Written by A.J. Brown

Is Wall Street Rigged?

If you’ve ever had a 401(k) or just about any kind of retirement plan, you’ve probably heard the popular advice that you should “buy and hold.”

Never mind if the market is tanking and your portfolio is bleeding money like IndyMac. You should simply keep investing money because you’re getting a “good deal” on stocks.

After all, if you’re buying stocks at cheaper and cheaper prices, you’re “dollar cost averaging.” And dollar cost averaging is the best strategy in the long-run because stock prices always go back up, right?

Frankly, this popular line is a little bit of investing propaganda. Or at least that’s what Ron Ianieri says in a recent article titled “Wall Street: The Great Hypnotist” — and I agree.

Here’s the funny part: Your average investor knows when his portfolio is tanking. And yet he will continue buying and holding because he believes too strongly in what he’s been taught.

But this same investor can’t avoid the psychological pain of a shrinking portfolio. So rather than doing anything to stop the bleeding, he will decide not to look at his portfolio — as if closing his eyes will make the problem go away!

Obviously, a more effective strategy might be to pull the money out and put it in a cash fund. Once the market has bottomed out, the investor could buy back his entire portfolio for pennies on the dollar — meanwhile avoiding all the painful losses he would have incurred by staying in the market.

Ron Ianieri agrees:

Even the idea of just simply getting out when the market runs into a bad period and avoiding the portfolio loss you would have encountered, can make a huge difference in your returns over the course of an individual investors investing years. But no, that is not what Wall Street wants you to do. They want you to buy and hold, put in some more money that they can control, and buy and hold again. Over and over, year after year for your entire life, buying and holding. That is how Wall Street wants you to do it. What you do not realize is that this allows Wall Street to use you to help them.

So why would Wall Street want you to keep investing money? Why is it to their advantage if you continue to buy and hold?

The reason is this:

If the players on Wall Street ever find themselves long in a falling market, they can then prop up the market — create a false recovery — and then sell off their long positions to avoid losses.

After they’ve liquidated their positions, they can then let the market fall as long and far as they want. And why not? They don’t have any skin in the game anymore. All their positions were passed off on unsuspecting buy-and-hold investors.

Have you ever wondered who’s selling stocks when you’re buying?

Well, in many cases, it’s probably Wall Street.

Ron Ianieri provides an interesting analysis of the recent run up and sell off in his article. If you have a moment, you might want to read it here. (His article starts on Page 10.)

Best regards always,

A.J. Brown

10 Responses to “Is Wall Street Rigged?”

  1. Bob R @ 6:49 pm:

    I always get a kick out of these types of vague, trade in and out, frequently, types of articles. The writers always use obscure, “alomost godly,” claims of “Wall Street,” or the “players,” or “they,” or “The Institutions,” to claim a great cospiracy theory about “them” taking your money, and running up and down the stock market, as “they” please. If investors could, as you say, just sell, when the market is tanking, and rebuy at the bottom, it would all be so easy, every one would be doing it, including “them”!! No one knows where a market downturn will end, nor where the bottom is, to start buying. A smart, long term investor, can only look at charts (which equate to History), and returns on quality stocks, over long periods of time (decades), which proves that in the long run, if you buy and hold good, strong, dividend paying companies, stocks will outperform all other investment types returns. Averaging in, is a sound investment stratagy, that in the long run will pay off better than trading in and out of stocks every time the market moves up or down. Stick with a long term, buy and hold, investment strategy, and you will be paid handsomely in the long run. I know, because I have made several million dollars over the last 25 years, using this strategy, believe it…or not!

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  2. RichE @ 9:15 pm:

    A.J. you’re talking Apples and Oranges. Investing is not trading. First, if the investor is doing, “Dollar Cost Averaging” then it doesn’t matter what the, “Big Guy Traders” are doing because the “Market” over the past fifty years has averaged 8.7% per year. Do some 5, 10, 15 year MA’s on the S&P 500 and you’ll come up with 8-12%. This is what investing is based on, the probability that the investment vehicle will return x-y% over any 5, 10, 15 year period. Any investment consoler, worth his salt, will assure you, and not guarantee you, 8-12%. If you want to piss him off ask him what that assurance is based on and he’ll tell you, blah, blah, the market over the past 100 blah, blah, years and in almost any ten year, blah, blah, period has historically, blah, blah produced 8-12% blah, blah, blah. Then ask him if that’s so, the market did it all by itself then what did he do. The purpose of investing is to, “Buy and Hold” vehicles based on their historical performance. It has nothing to do with trading. Will Apple be around in 100 years? Don’t know. Will the S&P 500 be around in 100 years? Yes! Will its performance be about the same? Probably.

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  3. A.J. Brown @ 11:59 pm:

    Hi Bob R and RichE,

    As always, I appreciate you both and your contributions. I love hearing your perspectives.

    Thank you!

