Why people hate the stock market — when they shouldn’t
Sure there are risks, Peter Hodson says, but there is also huge potential to get rich.
When I meet new people at, say, a party, and I tell them what I do, they are either (a) really interested in discussing stocks, or ( b) dismiss the stock market as a shady place, a “sham” or a place to lose money.
So often, I have met people who truly believe the market is stacked against them. Maybe they panicked and sold in 2009, or were once stuck with some high-fee, weak-performing mutual funds. These people, it seems, would rather own GICs, and lose out to inflation and have a boring retirement.
But this bothers me. Investors should not “dismiss” the stock market as a sham. Sure, there are risks, but there is also huge potential. Take a look at any “Top 100 Rich People” list.
Almost all of them are there because of exposure to equities. So, we thought we would take a look to see why people are so dismissive, sometimes, of the stock market. The reasons were not hard to find:
THE MEDIA
What is more interesting to a newspaper editor, a big stock market swindler, such as Bernie Madoff, or a company who does well and whose shares rise 20 per cent annually? Of course, the swindler gets all the press. Same thing with insider trading. A big insider trading scandal will make the front page, but the insider who slowly generates wealth for company shareholders over decades of strong management will get ignored.
The upshot: The media makes it look like there are more scammers and liars in the market than there really are. The average person gets a bad taste on the market because of this.
MOVIES
Whether it is The Wolf of Wall Street, Wall Street, or Boiler Room, movies have a way of portraying the market as one big, fixed party, but only for those insiders in the know, or for those willing to skirt the system. Sure, The Big Short showed that good analytical work can earn huge profits, but most in the movie were still portrayed as greedy cheaters, and even the protagonist only really got rich while everyone else was suffering badly in the financial crisis. Again, brokers and advisers simply do not come across very well, leaving the common investor concerned about the integrity of just who might be looking after their money.
LOSSES
Everyone has investment losses. It is simply part of the game. Of course, though, it is a lot easier to accept a loss you have if you can blame someone else, or “blame the system” itself. Thus, it is easier for investors to say, “the market is rigged to work against me” rather than “I made a mistake and never should have bought that stock.”
REAL FRAUD AND SCAMMERS
Seasoned investors know the Over The Counter Market (OTC) is a very dangerous place to trade. Newbies though can get caught, expecting proper disclosure and fair trading. But regulations and disclosure are very much relaxed on this market, and to a lesser extent, on the TSX Venture and some other smaller exchanges as well.
The SEC even uses a “skull and crossbones” symbol on some OTC stock listings just to highlight how dangerous they really are, on a market known for accounting “flexibility” and “pump and dump schemes.”
Looking for examples of the quality of these markets? The OTC is where (in 2016) a company looking for BigFoot (Bigfoot Project Investments Inc., still listed under ticker BGFT) once sported a $10-billion valuation. We can’t make this stuff up! A small, murky internet search company with no revenue had a $35-billion valuation on OTC the same year (NERO, now delisted). Stick with the larger, more-regulated stock exchanges.
INTERNET FORUMS
Surprisingly, many investors seem to get most of their stock information from internet chat groups.
Of course, these are not regulated, are largely anonymous, and are filled with posters who have big conflicts of interest (i.e. selling a stock while they are touting it on the forums).
Anyone who acts and trades on information on most forums is simply asking for trouble. But, for small investors without an adviser, it is often the key — if not only — source of some types of information. Of course, acting on his information is likely to cause you big losses and further underscore the feelings that the market is a “scam.”
But it is not.
The market has created huge value for investors over time. Good companies exist, outperform for years, and can make you rich through consistent profits, cash flow and dividends. Companies such as Fortis (FTS on the TSX have paid dividends — and raised their dividend — for half a century. Companies such as Intuitive Surgical (ISRG on Nasdaq) and Amazon (AMZN on Nasdaq) have gone up thousands and thousands of per cent over the past decade.
Thinking the market is rigged will only prevent you from finding and investing in the next big winners — much to your financial detriment.