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ByPeter Morici, Senior Contributor to TheStreet , On Monday November 29, 2010, 6:48 am EST
With corporate profits breaking records, Wall Street anxiously anticipates the return of the individual investor to the stock market. It may be a long wait because the little guy may have concluded investing in stocks is a sucker's bet.
Investors, as opposed to traders, buy stocks in companies whose profits they expect to rise. The conventional wisdom says stock prices will follow profits higher, but over the last two business cycles that simply hasn't happened.
In February 1998, the S&P 500 first closed above 1000. From the first quarter of 1998 to third quarter of 2010, corporate profits were up 203%, but the average daily close of the S&P 500 was up only 7% -- about half a percent a year.
Buying stocks doesn't seem to pay anymore because most of the increased value created by higher profits has been captured by hedge funds, electronic traders, private-equity funds, and aggressive M&A shops, free standing and at major investment banks, which have multiplied over the last two decades.
Their activities, essentially, fall into two categories: aggressive trading -- exploiting complex shorting opportunities, quickly detecting and exploiting movements in trading intentions of large mutual funds and other tactics often associated with exotic hedged bets and electronic trading; and direct asset purchases -- buying underperforming companies, all or in part, to force managers to pay out large sums, rearrange their companies through mergers and divestitures, or exploit unattended business opportunities incumbent managers have been lazy about pursuing.
Not all of this is negative to stock prices or unfair.
Shrewdly synthesizing public information to identify value in companies ahead of other investors is the way stars like Warren Buffett became legends. Stock prices rise permanently in wake of their actions, and that's good for the ordinary investor already in the stocks they pick.
Shaping up underperforming companies likely started even before the first Greek shippers bought out rivals to discharge incompetent captains and reduce seafaring risk, spread overhead and accomplish more leverage with potters, weavers, farmers and foreign merchants.
However, too much of a good thing -- electronic trading and aggressive hedging -- can be disruptive. Look at the costs imposed by the May 6 "flash crash" or defensive tactics by corporate managers besieged by unwarranted shorting. And, consider how often private equity and M&A shops acquire companies and load up them with debt, make big payouts to dealmakers, and then later disappoint investors and creditors.
Through superior information, quick execution and aggressive marketing, traders and dealmakers capture a great deal of the potential increase in value created by new and anticipated corporate profits before that value is recognized in stock prices. This results in lavish compensation for traders and dealmakers and stock prices that don't rise with profits.
Instead of ordinary folks getting a decent return in their IRAs and Keoghs, real estate prices in the Hamptons and luxury goods sales at Manhattan's finest stores soar.
Hedge funds, electronic traders, private equity and M&A shops do act on information that is obtained through careful, legitimate research but as ongoing Securities and Exchange Commission investigations into insider trading and published reports on electronic voyeuring indicate, critical competitive information is obtained through unethical and perhaps illegal means. Data pried from incautious corporate officials and through electronic espionage further disadvantages opportunities for gains by individual investors and conventional mutual and pension funds.
It all sounds preposterous, but consider that JPMorgan and Bank of America went through the entire third quarter without a negative trading day -- no losing days on proprietary trades. Unless you believe in perfection, something stinks about the information they are using.
If someone is winning all the time, then someone else is losing. That's the ordinary investor.
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i came to that conclusion a couple years ago...
it's not impossible for the little guy to make money anymore, it's just impossible to make money without working your butt off at it... and the risk is just too high, they can scare you out of your long position and then take it higher in hours...
and they do
i've watched them take out everybodies stop losses out in the first twenty minutes of trading and go up all day after that... too many times to count in fact.. at first i believed the rumors that it was the MM's doing it, but i began to realise that the MM's cannot possibly do it alone... they have to have traders to work with them in order to do it...
then i saw them sell me shares that never existed and that was the end of any kind of trust in the markets for me...
it's harder for them to get you on indexes, but there's a school of thought that says index trading will be the next big bomb to go off in the markets and the logic they offer is sound...
i have come up with a proposal that would fix this mess and fast...
of course i would be called all kinds of ugly names cuz it involves raising taxes, but this would stop the bullcrap instantly..
