‘The stock market is for suckers’

Facebook is the latest company to ‘unfriend’ the market

"The stock market is for suckers"

Justin Sullivan/GETTY IMAGES

Were it not for the source and recipients of the email—From: Goldman Sachs, To: Our most outrageously rich clients—it would have read like one of those Nigerian investment scams that slip through spam filters now and then. “When you have a chance I wanted to find a time to discuss a highly confidential and time-sensitive investment opportunity,” the secretive missive began. But this was clearly no shady dispatch from Lagos. What investment bank Goldman Sachs offered by way of the emails, sent out to thousands of its most valuable high-net-worth clients in early January, was the chance for them to buy a piece of the hottest company in America: Facebook.

Since the social networking site infused itself into every facet of our lives, investors have anticipated the day when the company would take its place in capitalist folklore beside Microsoft, Netscape, Apple and Google. Everything seemed to be in place—the phenomenal growth, chief geek Mark Zuckerberg’s rapid ascent to Bill Gates-ian prominence, The Movie!! It all suggested we were about to witness one of those rare moments when the spark of innovation meets the greatest wealth-creation machine the world has ever known: the American stock market.

Only that’s not how things have unfolded. In its email to clients, Goldman wasn’t talking about a public stock offering for Facebook. Instead, the bank, along with a Russian investment firm, injected US$500 million into Facebook’s coffers by way of a purely private transaction. Goldman, in turn, set up a fund through which wealthy clients could own those Facebook shares themselves, for a minimum of US$2 million. Based on that valuation, Facebook emerged a colossus worth more than US$50 billion.

Since the deal first made headlines, Goldman has had to backtrack somewhat, due to “intense media coverage.” Regulators were cool to the optics of rich Americans gaining access to hot companies when their less wealthy countrymen were shut out. So last week the investment bank made membership to its Facebook fund more exclusive still. Now only rich foreigners will be invited in.

The stealth arrangement is just the latest sign something is very wrong with Wall Street. The stock market has become dangerously disconnected from its primary function of uniting growing businesses with large numbers of long-term investors. Part of that disconnect can be seen in the growth of a so-called “second market” for private companies­—like Facebook—off limits to all but the wealthy. But there’s more. Markets have come to be dominated by myopic short-term thinking. The vast bulk of trades now involve no humans at all, but rather sophisticated computer programs that swap stocks at lightning speed; many believe so-called high-frequency trading was one of the causes of the flash crash last year that exposed how fragile the whole game has become. And as more Americans have tied their savings to the market, regulators have sought to protect them with layers of rules and red tape that critics say is driving away public companies.

Now there are signs some institutional investors, such as pension funds, are giving up on equities and buying alternative assets like bridges and toll roads instead. No wonder American companies like Facebook are avoiding the hoi polloi of traditional stock markets in favour of raising capital from private, rich investors. “The idea of the stock market was to help businesses raise capital, and to provide people, individuals, with a chance to invest their savings and participate in that growth and have enough money to retire,” says Peter Cohan, president of Peter S. Cohan and Associates, a venture capital and management consulting firm in Marlborough, Mass. “But in the last decade the whole thing seems to have fallen apart.” Where the market once helped investors and companies, now it’s failing both.

In Canada it may seem academic to fret about the faulty mechanics of the U.S. stock market. Yet we should be very much concerned that it’s not working properly. Many Canadian investors put their money into U.S.-listed stocks, and as America’s largest trading partner, we also benefit when that country’s economy is functioning properly.

Perhaps billionaire Mark Cuban, who made his money off the Internet bubble of the late 1990s and now owns the Dallas Mavericks basketball team, has put it best on his blog and in interviews. “The stock market,” he says, “is for suckers.”

Facebook’s decision to shirk public stockholders in favour of rich, private ones has only driven home that point further, and sparked a debate about how America’s rising corporate stars are financing their growth.

Facebook is far from alone in choosing to “unfriend” the stock market. Despite rumours that some high-profile stock offerings could be coming down the pipeline—including social networking company LinkedIn and bargain-shopping site Groupon—the U.S. IPO market has been in decline since the mid-1990s. According to figures compiled by Jay Ritter, a professor of finance at the University of Florida, last year 96 operating companies went public on the major U.S. exchanges. True, that was a rebound from the depths of 2008, when just 21 companies went public. But in the mid-1990s, even before the tech bubble, 400 to 500 IPOs a year was common.

Why does it matter whether companies go public? Because that has historically been the best way for smaller businesses to boost themselves to the top of their industries. Instead, with fewer new companies coming to market, the number of U.S. stocks is growing worryingly thin, leaving regular investors with fewer options to choose from. In a report last fall, the New York Times noted there were 7,500 companies listed on the NYSE, Nasdaq and American Stock Exchange in 1997. Today there are fewer than 4,100. “In the 1990s going public was a badge of honour,” says Cohan. “Now companies look at it and say, ‘If we can avoid it, we will.’ ”

To do that, companies are increasingly relying on private investors, depriving the investing masses of access to exciting new businesses. Private investors are not new to Wall Street. Since the early 1980s, private equity funds have regularly gone shopping for unloved public companies with the goal of fixing them up and then taking them public again. Venture capitalists have also injected untold billions into upstart tech companies with the hope of cashing out with IPOs.

What sets the deal between Goldman Sachs and Facebook apart from previous private financings was the way it targeted large numbers of wealthy individuals while flouting rules intended to stop private companies from doing just that. The SEC bars unlisted companies from accumulating more than 500 shareholders. Anything above that limit means they must disclose financial information, something Facebook is loath to do. So Goldman set itself up as a single Facebook shareholder, while its clients go along for the ride. What’s more, under SEC rules investors must be “sophisticated”—or rich—to buy private company shares, with a net worth of US$1 million or annual earnings of US$200,000 in each of the past two years. Put another way, wealthy people are considered inherently smarter than the rest of us when investing.