    For all of you out there that are still waiting for a recovery from the dot.com crash that is now seven years behind us, I would appreciate hearing your counter thoughts to Bob R and RichE. I can think of a few of you I know personally that read this blog. (I also know that the last thing an investor wants to do is call attention to him or herself after suffering amazing losses following a tried and true strategy like “Buy and Hold”, so I would also understand if you refrain from commenting.)

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  4. Bob R @ 6:49 pm:

    You are still thinking short term AJ, even with the internet induced, losses of the NASDAQ bubble, of 2000. As I said, if you held, even the NASDAQ, over the more tried and true S&P, over the last 25 years you would have gone from an index of 232 to 2292. Not a bad run! People that bought into the bubble (myself included, to a limited degree) were not into the markets for the long term, rather for quick, short term, (can I say greedy?) profits. I bet history will prove,even those that bought in at the highs of the bubble will profit, if they hold for the long term. We’ll see, if I make it that long…Best Regards, Bob R

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  5. Smokey @ 10:51 am:

    Hi A.J.
    I agree that buy and hold is old school and does not work present day and hasn’t for quite some time as my retirement account at work shows. The people who bought during the Dot Com bubble and were told to buy and hold may never in their life time get back to where they started. As everyone knows, if the market drops 50% it takes a 100% gain to get back to where you were. No one can pick the top so they don’t know when to sell and no one can pick the bottom so they know when to buy. All you can do is decide on what your level of PAIN is and set your sell at that point, why suffer all the way to the bottom, and dollar cost averaging is like throwing good money after a bad trade. As you teach, money can be made on the way down as well as the way up, even faster on the way down, in this market you just need to be quicker. If you could just flip the chart a down chart would be an up chart and it would not be so scary. Most of the Billionaires made their money during the depression on the PAIN of others, they loaded up on cheap stocks and waited, so if we get another depression it may be the time to buy, if you still have any money left from your Buy and hold. Greed and Pain are driving the present market and all the experts have their own ideas as to where the market is going and there all different. The best solution is to get an education and learn how to do your own trading.

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  6. A.J. Brown @ 2:51 pm:

    Hi Smokey.

    You make real insightful points. And, I agree with you, there is definitely more greed and pain / fear emotion than ever in today’s market.

    Thank you for contributing your comments to my blog!

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  7. Edwin Lee @ 7:59 pm:

    Hi Mr. Brown, fellow Investors and Traders,

    Before I let you know where I stand, allow me to offer my two cent’s worth.

    First things first, let’s begin with the end in mind. Why not let’s think in terms of MONEY?

    Since that’s what we are in this game for, right?

    We play to Win. We play for the Money.
    Both sides should not have any dispute on this.
    If you play to lose, do let me know. =)

    ‘Playing’ in this sense, refers to Trading or Investing. By that, I have no intention to ‘degrade’ the business of Trading/Investing to just a simple game which anyone and everyone can play. In fact, most of us cannot afford to play this game for long as we all know that 95% (or so the statistics claim) loses in this game of wealth accumulation/creation.

    Now, with that clarified and out of the way, let’s think now ONLY in terms of money.

    Nobody plays to lose (money). So what’s your strategy to win (money)?

    Wouldn’t it be fair to say that both investing and trading are simply two ’strategies’ to play the market?

    So what’s the main difference, one may ask?

    Well, the first thing that comes to my mind is TIME!!!

    That’s all it is to me.

    Ok ok, I know I know…some of you INVESTORS must be urging to scold me for my ‘ignorance’. You might ask, “Hey come on man, are you a newbie or what? There
    is more to INVESTING than that!!! Don’t you read books by INVESTING LEGENDS (you know who)?

    Don’t you know you need to look at fundamentals?
    Don’t you know you need to study a company inside out, better still - take some time, talk to a few employees, esp. the top executives, understand where a company is headed for?
    What is the CEO’s vision?
    Is he capable of leading the company to greater heights?
    What are the unique selling points of the company and it’s line of products or services?
    What are its competitors up to?
    What is the company’s market share?
    More importantly, does it have a wide economic moat?
    blah blah blah….You end up paying hundreds, if not thousands per year to learn most of the available courses on INVESTING and/or subscribe to certain
    online newsletters, Investment TV shows, advisory services out there.

    You get the picture.

    Alright, I know you TRADERS must be very mad at me too? You guys, on the other hand, might say things like, “Hey dude, you are new to the game. Timing is only part of the equation…you need to have a feel for the markets if you want to trade, you need indicators, sophisticated ones. You need to understand how to use the indicators, like Stoc Slow, ADX, MA. You need to understand price action. You need to learn about Candlestick Trading. You need to learn how to use the Fibbonacci Retracement to better gauge the support/resistance of the price levels. You need to go and learn about the fantastic Elliot Wave because markets tend to obey a certain rule/law and history repeats itself. Blah blah blah… You end up paying thousands, if not tens of thousands to learn most of the available courses on TRADING and/or subscribe to certain online indicators/trading methodology service.