Cap Gains tax becomes incremental based on the time frame you hold...
less than 24 hours? 50% tax taken immediately on the spot, no losses can be written off against these trades. 1 day to two weeks? 40% two weeks to 6 months 30% 6 months to 1 year 20% 1 year to 2 years 15% 2 years to 4 years 10%
over 4 years? 5% cap gains tax.. that would put investors back in the market and get rid of the sheep shearers. do this on commodities in a realistic commodity timeframe??? and you will see commodity prices come way down... real fast.
IWISHIHAD
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Originally Posted By Glassman:
"i've watched them take out everybodies stop losses out in the first twenty minutes of trading and go up all day after that"
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I got caught recently in TGB's crash with a stop loss taken out.
Below is what is happening there, from another board.
"Law firm launching class action over Taseko share imbroglio Comments Share | Law firm launching class action over Taseko share imbroglio November 26, 2010
Mark Nielsen Citizen staff mnielsen@pgcitizen.ca
The law firm that won a $49-million settlement for Hollinger shareholders is organizing a class action lawsuit on behalf of those holding stock in Taseko Mines Ltd. following the mysterious drop in the company's share price last month.
Both the RCMP and the B.C. Securities Commission are investigating the possibility of insider trading after the stock's price fell drastically on Oct. 14, 2 1/2 weeks before the federal government blocked construction of the proposed Properity gold mine southwest of Williams Lake.
Lawyer Anthony Merchant, of Merchant Law Group LLP, said that's all well and good but will fall short of getting money back for shareholders.
"The only way that people are going to get money back is by grouping together," Merchant said.
Past and current Taseko shareholders are being urged to visit the firm's website, www.merchantlaw.com, and provide their contact information, stressing that doing so creates no financial obligation for those who do."
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glassman
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that sounds differnt from what i am talking about tho,
lemme 'splain:
first thing in the morning? a few big sell orders get placed... these sell orders take the price down far enough to trigger stop losses.
a reasonable stoploss target is 10% below the price from the previous day, or 10% below your buy-in price.
so i have watched the price of many many stock drop between 15 and 20% withing the first 20 minutes of morning trading on no news...
now, if the price settles their? that's fine, but what i have seen many more time than i can count is the buying starts to get heavy after the price drop and actaully ends the day significanlty higher ( 5% or more would a significant 1 day climb)
waht i know from experience and guessin ONLY is that somebody has enough information t know there's enough shares on stop loss to fill a buy order at a profitable price for the MM...
my DD says the MM's can see the stop loss orders.. i cannot prove this tho..
they have a buy order sitting on their desk that they want to fill, so they go get the shares the easy way, by triggering the stop losses..it takes almost no volume to trigger a stop loss... just filling an order of 100 share at 15% below the starting price of the day should trigger almost all stop loss orders place by reasonable people, of course if they do only 1 trade of 100 shares? everybody would be on them hard, so they have to put on a show... theoareticlly it don't take much money to do this, just a few fast trades below closing price from the day before
the brokers are the ones that are making hte stop loss orders visible to the MM's...
IWISHIHAD
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In the last few years it seems like what you are talking about is just part of the day in the stock market.
What your are saying is different than my statement, but both seem to be more of a common place these days.
Sad, but true and we use to think getting 10% on the big boards in a month use to be great.
Seems like the big boards are more like the pennies...watch where we step
The one i stated about(TGB) even gets more interesting considering that a couple of the indivuals that were making the decisions for the Gov. to allow or disallow the mine had ties.
One with the Indians and the other took a job with a major bank the day after the decision was made to not allow the mine.
Maybe nothing there, but with the lawsuit i assume they can open up everything, should be interesting to watch, but might be a settlement fairly quick if much is questionable.
But the Lawyers will get most of the money anyhow.
The Markets are sure more of a challenge these days for us average investors.
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CashCowMoo
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No more of a suckers bet than GETTING MARRIED!
glassman
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LOL. i been married for over 20 years and wouldn't change a bit of it... not perfect but nothing is ever perfect... a year before i got married? i was absolutely sure i would never ever get married...
IWISHIHAD
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Originally Posted By CashCooMoo:
"No more of a suckers bet than GETTING MARRIED!"
_________________________________________________
So when are you going to be the sucker?
How old are you?
Wait to long and all the good ones will be gone.