The Goldman Sachs financing isn’t the only way private money is allowing Facebook and other companies to avoid the markets. Virtual online exchanges are springing up, where investors in private companies can sell their shares. One of the key reasons companies go public, aside from raising money to fund their growth, is to give venture capitalists and employees who already own shares a way to unlock their money. Two of the largest firms in the burgeoning private company market are SecondMarket and SharesPost, which both launched their private company services within the last two years. As a result, existing shareholders now have a venue to sell their stakes, and companies are feeling far less pressure to go public. In addition to Facebook, shares in scores of private companies now trade on these alternative exchanges, including Twitter, Craigslist, Zipcar and Digg. Not all are Internet companies, though. There are also clean technology and semiconductor businesses benefiting from the shadow market. Nyppex, a New York-based advisory company that specializes in secondary markets, estimates that roughly $4.9 billion worth of private company stock was traded last year, more than double the year before, and it’s expected to continue growing rapidly. Once again, regular investors can forget about participating, though—these alternative markets are also off-limits to all but the rich.

There’s a much darker side to all this stealth trading in private company shares, argues Cuban. “We are seeing people who are trying to game the system,” Cuban told Maclean’s in an email interview. “The expectation is that [a company] will go public at a significant premium and the secondary market is a way to ‘get in on the IPO’ at a lower cost.” After all, for rich investors who snap up Facebook shares by way of the Goldman Sachs deal or through SharesPost and SecondMarket, the ultimate way to profit will be for Facebook to go public. By then, though, the value of the shares will have been bid up, and much of the company’s best growth may be behind it. The very real risk is public stock market investors could be left with an overpriced heap.

For now it seems many private companies seem intent on staying that way. One reason for that, some believe, are increasingly onerous rules that accompany a stock listing. For instance, Andrew Lo, a professor with the Massachusetts Institute of Technology’s Laboratory for Financial Engineering, points to the impact of the Sarbanes-Oxley Act, the sweeping rules passed in the wake of the dot-com crash and Enron scandal. Critics say the legislation does little to prevent frauds, but has driven up the costs for companies that go public. “There are enormous costs to being on the public market, thanks to Sarbanes-Oxley and other regulatory changes,” says Lo. “It’s become a lot more expensive to be a public company. So now you can access capital through hedge funds and private equity firms without the costs of going to the stock market.”

It’s important to remember why regulators have felt compelled to layer on so many rules. Over the last 40 years there’s been a radical reshaping of the investment world as retail investors rushed into the market. Since the late 1970s American investors have gone from having less than US$100 billion (adjusted for inflation) tied up in equity mutual funds to a staggering US$12.6 trillion in 2007. Where in 1980 fewer than six per cent of households invested, now roughly half do. Analysts have hailed this as the “democratization of finance.” As more people took control of their own retirements, it was generally seen as a good thing for American society. But with last decade’s back-to-back crashes, leaving the market where it was 11 years ago, that also means the pain was democratized, too. Panicked politicians reacted by passing new laws. Now it seems the very rules established to keep regular investors safe may actually shut them out from participating in the growth of many of America’s fastest-growing companies.

But there’s even more to the market dysfunction hurting investors and companies.

In 2004, at the age of 92, the late Sir John Templeton, a pioneer in the world of mutual funds, issued a stark warning to investors. “The stock market is broken,” he said in an interview. He went on to predict the housing bubble would spark the sort of terrible market crash we witnessed four years later. But Templeton saw a bigger problem than just the bubble then emerging. Stock markets are now dangerously short-sighted. “Mass media, especially TV today, is so short-term that few in its audience grasp the lasting damage and corrective impact which will continue to linger from the greatest financial crash in world history,” he said. In the wake of that very crash, short-term thinking is as much a problem as ever before.

The stats behind investors’ amputated attention spans are astonishing, and reveal the damage caused to the wider economy. According to the New York Stock Exchange, in the 1960s the holding period for stocks was eight years. By 1990 it had fallen to two years and today the average stock is held for just nine months. As investors have shortened their time horizons, companies have been focused on each next quarter’s financial results at the expense of the next decade, say experts. Last spring, the U.S. Senate banking committee held hearings to examine the plague of short-term thinking in capital markets. Some astonishing revelations emerged. In a survey of 400 chief financial officers, 80 per cent said they’d cut research and development spending to goose short-term performance. To make matters worse, when companies do beat expectations, executives are lavished with huge paycheques and millions of stock options that dilute existing shareholders even further.

One reason investor time horizons have shrunk so dramatically is that hedge funds have been taking massive gambles using borrowed money, says Cohan. “One of the biggest sources of volatility is hedge funds betting on very short-term movements,” he says. “That whole dynamic is not really conducive to long-term investing, or the long-term management of companies.”

The same can be said for much of what goes on in the stock market these days. At precisely 2:45 on May 6, 2010, U.S. indices plunged nine per cent, temporarily wiping out US$1 trillion of market value, before recovering several minutes later. For many regular investors, it was their first painful introduction to the volatile world of high-frequency trading. HFT firms earn billions betting on stocks as they move up and down by fractions of a penny. A typical high-frequency trader owns a stock for just nine seconds. The problem is, should markets drop abruptly, the complex computer algorithms used by HFT firms can make matters worse.

The same goes for the rise of another Wall Street creation, exchange-traded funds—mutual funds that trade as stocks. While ETFs are pitched as a safe, low-cost way to invest, critics say the nearly US$1-trillion segment poses a systemic risk to investors in the event of another flash crash, since the inevitable rush by ETF managers to sell their holdings will drive markets down further.

For those in the burgeoning secondary market for private company shares, like SecondMarket, this all points to increased demand for their services. “There are problems in the public markets that are not going away,” says Mark Murphy, a spokesman for SecondMarket. “If they can avoid having to deal with high-frequency trading, short-term thinking and Sarbanes-Oxley, private company CEOs are saying they’d rather stay private and build something long-term.”

