spreads are huge, and people are getting scalped right and left by manipulation and high frequency computer trading games.

I’ve always looked with skepticism at the stock market. It’s a giant zero-sum game, for the most part, since dividends and stock buybacks have largely disappeared. Despite all the pumping of the market as a way to make wealth, it’s a mathematical fact that the stock market is essentially just a mechanism for transferring money between people and institutions. But lately, it’s also an empirical fact that it’s largely a way for money to be moved into Goldman Sachs’ trading accounts.

The stock market has become a Persian bazaar, and yet another example of the hubris and unchecked greed of Wall Street. It’s time the average person says “enough is enough” and quits playing. The only way Wall Street will get the message is if enough of us decide to quit being patsies, and leave the market. The truth is, your broker doesn’t care if you make money. They don’t offer their stock advice or “trading tools” because they give a damn about helping you. You’re the trading tool. They know, by definition, that their customers will lose money on average by taking their advice (it’s a negative sum game when you factor in commissions, even before considering that it’s a rigged game). They just need you to play the game, because the only way Wall Street stays alive is by skimming from the streams of money flowing through it.

If you haven’t thought about it yet, just ask yourself where money goes when it “goes into the market.” In truth it just goes from one person’s cash account into another’s. There is no such thing as money “in the market” or “on the sidelines.” It would be just as ridiculous to talk about money being tied up “in oranges” when people buy produce. Money is always going from one bank account to another. The market is just a way to transfer money and shares, and rather than money “moving in” from the sidelines it’s really more accurate to say that at any given point, dumb money is moving in or out of the market in the opposite direction of smart money. If you’re a short term trader, you have to wonder if you’re on the right side of this transfer if you don’t have access to a thousand CPU cluster computer center and direct exchange connections. If you’re a long term investor, you have to wonder if you’re on the right side of this transfer when you see investment banks make bets with their own money in exact opposition to what their retail research advises.

I know you might miss the fun of trading stocks, but consider taking up gambling on sports, instead. At least it’s a fair game.

(*including government entitlement promises as debt)

8 responses to “It’s a buyer’s market for greater fools”

  1. Hmm I dunno I disagree with you. Buy & Hold is making more millionaires this summer than anything else I can think of. To serve you better you might want to look into either swing trading or even better, options trading.

  2. Hi Jon,

    I’m not sure if I read [this rather depressing] post before or not. One thing I don’t see is a recommendation from you of how to invest one’s money if not in long-held stocks.

    Right now I use a financial advisor and he recommends mutual funds. Not being a particularly educated investor, I like this idea since I am not placing bets on individual stocks which I think I would find too stressful.


    • Thanks for keeping me honest. I don’t want to get myself in trouble making recommendations, but my money is mostly in cash, with a chunk in gold and commodities. I was out in 2007, and so fortunately missed the initial big drop in the stock market. Of course, I’ve also missed the recovery, too, and may miss quite a bit more. On the other hand, I can sleep well at night knowing that my money is not tied up in an equity market dominated by computers all fighting each other over pennies, based on some vague confidence in an economy that is based on a bloated government borrowing vast amounts of money from foreign countries to waste on spending that has very little economic return. I’m not saying the stock market is going to crash, I have no damn clue what it’s going to do. But I think there’s a risk it will and I’m happy to miss out on making money the easy way in the market so that I can keep the money I earned the hard way.

  3. I would still go with the buy and hold strategy for my stocks. The stock markets all over the world have found a similar effect with the investors gaining big time in the long run and the traders losing it eventually. Although short term investment will get some good returns it is beneficial that we have a diversified portfolio and invest according to the age factor. I am not sure how relevant this age factor is presently but an young individual will be encouraged more to invest in short term high risk-high return investments than in long term low risk-stable returns investments.

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