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CashCowMoo
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I will be the sucker soon enough..never been married. 30yrs old. Been close to it, but skirted by. More worried about my MBA and business right now, after that ill worry about buying a diamond. I wonder if Obama will put a marriage tax on diamond rings... wouldn't surprise me lol.
IWISHIHAD
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Your going to get an ulcer worrying about Obama.
You could find some old cracker jacks and get a ring out of the box, then you wouldn't have to worry about a tax.
Then your problem would be solved and the wedding bells could ring.
How did we get from stocks to weddings?
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IWISHIHAD
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The stocks remind me a little of the Indian casino's.
The big players in the stock game are the indians, controling the odds for us small investors.
As times have gotten tougher the big payers let us smaller investors have less and less of a return.
The big stock players control when the odds during the day are greater for us, while all the time making sure that we do not have the odds in our favor to long.
The Indians do the same with the video poker machines etc.
Set the odds a litlle higher during one point of the day sucking people in, then reducing the percentage of payout later in the day getting back all we won plus some.
The Indian casino's are not regulated for this but the stocks are suppose to be.
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CashCowMoo
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quote:Originally posted by IWISHIHAD: The stocks remind me a little of the Indian casino's.
The big players in the stock game are the indians, controling the odds for us small investors.
As times have gotten tougher the big payers let us smaller investors have less and less of a return.
The big stock players control when the odds during the day are greater for us, while all the time making sure that we do not have the odds in our favor to long.
The Indians do the same with the video poker machines etc.
Set the odds a litlle higher during one point of the day sucking people in, then reducing the percentage of payout later in the day getting back all we won plus some.
The Indian casino's are not regulated for this but the stocks are suppose to be.
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That is why I have never been big on going to casinos. I go MAYBE once a year. I havent been in and played in a casino since 2008.
As for the stock market, I dont like the buy and long term hold. What if the market crashes again and your "safe" and slow portfolio is down 40% or more? I call it grandpa investing, you know, waiting 30 years to make 8% or whatever it is.
It is all about the trade baby. Get your butt out of the casino, open up an account and learn the ways. Taken me years of failure to get to where I am now. To think it all started with CMKX. I am glad that was my first stock because it burned me bad and I learned a lot from it...not overnight though of course. Get this, there are STILL a lot of CMKX bagholders who still believe in silly lies about trillions of dollars in some sort of master plan being sent out in checks. They still believe the suckers that tell the same lie over and over again lol.
The Bigfoot
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I don't think stocks are a suckers bet.
I think the whole 'buy and hold strategy' is about tapped-out as there are too many who have learned how to siphon off the wealth, but there is still money to be made.
Once a year (more frequently if I am not performing well) I revamp my program and every time I do I perform just a little bit better than I did before.
One of my best moves was that I don't hardly ever do pennies anymore, that helped quite a bit. Most my time is devoted to mid-cap now but I will play small or large if the stars are aligned.
Starting up a new more aggressive program in 2011 that I have high hopes for. We will see.
IWISHIHAD
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I agree The Bigfoot.
The whole market itself is what always worries me, not so much the indivual plays.
Still money to be made for us small investors.
Im into trading the options, wish i had done that years ago.
Will see how it works out in the longer run.
I still will play a penny from time to time, but i am much more selective in the ones i play.
The big board these days has those moves of 10% or greater in such a short of period of time i don't see much reason to play the pennies.
The big board is also easier to get semi realible information on than the pennies.
And i still like the casino's from time to time for some fun, love the video poker
But i know i am not going to beat a casino over much time, so i keep my bets very small, way to low of a return to the public these days and that includes Vegas.
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bullitt49
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Does anyone know about In n out burgers. Are they a public or private company and are they owned by someone where I can buy stock in them. Thanks for any information if someone has it.
IWISHIHAD
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Family owned i believe.
They have been around a long time in my area.
I remember them way back.
What many people don't know is there are speciality burgers that are not even on the menu.
Good to their employees in general.
They had a TV documentry on them about a year ago,very interesting.
I think they are in their third or forth generation of family now.
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CashCowMoo
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I was just talking with someone who was in California eating there. They ARE family owned, but you can franchise them. I guess they are really taking off and have good publicity.
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