You want to know the truth? The truth is that Wall Street has stacked the deck against you.
That's why you need to understand how the game is played. Otherwise you'll end up a Wall Street patsy.
So, here's the truth along with some lessons that will help you play the game like a pro.
First, though, we'll need to debunk a few myths…
Let's start with the myth that the Street lowered brokerage charges for the benefit of retail investors. At one time, these fees used to be obscenely high and fixed.
But, on May 1, 1975, fixed commissions were abolished after brash upstarts like Charles Schwab and disgruntled investors decided to attack The Street's price-fixing schemes.
The negotiated commissions regime that followed lowered the cost of access to the stock market, essentially ushering in the era of the "individual investor."
The influx of these individual investors, many of whom didn't have enough money to create diversified portfolios, soon became a boon for mutual funds – which have since grown like weeds in an untended sod farm.
Wall Street Changed the Game
Since the commission business was no longer profitable, Wall Street moved its retail business to an "assets under management" model.
So instead of making money on commissions the game changed to gathering as many assets as you could into a retail investor's account and charging a fee to "manage" them; in other words, just watch them.
That's one of the reasons why Wall Street advocates a "buy and hold" strategy for retail investors. They don't want you to take those assets away from them.
It's the same thing with mutual funds.
And conveniently, if your broker puts you into mutual funds that are losers, it's not your broker's fault.
Now, it's the mutual fund manager's fault. That way the broker can't be blamed if your account loses money.
Instead, your broker can tell you, "Don't fire me, let's fire the mutual fund manager and let's find you a better fund to invest in. But, no matter what happens, we need to buy and hold and not try and time the market."
That's what retail investors are told to do over and over and over again.
But guess what? That's definitely not what Wall Street firms do.
In fact, while you're being told to buy and hold, exchange specialists, market-makers, hedge funds and every trading desk at every Wall Street bank and firm are busy trading.
Some individual investors began to see how Wall Street was really making its money and started trading themselves.
Of course, that only increased the competition for easy trades as more retail investors traded in and out of stocks.
To continue their advantage over the public, Wall Street fought to do away with the uptick rule. The rule was wiped out so traders could short sell any stock at any time.
But it's the big Wall Street players who benefit from the rule change because they can use their huge capital positions and work with each other to drive down stocks they have shorted.
Who gets hurt? The buy-and-hold retail investors who are told to buy more at lower prices are the ones who get fleeced.
And, who is selling to them?… The same short sellers who are driving the price down.
"Decimalization" is another idea Wall Street pushed on the markets under the guise of helping investors.
Stocks used to be priced in increments of eighths of a dollar, they are now priced in pennies.
So who really benefits from decimalization? Wall Street does.
The net effect of decimalization was to lower spreads at the cost of lowered liquidity.
That's because fewer large investors were willing to put down orders on exchanges to buy and sell at set prices when specialists and market-makers could "front-run" them and risk only a penny if they were wrong. Standing orders were withdrawn and the markets (willing buyers and sellers) became thinner.
Interestingly, as these markets became thinner, Wall Street started to open private trading venues and "dark pools" to cater to big institutional clients because they were afraid to put down orders at exchanges or with market-makers.
Needless to say, retail investors aren't invited and the splitting up of orders across multiple venues works against those who don't have access to dark pools and private trading venues.
The catchword here is volatility. Everything Wall Street has done has increased volatility.
What's so great about volatility? Volatility is what makes trading profitable. Without volatility traders wouldn't have the same opportunities for the quick profits they enjoy.
But, of course, this same volatility puts retail investors at a complete disadvantage.
Only you don't have to be patsies. Retail investors can play a lot of the same games that Wall Street does.
Here's How to Play the Markets Like a Pro
First of all, unless you're getting excellent advice from your broker and you don't mind paying the fees they charge, move your portfolio over to a discount broker.
And don't get caught up in the myth that mutual funds are the answer to beating the market. They're not. Most of them buy and hold a lot of the same stocks and end up trailing general market performance.
Check out the fees they charge. Are they worth it? Are you paying fees to lose money because you believe mutual funds have a leg up?
Remember, mutual funds are Wall Street businesses, run on the same assets under management for a fee principle.
Second, realize that buy and hold is dead. While it's great to buy and hold onto winning positions, it's holding onto losers that will kill you.
The only time you should hold onto a losing position is if you actually plan to add to it when prices come down, and only because you understand why the stock has dropped in price.
It's okay to add to that position if it's fallen because the rest of the market fell, but only if the company's business model and fundamentals are sound and growing. Otherwise it's a sell.
Just make sure you have an out or a price at which you say to yourself, "That's it, I've reached my limit on this position." And then promptly get out.
The way to play the Wall Street game is to do what they do, not what they say you should do. In other words: Trade.
Trading doesn't mean day-trading. It means thinking like a trader. Know what entry points are good places to buy. Know what points are good selling points. Trading means having a plan.
First pick the stocks or exchange-traded funds (ETFs) you want to trade. It's important to diversify by building a portfolio of stocks that represent different asset classes, like U.S. big-cap dividend-paying stocks, tech stocks, materials stocks, emerging markets ETFs, or commodity-based ETFs.
What matters is that you have a handful of stocks that you know and watch and that when you hold them you are diversified. Learn how they move and why they do what they do.
Trading is the first step in investing. You have to take a position, and that means putting on a trade.
But don't fall in love with any position unless it keeps doing what you expect it to do and you're making money holding it.
Even then, don't be greedy. Pick a point to take some or all of your profits.
Finally, always have an exit plan.
Every trader I know has one – and after 30 years as a Wall Street trader I know a lot of them. Whether they are winning or losing, every single one of them has plan. You should, too.
It's not hard to play the Wall Street game. Don't try and beat them, you can't.
Just play the game the way they set it up for themselves and you'll figure out pretty quickly that volatility can be your friend, and that you can make money trading from both the long and short side of rapidly rising and falling markets.
Otherwise, you'll just end up as one of their patsies.
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.