What’s the solution to all this then? In the eyes of some, we must tempt investors to hold their shares longer. U.S. legislators have looked at measures such as bigger tax breaks on capital gains for longer-term investors. Meanwhile, Lo at MIT offers the radical proposal—license retail investors to educate and protect them. “In the same way there was democratization in travel when the car was invented, at some point they put in mechanisms to protect people from each other, like stop signs, traffic lights and certification for drivers,” he says. “We had a tremendous period of financial innovation; now it’s time to figure out what protections we need to impose to make the investing highways more safe. Maybe people should pass tests to show we can manage our retirement well.”

In the meantime, the market will remain a dangerous place, not just for companies, but especially for regular investors. Which is why Cuban stresses to investors that they should avoid what Wall Street is selling. “There should be warning labels with every stock purchase,” he told Maclean’s. “Dear Sir or Madam?.?.?.?Before you place this order, please press the button that says ‘I know the person on the other side of the trade probably has spent far more time and money to understand this stock than I have and I am okay with that.’ ” Or, as he wrote on his blog last fall, “The stock market is still for suckers?.?.?.?you should put your money in the bank.”




Browse

‘The stock market is for suckers’

  1. Here is how it breaks down: They know what they are doing is wrong. They know that, over the short term, they will get away with it. They know that, at somepoint, someone will come for them. They are ready for that eventuality.

    The cabal has gone rogue.

    Money is leaving your pocket because of their creative deployments of financial instruments. There is, to their advantage, plenty of disagreement over what is the best policy for the financial industry. And a few have expressed their disagreement with my policy proposals ( without actually doing anything to declare their position). But I challenge anyone to say that the arrangements outlined in the above article are good for soceity as a whole.

    • and the “they” you refer to are…

  2. Here is how it breaks down: They know what they are doing is wrong. They know that, over the short term, they will get away with it. They know that, at somepoint, someone will come for them. They are ready for that eventuality.

    The cabal has gone rogue.

    Money is leaving your pocket because of their creative deployments of financial instruments. There is, to their advantage, plenty of disagreement over what is the best policy for the financial industry. And a few have expressed their disagreement with my policy proposals ( without actually doing anything to declare their position). But I challenge anyone to say that the arrangements outlined in the above article are good for soceity as a whole.

  3. A typical high-frequency trader owns a stock for just nine seconds.

    This is because a "a typical high-frequency trader" is servant to a computer program that's analyzing news feeds and market data to bet on where the stock is going to go in split second increments and telling them where to bet (or doing it itself). Which gets really fun when they all get in lockstep racing towards the bottom. Look up "Flash Crash" sometime.

    Why it's legal to give computers this much control over the market is beyond me.

    • Lol Skynet isn't just going to kill us, it will impoverish us first. Just for kicks.

    • Well, computers are definitely deployed to do the work of high-frequency trading, but it is humans that do the building, programming and strategy mapping that enables computers to do the controlling.

      Why is it legal? Better question: How can this possibly be moral?

      • Clarifying "this" as computers trading (or being programed to trade more accurately) or the issues mentioned in the Article?

        If the former, what specifically makes it immoral?

        • Clarifying dave's. Slightly tangential to this article, but really very closely related as it is the same firm.

          "If the former,…"
          Let me ask you this: Is it possible for something to be legal, yet immoral? Do you even admit the possibility of immorality?

          • Yes of course, but I don't see what the immorality in getting a program to do trades is, which is why I was asking. :)

          • Have you read any articles that describe the process of "front loading" that is possible with these programs? You aught be able to search for them. Sorry, I have not saved any to refer you to, but read one or two and then tell me if you think it is moral, especially when they do it against their own clients.

            Disclaimer: I lack the technical expertise to assess the means by which trades are front loaded with these types of programs, and am entirely relying upon the assesments of those that I assume know and have turned said knowledge into an article.

          • I looked around but couldn't find the 'front loading' you mentioned, I did however follow dave's link that I didn't notice before and it was pretty good explanation of current practices. For some reason I was being simple minded and wasn't expecting people to be doing complex algorithms like that, or more importantly ceding control that much; which is where I suspect immorality would be found although I couldn't point out what specifically would be its cause.

          • Oops! Front loading refers to a commission structure where the costs and fees of a mutual fund are taken off during the first years of the investment. I should have suggested you look for "front running".

            Now, I don't mean to say it actually fits the legal definition of front running… that is just the closest concept that I have to express my apperception of the use of these computers to get a deep inside position on a very large number of trades. It looks to me like they are occupying a stradle position of market maker and second party in trades. It also looks like they have captured the regulatory side as well, which might lighten intensity of the enforcement process.

  4. A typical high-frequency trader owns a stock for just nine seconds.

    This is because a "a typical high-frequency trader" is servant to a computer program that's analyzing news feeds and market data to bet on where the stock is going to go in split second increments and telling them where to bet (or doing it itself). Which gets really fun when they all get in lockstep racing towards the bottom. Look up "Flash Crash" sometime.

    Why it's legal to give computers this much control over the market is beyond me.

  5. here's a simple idea: instead of ongoing "Regulation", why not just change the definition of a Stock to a publicly traded unit of a company that MUST BE HELD FOR A MINIMUM OF ONE WEEK. One week — as an investment time span, it is hardly radical, it's infinitessimal even – but it would effectively kill off the high-frequency trading, which is more akin to continuous gambling than investment. We need to do this.

    • That would create some serious problems. Because then orders would take many days to fill. The reason we’re able to get almost instant fills is because of all the day traders. 

  6. "Investing" in stocks is often a con. It's simply that the speed of the con has greatly increased thanks to computerized trading. No person, no matter how smart, can trade faster than a computer program that's designed to catch every minute change in a stock's "value"

    And, there are so many odd factors that affect "value" You might was well buy a lottery ticket every week, you'd be just as likely to win big, if that's what you are after.

