Forum Post: Why Retail Investors Should Flee Stock Market
Posted 12 years ago on Dec. 2, 2011, 12:41 a.m. EST by pandoras
(56)
This content is user submitted and not an official statement
TL;DR: The finance industry funnels money from the masses to the ultra rich, through vehicles like hedge funds which dominate all of the financial markets.
I work in Wall Street and work in hedge fund analysis. I'm the only person in my office who supports OWS
This is a self-post, so I'm not trying to karma-whore or anything. I have a message I want to share with anyone who's interested.
I'm writing this in hopes that the OWS movement can have a better understanding of the hedge fund industry and the financial markets. With OWS being the zeitgeist of current politics, I think it's important to know how exactly the hedge funds, along with the financial markets are destroying the 99%.
Hedge funds. These guys are basically the vehicles of choice for ultra-rich people to get into the financial markets, besides family offices and private wealth managers. What are hedge funds? They are funds that have a 1-5 million deposit minimum, cater to the mega-rich, and can invest in anything without regulatory restrictions, use leverage to pump up their exposure by 15x, and pretty much eat up a vast majority of the industry's profits.
These guys invest in EVERYTHING. Instruments you've heard of - stocks, bonds, forwards, futures, currencies, and instruments that you, me, or anyone else have never even heard of, much less know anything about: commodity future swaptions, FRA/OIS swaps, CLOs, exotic future options, p-notes, index/commodity/equity exposures, and a huge array of OTC (over-the-counter) instruments that no regular investor would ever have access to.
Why I bring this up: the financial markets are rigged. 99% of the investing public has access to services such as basic brokerages, 401k/IRA's, mutual funds, pension plans, etc. Some of these services, especially pension funds, will invest into hedge funds, who take an additional 2 and 20 (meaning 2% of assets plus 20% of capital gains).
What this means is that if you go any of the traditional retail routes, you are utterly screwed facing off against the hedge funds.
First, you are paying exorbitant fees. Commissions on every stock trade. Mutual fund managers taking a cut - an annual % cut, as well as a % per profit cut. If these managers (i.e. pension plans) invest in another fund, that fund is also taking another % cut. You're down 2% the minute you invest your money.
Next, if you're doing the investing yourself, you're paying ridiculous spreads. The bid/ask spread of a stock will cause you to be down another 2-3% the minute you buy the stock. For example, if you're buying a share of company at $4.25, you can sell back at only $4.15.
Furthermore, you have absolutely no chance in terms of access to the best services. Hedge funds have a direct line to investment bank's institutional brokerage teams - these are the guys that spend day and night sucking up to hedge funds, trying to get them the best deals at the cheapest rates. This means that while you're buying stocks and bonds, hedge funds are getting special rights, warrants, sweetheart deals, private placement deals, options, bigger discounts on bonds, and much better bulk commission rates and lower spreads on stocks. If you're paying 4.25$ for a 4.15$ stock, they are paying something like 4.16$. And they are eating alive your profits because when the stock goes up to $4.30, they can activate another warrant to purchase 20m shares at $4.25, diluting the value of your shares.
Next, you lack information and exposure. You have no idea what is going on in the market besides what you see on the news - while hedge funds have analysts working around the clock and a bunch of service providers who give minute-by-minute analysis of their portfolio opportunities and weaknesses in all markets with exposures to nearly everything. Meaning, if there is an opportunity in the real estate market (i.e. legislation), it might take you weeks to get in - hedge funds will have gotten in the minute the legislation was passed. Furthermore, when IPOs come out for companies, hedge funds get top billing on the primary market shares - which means investment banks are selling directly to them. Once the secondary market becomes available, hedge funds are up 15-20% on these investments, sometimes within hours.
Finally, you have no capital compared to these hedge funds. The people who invest in these hedge funds are not just the 1%, they are the 0.1%. These are the guys with 500million dollar bank accounts and the ability to do whatever the fuck they want. Hedge funds know this, and they invest without having to care about whether their clients can pay the rent or send their kids to college. All of that is irrelevant. Their sole purpose is to earn money, not to mitigate risk.
What does this all mean? It means the hedge fund industry is making a gigantic proportion of the profits. The top .1% is earning nearly half of the profits in the industry, through not just hedge funds, but other similar vehicles.
The finance industry is a complete scam, designed to funnel money from the 99% investing public into the hands of the top .1%. Sure, some of you will make good money, but stastically, the rest of us will lose, and who is feeding off us? Hedge funds, and the .1%. You have better odds going to a casino and playing slots, the worst-paying game in the house, but still better than the stock market.
Also, the government is in bed with the financial industry. Tax loopholes give hedge funds and other top players the ability to write off losses and not pay taxes on gains for years at a time. For income they derive from the hedge fund (profits), they pay only 15%, rather than the 35% income tax charged to most people earning 80k and above. Meanwhile, you have to pay taxes for not just your own income but also capital gains.
