The hubbub surrounding GameStop’s recent boom—and bust—has many bemoaning retail investors getting the shaft. Brokerages halted trading in hedge funds’ favor, allegedly. Congressional hearings loom, with opportunistic politicians from both parties screeching about markets stacked against the “little guy.” As i see it, they’re rigged to benefit investors big and small. Today, it’s easier than ever to take advantage. Let me explain.
When starting my career, 49 years ago, investors faced high hurdles. Until May 1975, the New York Stock Exchange enforced strict—and steep—minimum commissions on stock trades. Depending on the stock, brokerages snatched mandatory commissions of as much as 2-3% per trade. Brokers caught subverting these minimums faced expulsion from the exchange. With commissions fixed, brokers had scant incentive to improve services. Bid-ask spreads—the gap between buyers’ and sellers’ offering prices—averaged about 0.6% to 0.8%, further impaling investors’ returns on every trade.
And data were negligible, as I detailed in July. Deep research required scouring library archives and infrequent reports and brokerage guides. There was no Internet to gather data, no spreadsheets to test hypotheses—just painstaking hours spent crunching numbers by hand and with slide rules. Few amateur investors had the time, resources or energy to succeed.
Today, though, notions of capital markets still being an exclusive, white-shoe tycoon’s club are bunk. Regulators’ 1975 “May Day” reforms scrapped fixed commissions, sparking competition that birthed discount brokerages. The advent of no-load and index funds brought low-cost alternatives to formerly dominant 8% load funds. Trading commissions cratered when online brokerages boomed. Recently many brokers scrapped them altogether. Account minimums? Increasingly rare. Small investors can easily buy fractional shares in high priced firms now, an impossibility back then. Bid-ask spreads—up since last winter’s shock—generally trended sharply downward for decades. Data is ubiquitous—anyone can research companies, track portfolios and test strategies with a few clicks on a smart phone.
All this leveled the field for individual investors. There isn’t much hedge fund managers can do that you can’t. But it doesn’t guarantee success. Too many trade too frequently, chase heat or base big bets on well-known information already reflected in prices. Instead of diversifying, sitting still and letting compound growth work its miracles, too many fall prey to emotions, get spooked by volatility and react at the wrong times—selling after stocks fall, buying after they rise.
Too many overlook this simple, basic truth: Stocks rise much more often than they fall. Since 1925, the S&P 500 increased in 75.2% of rolling 12-month periods (including dividends). And 88.0% of rolling 5-year periods were positive—94.3% of 10-year stretches. There have been zero negative rolling 20-year stretches. Zero! Does that sound “rigged” to you? It’s good rigging.
But rather than participating and reaping stocks’ roughly 10% annualized gains since 1926, too many bet on the next Amazon, Netflix or Apple. Meanwhile many try to dodge any and all downside. Some fail to start, believing they need huge sums to impact their financial future. Those falsehoods blind them to what is really necessary: consistency, discipline—and time.
Consider: A $2,400 annual investment—$200 saved per month—not exactly high-roller money. But compounded at 8% over 30 years, it becomes nearly $300,000. That isn’t infeasible if you diversify and stick with it. That road to riches isn’t lined with flashy portfolios and get-rich-quick schemes. As detailed in my 2008 book, The Ten Roads to Riches, it‘s the least sensational but most reliable path to wealth. No one-day windfalls and high-wire-act day-trading. No gushing profiles in the financial press.
This isn’t to advocate a “set it and forget it” investment approach. But the call to action is when you know something others don’t—which is a tall order. The Redditors’ case makes this clear. Efficient markets price in all well-known information near-instantaneously. Hence, the Redditors succeeded because their social media short squeeze developed under the radar of most observers.
It won’t repeat. Those big, bad hedge fund managers many love to hate got fooled once, but they aren’t fools. It’s just like politics or sports. Donald Trump shocked Democrats with his unconventional 2016 approach. By 2020, they were waiting for him. In 1978, an overlooked Leon Spinks (who, sadly, passed away February 5), just eight bouts into his professional career, stunned Muhammad Ali to win the heavyweight championship. But Spinks wasn’t sneaking up on anyone after that—including Ali. He lost a rematch seven months later, and won only half his 38 post-title-win fights.
Now eyes everywhere fixate on trying to profit from social media stock sentiment swings. One fund firm is launching an ETF that buys and sells on social media buzz. More will come. Even if you judged their initial fundamental analysis spot-on, the Redditors’ strategy won’t shock again. Markets will pre-price any potential impact.
So if you can spot an oncoming shock that few see, good for you and more power to you! But long-term success doesn’t depend on that—because the whole crazy thing is rigged—for you.