    • More like blackjack, where you see some of the cards, but have no idea of the others.

      (I emailed you an age ago after you emailed me. Did you get it? Because I'm ready whenever you are.)

  7. "Investing" in stocks is often a con. It's simply that the speed of the con has greatly increased thanks to computerized trading. No person, no matter how smart, can trade faster than a computer program that's designed to catch every minute change in a stock's "value"

    And, there are so many odd factors that affect "value" You might was well buy a lottery ticket every week, you'd be just as likely to win big, if that's what you are after.

  8. Cuban is mostly spot on, but "putting all your money in the bank", due to the US' policy of Zero Interest rates (to rescue Wall Street) kills investors who are seeking safe returns. And forget about municipal bonds, too.

    Joe Investor, like Joe Six-Pack, is getting screwed. Buy gold, buy silver, buy land.

    • not land but income producing properties, even if only part of an LLC put together by HONEST property managers or other big (primary) buyers who engage HONEST property managers. Good cre brokers in your area can keep an eye out for such opportunities with apartment complexes, shopping centers, office buildings that you can see and touch in your area. you will receive monthly detailed financial statements with your check. Look for a minimum of 7% roi, return on your investment the first year, growing a bit annually. pay no taxes until you have received more than 100% of your investment back in some years. That could be as few as 4.5 years as on one deal that I put together and became the largest investor in, along with about 12 others organized by the primary buyer, the management company.

      these are the best, most transparent deals that I can think of. I made great money in the U.S. stocks market in the 80s and 90s but none since. the U.S. is run by Wall St and the big 4 banks + banker-dealers, investment banks, big oil, pharma and insurance. They buy repubs and dems alike ON your and my property, the formerly hallowed Capitol building. Lobbyists are so cavalier that they deliver exact preferred language of Bills to the lawmakers they own!

      c.r.e. commercial real estate. Many many risks, but the best investments now, IF analyzed and underwritten (debt) properly.

  9. Cuban is mostly spot on, but "putting all your money in the bank", due to the US' policy of Zero Interest rates (to rescue Wall Street) kills investors who are seeking safe returns. And forget about municipal bonds, too.

    Joe Investor, like Joe Six-Pack, is getting screwed. Buy gold, buy silver, buy land.

  10. I've often heard it said that the stock market is exactly like Vegas.

    Well no, not really.

    Vegas has rules.

  11. I've often heard it said that the stock market is exactly like Vegas.

    Well no, not really.

    Vegas has rules.

  12. "under SEC rules investors must be “sophisticated”—or rich—to buy private company shares, with a net worth of US$1 million or annual earnings of US$200,000 in each of the past two years. Put another way, wealthy people are considered inherently smarter than the rest of us when investing."

    That is not the reason this is required. Unregulated private equity markets have a huge amount of risk associated with them, in Canada (which has the same rules), these people are designated "Accredited Investors". The idea behind these requirements is that since there is more risk of losing everything, the investor must be able to take a loss without being wiped out.

    In Canada (I'm not sure if it's the same in the US), you must be an accredited investor to invest in hedge funds as well, as they are not subject to the same regulations as mutual funds (which are highly regulated), since hedge funds are able to take on significantly more risk.

    Any investments in any markets carry the same rule, greater returns=greater risks.

    • Well explained. Thanks

      • Sadly the other 199 sentences in the article will not get the detailed explanation they so desperately need, and most readers won't even see this comment.

    • Yup. There's no realization behind the history of these rules in the US, which date back to the Securities Act in 1933 and the Exchange Act in 1934, when the SEC was formed and were designed to be protective of small investors (the proverbial little old ladies and mom and pops). Wealthier investors aren't "smarter" – they can simply afford to take on more risk, and afford to pay for advice.

    • Good summary, however why should the government decide who can and can't afford to lose money? Yes it protects some investors from losing money they can't afford to lose (if they can't afford to lose it, they should know not to invest in high risk investments) but it also ensures that only the rich are the only people who have access to stocks that have large upside potential. Do you really think people who would put money they can't afford to lose into a high risk stock they know nothing about will be better positioned than if they were restricted? My opinion is they will lose that money some other way thus learning a valuable lesson that will hopefully benefit them next time.

    • Actually, the rules are different in each province. Some provinces require investors to be "accredited" to invest in private companies, and some do not, depending on what other documentation is provided to the investor.

  13. "under SEC rules investors must be “sophisticated”—or rich—to buy private company shares, with a net worth of US$1 million or annual earnings of US$200,000 in each of the past two years. Put another way, wealthy people are considered inherently smarter than the rest of us when investing."

    That is not the reason this is required. Unregulated private equity markets have a huge amount of risk associated with them, in Canada (which has the same rules), these people are designated "Accredited Investors". The idea behind these requirements is that since there is more risk of losing everything, the investor must be able to take a loss without being wiped out.

    In Canada (I'm not sure if it's the same in the US), you must be an accredited investor to invest in hedge funds as well, as they are not subject to the same regulations as mutual funds (which are highly regulated), since hedge funds are able to take on significantly more risk.

    Any investments in any markets carry the same rule, greater returns=greater risks.

  14. I've been saying for 20 years that the stock market is a glorified ponzi scheme and that the average person should put his money in GICs and make sure every penny of it is CDIC insured. Cuban is right. The stock market is for suckers.

    • I'm willing to bet my returns are better than yours…

  15. I've been saying for 20 years that the stock market is a glorified ponzi scheme and that the average person should put his money in GICs and make sure every penny of it is CDIC insured. Cuban is right. The stock market is for suckers.

