One of the most devastating myths perpetuated by the financial media and authorities is that the global investment business is a “level playing field.”The small amateur investor who reads Barrons on the weekends, this story goes, should be able to go toe-to-toe with full-time professionals with decades of experience, multi-million-dollar research budgets, and global trading operations.
The fact that this story isn’t always laughed out of town says pretty much all you need to know about the state of investment expertise in this country. But it is a story that has been and will be told forever, to the detriment of millions of Americans.
Yesterday, the unfolding insider-trading scandal provided a concise snapshot of just how little the average American stock-junkie knows about the way Wall Street actually works.
In a CNBC poll, some 60% of viewers reported that the idea of checking with industry insiders to get real-time insights into business trends seems unfair.
Checking with industry insiders to get real-time insights seems unfair?
What exactly is it that these 60% of CNBC viewers think that Wall Street does all day?
Wall Street spends tens of billions of dollars a year “checking with industry insiders” in one way or another. It also spends tens of billions of dollars a year analysing financial statements that are often inscrutable to folks who don’t work in the industry. And it spends tens of billions of dollars building real-time trading systems, locating its computers closer to the stock exchange for faster execution, and so on.
Why does Wall Street spend all this money and go to all this effort?
Because it has to: It’s the only way it has even a tiny hope of gaining an “edge” over other investors.
As we’ve often noted, the only way to win in the trading game is to beat other investors. You can get the market return by investing in an index fund. The only reason to trade, therefore, is to try to do better than the market return. And, again, the only way to win the trading game is to win while other investors lose.
(Before you ever trade a stock, you absolutely must understand this: The only way you are going to make money relative to a passive investment strategy is if someone else loses. Put differently, 100% of the “winnings” of some traders must be lost by other traders. The winnings and losses always offset each other–and have to mathematically. Who is likely to win when a part-time amateur goes head-to-head with a full-time professional? Well, as the saying goes, if you don’t know who the sucker is at the poker table, it’s probably you.)
Once you understand that trading is a zero-sum game, you can begin to understand why trading is so competitive. You can also begin to pity the poor suckers at home who are being led to believe that it’s a “level playing field.”
It what other endeavour do part-time amateurs expect to be able to compete toe-to-toe with full-time professionals? (Especially in an endeavour that is so competitive that most average professionals can’t even compete with the most talented professionals.)
None that we are aware of.
And yet, in investing, this ridiculous conceit never dies.
Wake up, amateur investors. Trading isn’t a level playing field. And it never will be. The sooner you learn that, the better off your retirement savings will be.
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