The worst part by far is that the government "encourages" you to put your money into your 401k through 'tax exemptions', which basically puts your money with the lowest tier of the financial industry - pension funds, retail wealth managers, and retail asset managers. These guys have shit strategies like long-only or domestic equity (which means they only invest in American stocks), and have nowhere near the capability and reach of hedge funds. These guys are even more likely to lose your money than you are, and even worse is they will take a 2.35% cut while doing so. And you get penalized when you try to take your money out early. How f*ed up is that.
In other words, if you aren't in the .1%, you have no access to the derivatives markets, you have no access to the special deals that hedge funds and other wealthy investors get, and you have no access to the resources, information, strategic services, tax exemptions, and capital that the top .1% is getting.
If you have any questions about what some of the concepts above mean, ask and I will try my best to answer. I'm a first-year analyst on wall street, and based on what I see day in and day out, I support the OWS movement 100%.
Thanks for this unselfish post. As a long-time CPA, I will soon share some inside, unflattering information about the housing debacle and the CPA profession itself. You will be stunned. Again, thanks so much.
Just for your info, I didn't WRITE this post. I put the link on the top from where I got it.
A great post. Thanks for this information.
Thx for the info.... enlightening...
Just in case no one else says it. Thank you.
I'm just glad more people would read it. I'm an insider too, if you want to call it that, and this guy is telling the whole fucking truth.
So if investing in the market is a no-win situation for 99% of the population, what do you do with your money?
Gold and silver...
p@ndoras : I "ditto" the other posters above in expressing gratitude for your excellent 'cris de coeur' and post the following links in solidarity :
a) http://rt.com/programs/keiser-report/ ;
b) http://michael-hudson.com/ ;
c) http://www.nomiprins.com/ ;
d) http://www.teribuhl.com/ &
e) http://maxkeiser.com/ .
radix malorum est cupiditas ...
When people post things like this do they depend on the ignorance or stupidity of their readers? The lack of facts is stunning and some of the statements are ludicrous, bordering on comical.
If you buy a share for 4.25 you can only get 4.15 if you sell it back? That shows such a profound lack of understanding of how the market works as to bring actual idiocy to mind. You buy a share based on the current market price and should you choose to sell it back it will bring whatever the current market is at the instant you sell it.
If the OP worked at a hedge fund it was most likely as an intern in the mail room. :)
Yeah no, the market price moves in microseconds and the price you see quoted now will never be the actual price you pay because A) your broker won't be able to execute the trade fast enough before the bigger banks with their bigger computers and more connections can. B) The brokers take a tiny slice of each transaction.
Your comment shows a profound lack of understanding of how the market REALLY works. Simple everyday example, tell me again if you've veer bought/sold stock or currency because I doubt you have.
LOL! I make my living trading stocks and options. If I put in a limit order for 4.25 I pay 4.25, If I put in an order at market I pay whatever the market is at that second, normally only fools or rank amateurs use market orders. The only time a rational investor would use a market order is if a market is running and you really want in, a very rare occasion for a professional trader.
Interestingly, what actually happens is my trading partner these days is almost certainly a computer, I put in my limit order for 4.25 and in nanoseconds the computer will go find the stock I want at 4.24.999, buy it and then sell it to me for my price of 4.25. I'm happy I got my price and the computer has done another 10,000 trades like that by the time the pixels dry on my trade.
I repeat, you don't know beans about the stock market.
Not at all surprising, but spelled out nicely....
Which all goes to validate why OWS should be organizing politically to neutralize the Wall Street subversion of our democracy.
Concerted creative political action by the people is the only thing that can overcome the undemocratic control that Wall Street 'duopoly' dollars have on the two party system.
So, essentially, the only way a small-timer can make money in the stock market is if they are very smart, very lucky and spend a whole lot of time on research, correct? And one more question; do you think hedge funds should be illegal? It seems like they give an inordinate amount of advantage to the 'insiders.' It almost seems like it borders on insider trading.
No, the only a small-timer can make money in the stock market? You can't, except for once in a blue moon. I don't think hedge funds should be illegal because the line between hedge fund and mutual fund isn't that clear. Also, insider trading itself is a wooly topic.
GREAT POST! Thanks so much for sharing.
This provides yet more evidence that OWS' message is being heard across the country and is gradually changing the national discourse.
More like, we've been saying it but no one's been listening because they liked Jim Cramer and Warren Buffett more.
Why did you even go into Wall Street?
Because I wanted to make money, why else would I go to Wall Street?
Idk, but then turning around on it within a year seems weird.
Why? I worked at an investment bank for a couple of years in the late nineties--there were some very nice people there, but there were also a lot of complete PIGS. And it's the latter that make attacking Wall Street not only important, but FUN. Wall Street's goal is to stomp on you, take your money, and the LAUGH at you. Our goal should be to return the favor, TENFOLD...
So...you're openly attacking good people simply because the rub shoulders with people who you call pigs. Nice. Way to lump everybody in one category.
Wait, I'm not that first-year analyst. And I've never had delusions about doing God's work and neither does most people I know. We're just here to make money and check out.