  16. Funny that there was no mention of the elimination of the "uptick rule". It contributed to the crash when it was removed in July 2007 and they have yet to bring it back as it was.
    http://en.wikipedia.org/wiki/Uptick_rule

  17. Funny that there was no mention of the elimination of the "uptick rule". It contributed to the crash when it was removed in July 2007 and they have yet to bring it back as it was.
    http://en.wikipedia.org/wiki/Uptick_rule

  18. What is one to do. Real Estate or Equities. Or Vegas like Emily hilariously pointed out.
    Not everyone is a trader, there is still room for traditional type investing I hope.

    With the global meltdown I saw example average portfolios losing 60% or over $200K simply wiped out almost overnight, like everyone else.
    Since the market low, the same are up over $300K with pretty well the same mixed portfolio of equities; gold, silver, base metal stocks, oil patch stocks, ETF's and some select TSX top 50 level stocks.

    Much the same happened for every single Canadian in some fashion because we all pay CPP and most have mutual funds, and both are comprised of a selection of the top Canadian TSX equities. Everyone suffered, at least temporarily.

  19. What is one to do. Real Estate or Equities. Or Vegas like Emily hilariously pointed out.
    Not everyone is a trader, there is still room for traditional type investing I hope.

    With the global meltdown I saw example average portfolios losing 60% or over $200K simply wiped out almost overnight, like everyone else.
    Since the market low, the same are up over $300K with pretty well the same mixed portfolio of equities; gold, silver, base metal stocks, oil patch stocks, ETF's and some select TSX top 50 level stocks.

    Much the same happened for every single Canadian in some fashion because we all pay CPP and most have mutual funds, and both are comprised of a selection of the top Canadian TSX equities. Everyone suffered, at least temporarily.

  20. Well explained. Thanks

  21. Not even close to a plausible solution. The efficiency of the stock market depends on investors reacting to new information and making decisions as that information becomes available. By imposing an arbitrary gap in this procedure, investors will not be able to make proper decisions regarding buying and selling stock. However measures do need to be taken to limit malicious HFT, perhaps a regulation against automated systems.

  22. Not even close to a plausible solution. The efficiency of the stock market depends on investors reacting to new information and making decisions as that information becomes available. By imposing an arbitrary gap in this procedure, investors will not be able to make proper decisions regarding buying and selling stock. However measures do need to be taken to limit malicious HFT, perhaps a regulation against automated systems.

    • The stock market is not efficient, as Warren Buffet famously remarked.

  23. Sadly the other 199 sentences in the article will not get the detailed explanation they so desperately need, and most readers won't even see this comment.

  24. and the “they” you refer to are…

  25. This is possibly the most insightful article into the state of the stock market – not to mention the economy in general that I've read. I think Sir John Templeton is right. Nobody is stopping to consider the 'real' market. It was apparent to anyone with a brain that house prices could not be sustained – people have to be able to afford to live in the houses. Looking forward, can the real estate market return to its former levels? Not without paying people a lot more and given that Canada and the US are now in competition with China and other countries with far lower wages, I don't see that happening. It's definitely time to take another look at what counts as a suitable investment – not a house, not the stock market … the bank? We'll see.

  26. This is possibly the most insightful article into the state of the stock market – not to mention the economy in general that I've read. I think Sir John Templeton is right. Nobody is stopping to consider the 'real' market. It was apparent to anyone with a brain that house prices could not be sustained – people have to be able to afford to live in the houses. Looking forward, can the real estate market return to its former levels? Not without paying people a lot more and given that Canada and the US are now in competition with China and other countries with far lower wages, I don't see that happening. It's definitely time to take another look at what counts as a suitable investment – not a house, not the stock market … the bank? We'll see.

  27. Lol Skynet isn't just going to kill us, it will impoverish us first. Just for kicks.

  28. As usual the downward trend spirals the second more government involvement hits the table. Same in virtually every industry. The more rules equals more gravel in the gears of life. In Canada people in the trucking industry are completely fed up with the draconian mommy government attitude squelching their industry. Now they want to license private investors. More rules. Read somewhere recently that societies tend to implode after 200 or so years. Guess it is just our turn.

  29. As usual the downward trend spirals the second more government involvement hits the table. Same in virtually every industry. The more rules equals more gravel in the gears of life. In Canada people in the trucking industry are completely fed up with the draconian mommy government attitude squelching their industry. Now they want to license private investors. More rules. Read somewhere recently that societies tend to implode after 200 or so years. Guess it is just our turn.

  30. Full points. Bonus points for the firm actually mentioned in the article.

  31. Full points. Bonus points for the firm actually mentioned in the article.

  32. Well, computers are definitely deployed to do the work of high-frequency trading, but it is humans that do the building, programming and strategy mapping that enables computers to do the controlling.

    Why is it legal? Better question: How can this possibly be moral?

  33. Clarifying "this" as computers trading (or being programed to trade more accurately) or the issues mentioned in the Article?

    If the former, what specifically makes it immoral?

  34. The stock market is not efficient, as Warren Buffet famously remarked.

  35. Clarifying dave's. Slightly tangential to this article, but really very closely related as it is the same firm.

    "If the former,…"
    Let me ask you this: Is it possible for something to be legal, yet immoral? Do you even admit the possibility of immorality?

  36. Yup. There's no realization behind the history of these rules in the US, which date back to the Securities Act in 1933 and the Exchange Act in 1934, when the SEC was formed and were designed to be protective of small investors (the proverbial little old ladies and mom and pops). Wealthier investors aren't "smarter" – they can simply afford to take on more risk, and afford to pay for advice.

  37. Perhaps a better idea, set capital gains tax to 100%, reduced by 1% for every 24 hours the stock is held until it reaches it's current minimum value. This will eliminate the profit on HFTs, while not in any way restricting real traders — who will see less profits if they have to sell quickly, but are not trapped in a position if it turns into a loser.

    Then to eliminate the fake orders – regulation that an order cannot be cancelled within two seconds of it being placed.

