Home > Uncategorized > Stock markets – scam or not?

Stock markets – scam or not?

November 22, 2010 Leave a comment Go to comments

Recently I’ve been seeing a lot of discussion about people who are avoiding investments in stocks now because they think something isn’t right. Whether it’s large businesses that inflate profits, plain and simple fraud, or governments playing accounting tricks with the whole economy, there is an arsenal of arguments that can be used for this viewpoint now (although I’m sure it never goes away even in normal times). Even Mark Cuban, who seems to enjoy poking at common opinions but is certainly not unsuccessful, advises individual investors to stay out of the stock market on his blog. Is it rational to stay out of the market until it’s more transparent, is it rational to invest because the good outweighs the bad, or do you take a chance and hope to make some profits before others wake up?

This article from Henry Blodget addresses this from the insider-trading perspective. I’ve recently seen (in The New Money Masters) that a number of well-respected fund managers don’t even think inside information would help them, but anyone can see that when you make a trade there’s a chance the person on the other side knows a good reason to buy or sell and you don’t. As the article rightly points out, these are games that traders play day-to-day with each other; if you invest on a monthly basis over the long term you can smooth things out quite a bit and get the average price over time.

Since I invest in index funds instead of individual stocks insider trading doesn’t apply as much unless it’s really affecting the whole market, but other factors that do influence the entire market could be a concern. However here as well it’s good to remember that there are short-term games and long-term strategies. Bad news naturally gets attention but it doesn’t mean the market is less honest than it was 50 years ago. There have been too many scandals and mistaken assumptions to remember in that time but the market has continued to grow and investors have continued to profit. As long as people eventually realize what doesn’t fit (such as a company with fake profits) and don’t keep pretending that it’s real, I don’t believe the impact will be too great.

Of course there are no guarantees. This is only a reasonable conclusion (I hope) and unreasonable events happen all the time. But since nothing is safe, I currently choose to trust in the public investment markets as a reliable way to make a profit (as long as I stay away from investments that don’t even offer the chance of a reasonable profit). The markets accommodate everyone; while this means you might be buying from a trader who’s driven the price up 50% it also means you aren’t forced to go along with anyone’s plans and you can make your own way. Some day when another trader has a new plan and desperately needs to get something that you’ve been holding for the last 20 years you might find yourself with an unexpected profit!

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