It’s the myth that will never die.
Jim Cramer has made a career out of promoting it, as have countless other stock-picking gurus since the dawn of time.
What is this myth?
If only you “do your homework,” analyse those financial statements, (and listen to such-and-such a stock-picking guru), you, too, can pick stocks well enough to beat the pros.
If there’s one thing that should ring out loud and clear from the Galleon insider-trading bust it is that this is preposterous.
Stock trading is a zero-sum game. You cannot make money from trading without other people losing money.* In order to win the stock-picking game, therefore, you have to out-trade other traders. You have to beat the other traders by enough to offset your costs of research and trading (which are deducted from your returns). And you have to do this consistently, year after year after year.
Even without illegal inside information, your competition is intense. The hedge funds, mutual funds, and other professional traders you are competing with have, at a minimum:
- Professional analysts and traders with decades of experience who work 20 hours a day
- Huge industry Rolodexes filled with primary contacts at companies whose stocks they trade
- Research budgets that run into tens or hundreds of millions of dollars a year
- Dozens of Wall Street brokers calling all day with every scrap of info they can dig up
- Instant access to 100% of Wall Street research and analysts from hundreds of firms
- Proprietary research services that can cost hundreds of thousands of dollars a year
- High frequency trading computers that act on any market info in milliseconds
To win the stock-picking game, you have to consistently beat folks who have all of these advantages and more.
And then there’s the sort of information that Galleon is alleged to have traded on. Yes, some of the information is clearly illegal inside information. The rest of it, however, is what is known on Wall Street as an “edge.”
Most hedge funds would describe most of the information Galleon traded on as “research.” Many would not trade without it–because then they would be like all the dumb suckers they’re trading against who don’t have an edge.
Information like Galleon’s is everywhere on Wall Street, and professional traders use it to trade all day long. So in addition to every other advantage professionals have over you, there’s also that.
On Mad Money tonight (and every night), Jim Cramer will tell you which stocks to buy–and why. What he won’t do is explain how the information he gives you will enable you to out-trade firms like Galleon.
The folks at Galleon watch Jim Cramer, too, of course–as do the folks at most other Wall Street firms. They watch him out of the corner of their eye while they tee up trades based on much better (and much more narrowly distributed) analysis and information.
Perhaps you are one of the folks who deludes themselves into thinking that with an hour or two a day of “homework”, you can out-trade Galleon. If so, Galleon is thrilled to have you in the game. As are the hundreds of other firms who make their money whipping suckers like you.
There’s a saying in poker: If you don’t know who the patsy is at the table, it’s you.
Next time you feel like bellying up to the Wall Street poker table, therefore, ask youself again who the sucker is. Chances are, it’s not Galleon.
* Many people don’t understand this. They confuse market gains and trading gains. To make money in the stock market, all you have to do is own stocks when they go up. This is NOT a zero-sum game. It’s investing.
To make money TRADING, meanwhile–to move in and out of stocks trying to time their moves–is a zero-sum game. The only way to profit at that game is to do it better than other traders–the folks who sell or buy stocks from you.