  38. Perhaps a better idea, set capital gains tax to 100%, reduced by 1% for every 24 hours the stock is held until it reaches it's current minimum value. This will eliminate the profit on HFTs, while not in any way restricting real traders — who will see less profits if they have to sell quickly, but are not trapped in a position if it turns into a loser.

    Then to eliminate the fake orders – regulation that an order cannot be cancelled within two seconds of it being placed.

  39. Yes of course, but I don't see what the immorality in getting a program to do trades is, which is why I was asking. :)

  40. Have you read any articles that describe the process of "front loading" that is possible with these programs? You aught be able to search for them. Sorry, I have not saved any to refer you to, but read one or two and then tell me if you think it is moral, especially when they do it against their own clients.

    Disclaimer: I lack the technical expertise to assess the means by which trades are front loaded with these types of programs, and am entirely relying upon the assesments of those that I assume know and have turned said knowledge into an article.

  41. My opinion is that this has nothing to do with computerized trading and everything to do with the segregation of wealth to a thin margin of the super rich. It's not worth going to the market when a large amount of financing is required because the wealth is so concentrated that the banker have access to enough liquidity in their email address books. Why bother with the hassle and expense of the open market?

    • The government is the one restricting the investments to the "super rich" as you call them.

  42. My opinion is that this has nothing to do with computerized trading and everything to do with the segregation of wealth to a thin margin of the super rich. It's not worth going to the market when a large amount of financing is required because the wealth is so concentrated that the banker have access to enough liquidity in their email address books. Why bother with the hassle and expense of the open market?

  43. Cuban says the stock market's for suckers? Well that makes him the dumbest person in the room, because he bought an incredible amount of Charter Communications a company that went bankrupt. Nice trade, sucker!!!

  44. Cuban says the stock market's for suckers? Well that makes him the dumbest person in the room, because he bought an incredible amount of Charter Communications a company that went bankrupt. Nice trade, sucker!!!

  45. Good article. One missing point though – both Greenspan and Bernanke have said that one of the main focuses of Fed monetary policy (especially QE) is to move the stock market higher. That begs the question – who are these guys working for? Certainly not the general public. The political and financial systems are designed for wealth extraction by the rich, leaving debt slaves everywhere. The Federal Reserve and their system of fractional reserve lending is at the core of the wealth extraction.

  46. Good article. One missing point though – both Greenspan and Bernanke have said that one of the main focuses of Fed monetary policy (especially QE) is to move the stock market higher. That begs the question – who are these guys working for? Certainly not the general public. The political and financial systems are designed for wealth extraction by the rich, leaving debt slaves everywhere. The Federal Reserve and their system of fractional reserve lending is at the core of the wealth extraction.

  47. I looked around but couldn't find the 'front loading' you mentioned, I did however follow dave's link that I didn't notice before and it was pretty good explanation of current practices. For some reason I was being simple minded and wasn't expecting people to be doing complex algorithms like that, or more importantly ceding control that much; which is where I suspect immorality would be found although I couldn't point out what specifically would be its cause.

  48. More like blackjack, where you see some of the cards, but have no idea of the others.

    (I emailed you an age ago after you emailed me. Did you get it? Because I'm ready whenever you are.)

  49. I've been saying the very same thing. I think its time to ban that whole system and come up with something better–from scratch.

  50. not land but income producing properties, even if only part of an LLC put together by HONEST property managers or other big (primary) buyers who engage HONEST property managers. Good cre brokers in your area can keep an eye out for such opportunities with apartment complexes, shopping centers, office buildings that you can see and touch in your area. you will receive monthly detailed financial statements with your check. Look for a minimum of 7% roi, return on your investment the first year, growing a bit annually. pay no taxes until you have received more than 100% of your investment back in some years. That could be as few as 4.5 years as on one deal that I put together and became the largest investor in, along with about 12 others organized by the primary buyer, the management company.

    these are the best, most transparent deals that I can think of. I made great money in the U.S. stocks market in the 80s and 90s but none since. the U.S. is run by Wall St and the big 4 banks + banker-dealers, investment banks, big oil, pharma and insurance. They buy repubs and dems alike ON your and my property, the formerly hallowed Capitol building. Lobbyists are so cavalier that they deliver exact preferred language of Bills to the lawmakers they own!

    c.r.e. commercial real estate. Many many risks, but the best investments now, IF analyzed and underwritten (debt) properly.

  51. So sad that many of our senior financial leaders are so lacking in true wisdom….they are clever, smart, aggressive I am sure…they feel good about themselves…but for a man,such as me, of small net worth…but with a sense of community, country and history I know these men to be narrow and small.

    We do have to put leashes on these mad dogs….restructure what we can to provide wise long term goals and economies for building companies and investors that last the long term.

    Sadly, this present administration is not up to the job.

    • Thank you for your insightful comments on this article.

      I was never a "big player" – not even a microbe, let alone a minnow – but I left the market in 2007 and will never return.

      Hopefully, other reliable methods of building an economy in sustainable measure will emerge from the wreckage I see coming for the Market. Many people are going to be hurt by those "mad dogs" and their counterparts at the Fed and SEC who are complicit in this huge shell game.

  52. So sad that many of our senior financial leaders are so lacking in true wisdom….they are clever, smart, aggressive I am sure…they feel good about themselves…but for a man,such as me, of small net worth…but with a sense of community, country and history I know these men to be narrow and small.

    We do have to put leashes on these mad dogs….restructure what we can to provide wise long term goals and economies for building companies and investors that last the long term.

    Sadly, this present administration is not up to the job.

  53. Thank you for your insightful comments on this article.

    I was never a "big player" – not even a microbe, let alone a minnow – but I left the market in 2007 and will never return.

    Hopefully, other reliable methods of building an economy in sustainable measure will emerge from the wreckage I see coming for the Market. Many people are going to be hurt by those "mad dogs" and their counterparts at the Fed and SEC who are complicit in this huge shell game.