    Now, I am not being demeaning or sacarstic here. That may be jolly well what the master/guru/expert/professional INVESTORS/TRADERS will tell any guy on the street and what I have just said is probably only 0.1% of what they would want to impart to the average investor/trader… =)

    Back to what A.J. said about not buying and holding because in the long run, stocks that have collapsed generally do not return to their highs, if they do not get delisted from the particular Stock Exchange, that is. I dont care which stock exchange it is or which part of the world it is located in?

    It can be NYSE, it can Hongkong Stock Exchange, Tokyo Stock Exchange, London Stock Exchange, Australian Stock Exchange, or Singapore Stock Exchange. This applies to ALL Equity Markets. Generally, you can’t talk about investing in the Futures or Forex market (in a buy-and-hold sense).

    A few of you have rebuted this ‘theory’ and said that it WORKS! In fact, you might even swear by it, no doubt!

    My belief is this. Both schools of thought have their own TOP 5% (just a rough estimation). I mean to say that I believe EACH school (be it the school of investing or trading) has their own fair share of LOSERS - the other 95% (again, just a rough estimation).

    So what’s the argument here then?

    (1) Which school has more winners, in terms of numbers and %?
    (2) Which school has more winners, in terms of dollars?
    (3) Which school has produced winners on a more consistent basis?
    (4) Which school has produced winners in the shortest TIME?

    Well, for me, I take into account everything. I’m a Libra btw. =)

    Jokes aside, I give more emphasis on TIME. Like I said earlier, the GLARING MAIN difference between a group of INVESTORS and a group of TRADERS is TIME.
    If I were to ask the TRADERS, I would ask, “I want to know, how much TIME you took to PRODUCE that MONEY?”
    If I were to ask the TRADERS, I would ask, “I want to know, how much TIME you took to ACCUMULATE that WEALTH?”

    If I am young, yes, I may subscribe to that thinking that I should study hard, get a degree, work very hard, spend less than what I earn and INVEST the difference.

    If I am of retirement age, yes, I may subscribe to the thinking that I should take up a good course on how to TRADE smart and make the most money in the shortest TIME.

    More importantly, TRADE for a LIVING.

    You can’t invest for a living. Not unless you already have a lump sum of money set aside in some bank/investment account and you are simply collecting the returns/interest passively.

    And unless you have a relatively large sum of money and TIME, you may want to stay for relatively shorter durations in the market and that’s what differentiates TRADING from INVESTING. The TIME factor. You only buy options/stocks and ‘hold’ them for a relatively short period of time. If the price goes in your favour, you HOLD. If the price does not go in your favour, you either HOLD/SELL.

    Now, if you indeed choose to hold and you are holding stocks and not options, then you get ‘converted’ into an investor. Good luck to you. =)
    If you choose to sell and look for greener pastures, you recover a portion of your capital and you might grow that remaining portion in other stocks/options.

    But note that normally investors are looking to the upside, whereby they study a company inside out and choose to buy only those they antipate will appreciate in stock price. Direction-wise, quite limited, I must say.

    On the other hand, traders can do both sides. In anticipation of an upside, they can choose to long the mother share (or simply long call options). In anticipation of a downside, they can choose to short the mother share (or simply long put options). IN other words, they are more versatile.

    Likewise for the futures market, if you are only going to long, you are depriving yourself of opportunities when the price action heads south.

    For the Forex market, you dont really have a choice. Since you trade in pairs, whenever you long one side, you are effectively shorting the other side. Like the saying goes, when you pick up one end of a stick, you are picking up the other end too.

    I am digressing. I know we are talking about the Equities market here in general since it’s Mr Brown’s blog and the main focus is on Options Trading. But
    you get the picture, right?

    In conclusion, if you can make money both ways (longing and shorting) and you can make money in a shorter time (which you can use to pay your MONTHLY bills), why not look into trading?

    On the other hand, if you
    (1) are 100% sure that a certain stock will appreciate in value and that’s it’s near its bottom
    (2) have all the time (and youth) in the world
    (3) have lots of cash on hand
    (4) have no immediate need for the cash,
    why not snap up whatever shares you can.
    Simply adopt a Buy & Hold strategy. Even if you cannot realise the profits, your children/grandchildren will. ;-)

    A word of advice though, wait for the market to pick up, clearly showing that a stock/index has indeed bottomed up, then buy-and-hold forever (read as investing) NEVER catch a falling knife, ALWAYS wait for the knife to hit the floor, then pick it up. (Now, who ever said NEVER to use the word NEVER? ;P )

    By now, you should know where I stand. =)

    TRADE smart,
    Edwin Lee

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  8. A.J. Brown @ 3:08 am:

    Well hello Edwin Lee!

    After reading your comment, my initial knee-jerk reaction is … WOW!!!

    Thank you for taking the time to comment.

    A.J.

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