  54. There are a lot of shady deals in the stock market, just remember when the big companies are trying to get the small guy to invest. Chances are, what ever they are selling has run it's course. The rich have already made their money now they need someone to hold the bag .http://dawnsspot-brian.blogspot.com/

  55. There are a lot of shady deals in the stock market, just remember when the big companies are trying to get the small guy to invest. Chances are, what ever they are selling has run it's course. The rich have already made their money now they need someone to hold the bag <a href="http:// .http://dawnsspot-brian.blogspot.com/“ target=”_blank”> <a href="http://.http://dawnsspot-brian.blogspot.com/” target=”_blank”>.http://dawnsspot-brian.blogspot.com/

  56. Good summary, however why should the government decide who can and can't afford to lose money? Yes it protects some investors from losing money they can't afford to lose (if they can't afford to lose it, they should know not to invest in high risk investments) but it also ensures that only the rich are the only people who have access to stocks that have large upside potential. Do you really think people who would put money they can't afford to lose into a high risk stock they know nothing about will be better positioned than if they were restricted? My opinion is they will lose that money some other way thus learning a valuable lesson that will hopefully benefit them next time.

  57. The government is the one restricting the investments to the "super rich" as you call them.

  58. I'm willing to bet my returns are better than yours…

  59. Excellent article; another wake up call to all those still asleep and thinking things will be fine. We need a lot more 'expose' articles b/c the so-called self-regulated financial industry has just taken us all for suckers all the way from the early 80's. Ponzi schemes, outright crooks, hand-in-hand with deregulation so that things are 'legal' but obviously morally wrong to anyone who takes the time to look. Now they've dragged the entire world-wide economy down fueled by greed and billions in free money. Why aren't there more in jail? Is there any hope for rules to guide a more 'just society'? I think not.

  60. Excellent article; another wake up call to all those still asleep and thinking things will be fine. We need a lot more 'expose' articles b/c the so-called self-regulated financial industry has just taken us all for suckers all the way from the early 80's. Ponzi schemes, outright crooks, hand-in-hand with deregulation so that things are 'legal' but obviously morally wrong to anyone who takes the time to look. Now they've dragged the entire world-wide economy down fueled by greed and billions in free money. Why aren't there more in jail? Is there any hope for rules to guide a more 'just society'? I think not.

  61. Oops! Front loading refers to a commission structure where the costs and fees of a mutual fund are taken off during the first years of the investment. I should have suggested you look for "front running".

    Now, I don't mean to say it actually fits the legal definition of front running… that is just the closest concept that I have to express my apperception of the use of these computers to get a deep inside position on a very large number of trades. It looks to me like they are occupying a stradle position of market maker and second party in trades. It also looks like they have captured the regulatory side as well, which might lighten intensity of the enforcement process.

  62. Holy moly – this guy out did himself!!!

    "Hedge-fund manager John Paulson personally netted more than $5 billion in profits in 2010—likely the largest one-year haul in investing history, trumping the nearly $4 billion he made with his "short" bets against subprime mortgages in 2007."
    http://online.wsj.com/article/SB10001424052748704

  63. Holy moly – this guy out did himself!!!

    "Hedge-fund manager John Paulson personally netted more than $5 billion in profits in 2010—likely the largest one-year haul in investing history, trumping the nearly $4 billion he made with his "short" bets against subprime mortgages in 2007."
    http://online.wsj.com/article/SB10001424052748704

  64. I have a web site where I research stocks under five dollars. I have many years of experience with these type of stocks. I would like to comment about the stock market is for suckers. I am a astute value investor. the way to make money in the stock market is to avoid stocks that are popular. and instead focus on stocks that are very much out of favor. you do this by avoiding buying into the stock of a company when it is extremely popular an example of this is apple computer its the apple of everbody's eye the stock trades at 340 dollars a share if you would have bought the stock in 1998 you could have gotten into it at just 5 dollars a share this stock was hated by everbody back than.

  65. I have a web site where I research stocks under five dollars. I have many years of experience with these type of stocks. I would like to comment about the stock market is for suckers. I am a astute value investor. the way to make money in the stock market is to avoid stocks that are popular. and instead focus on stocks that are very much out of favor. you do this by avoiding buying into the stock of a company when it is extremely popular an example of this is apple computer its the apple of everbody's eye the stock trades at 340 dollars a share if you would have bought the stock in 1998 you could have gotten into it at just 5 dollars a share this stock was hated by everbody back than.

  66. The stock market is an addiction just like gambling. To keep gambling viable, one needs suckers just like they need to keep the stock market addiction viable. One of these bad habits or addiction is politically correct while the other is demonised as a pathology in need of treatment. Anybody with any ounce of sense would see thru this social scam creating monetary scarcity in the name of a god called THE INVISIBLE HAND OF THE MARKET. The sociologist, Michel Foucault, was right the definition of our social bad habits belong to an elite who decide which ones are ok and which ones are deviant.

  67. The stock market is an addiction just like gambling. To keep gambling viable, one needs suckers just like they need to keep the stock market addiction viable. One of these bad habits or addiction is politically correct while the other is demonised as a pathology in need of treatment. Anybody with any ounce of sense would see thru this social scam creating monetary scarcity in the name of a god called THE INVISIBLE HAND OF THE MARKET. The sociologist, Michel Foucault, was right the definition of our social bad habits belong to an elite who decide which ones are ok and which ones are deviant.

  68. Staying out of the stock market may be a wise decision for a company that wants to maintain strategic coherence and effective control over management. One of the most pervasive developments over the last 30 or so years has been the proliferation of index fund investment. A great deal shares are held by disinterested parties primarily aimed at diversifying risk (individually this is a great way to invest, but a scary thought experiment is to imagine what the market would look like if everybody invested exclusively in index funds).

    Investors no longer do the legwork of monitoring the firms they invest in, nor do they make the large investments in a single company they used to. As a result, executives have considerably more power to run companies as their own personal fief. Staying in power is easy, so long as one can keep the short term numbers good (even if it means taking on greater long-term risks).

    While avoiding the market seems to be the road less traveled, it is worth noting that outside of the United States there long been systems of corporate finance driven by something other than securities markets (eg. bank-based finance in Germany). If Facebook can do for the American corporation what it did for social networking, we will be much the better for it.

  69. Staying out of the stock market may be a wise decision for a company that wants to maintain strategic coherence and effective control over management. One of the most pervasive developments over the last 30 or so years has been the proliferation of index fund investment. A great deal shares are held by disinterested parties primarily aimed at diversifying risk (individually this is a great way to invest, but a scary thought experiment is to imagine what the market would look like if everybody invested exclusively in index funds).

    Investors no longer do the legwork of monitoring the firms they invest in, nor do they make the large investments in a single company they used to. As a result, executives have considerably more power to run companies as their own personal fief. Staying in power is easy, so long as one can keep the short term numbers good (even if it means taking on greater long-term risks).

    While avoiding the market seems to be the road less traveled, it is worth noting that outside of the United States there long been systems of corporate finance driven by something other than securities markets (eg. bank-based finance in Germany). If Facebook can do for the American corporation what it did for social networking, we will be much the better for it.

  70. I totaly agree. I would never ever return to the stock market as a place to operate in with my money or that of anyone else.
    While various securities agencies find no problem with or look the other way when it comes to some forms of activity in the stock market many find it hard to deal with those who can manipulate the stock market and escape prosecution. There are those who have been convicted of a felony fraud in the market who have moved to other countries and with financing from deep pockets through shorting of stocks literaly raped the investments of legitimate investors with impunity. High frequency trading is no match for the novice or even seasoned investor and is just another method used to pump and dump among other methods used to give the impression of real value when non exists. Just stay away let it go to the place it will end up. The Trash can.

  71. You're right to quote Sir John Templeton – his Templeton Growth Fund averaged about 15% annualized return for about 30 years, while the average investor of late has earned maybe a quarter of that – all because of the holding period. No one has the patience, nor the trust in their advisor, to buy & hold a position.

    However, I think the writer missed a glaring point in the article. How do you valuate Facebook or Twitter? Where is the revenue model?

    Mr. Zuckerberg may have half a billion friends, but they didn't take too kindly when Facebook wanted to allow retailers to market directly to its users. Look at the backlash YouTube encountered when it placed pop up ads on its site & videos. See daily how many YouTubers want VEVO out of YouTube.

    Further expounding Facebook's marketing problems is that some governments, including our own, have deemed some of Facebook's privacy practices as being lax, especially with regard to third party developers. So if these third party developers are constrained by government regulators from accessing Facebook users' profiles and data mining their preferences, how are they going to sell anything to them?

  72. You're right to quote Sir John Templeton – his Templeton Growth Fund averaged about 15% annualized return for about 30 years, while the average investor of late has earned maybe a quarter of that – all because of the holding period. No one has the patience, nor the trust in their advisor, to buy & hold a position.

    However, I think the writer missed a glaring point in the article. How do you valuate Facebook or Twitter? Where is the revenue model?

    Mr. Zuckerberg may have half a billion friends, but they didn't take too kindly when Facebook wanted to allow retailers to market directly to its users. Look at the backlash YouTube encountered when it placed pop up ads on its site & videos. See daily how many YouTubers want VEVO out of YouTube.

    Further expounding Facebook's marketing problems is that some governments, including our own, have deemed some of Facebook's privacy practices as being lax, especially with regard to third party developers. So if these third party developers are constrained by government regulators from accessing Facebook users' profiles and data mining their preferences, how are they going to sell anything to them?

  73. The value of a business is the present value of its future cash flows. This is why Facebook and Twitter and other such companies were "private issues", because they wouldn't pass the muster of any analysts' valuation. Where is the revenue stream with which to calculate future cash flows?

    Personally, I see the kids using FB as a bit of a fad. It's fun for a while. But given their increasingly shorter attention spans, they're soon bored with it. And how many of us are still friends with all the people we knew back in high school?

    Ultimately, I think Facebook & Twitter may evolve into a practical and potentially very powerful tool by which individuals, groups, and societies can reach out to their fellow disenfranchised brethren as a call to action, as witnessed most recently in Tunisia & Egypt, and as we have been seeing with dissidents in China.

    As an professional investment advisor, I wouldn't buy a share in either Facebook or Twitter, nor would I recommend it to clients.

    HS.

  74. The value of a business is the present value of its future cash flows. This is why Facebook and Twitter and other such companies were "private issues", because they wouldn't pass the muster of any analysts' valuation. Where is the revenue stream with which to calculate future cash flows?

    Personally, I see the kids using FB as a bit of a fad. It's fun for a while. But given their increasingly shorter attention spans, they're soon bored with it. And how many of us are still friends with all the people we knew back in high school?

    Ultimately, I think Facebook & Twitter may evolve into a practical and potentially very powerful tool by which individuals, groups, and societies can reach out to their fellow disenfranchised brethren as a call to action, as witnessed most recently in Tunisia & Egypt, and as we have been seeing with dissidents in China.

    As an professional investment advisor, I wouldn't buy a share in either Facebook or Twitter, nor would I recommend it to clients.

    HS.

  75. Actually, the rules are different in each province. Some provinces require investors to be "accredited" to invest in private companies, and some do not, depending on what other documentation is provided to the investor.

  76. Fantastic. I do agree the markets have been run as a mechanism to appeal to the dimwitted masses.

  77. Fantastic. I do agree the markets have been run as a mechanism to appeal to the dimwitted masses.

  78. 99% of stocks are held by 1% of investors, to me that means 1% of the investors determine the value of 99% of the stocks… I agree Mr Cuban, looks like a sucker bet to me.

Sign in to comment.