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Is the Stock Market A Fool's Game For Us Small Investors?

The Goldman mess hit the fan today, and it’s all over CNBC. The market is down -144 right now!  But, I’m not going to blog about Goldman, instead I’m going to blog about the stock market and if it’s a rigged game…

What’s a small (WallStreet calls us “Retail”) investor to do?

Perhaps, we should sock away our money under our proverbial mattress at home? Maybe…, but not me. After all, when you store money in your house, it loses value to inflation. It’s kind of like a glass of water sitting in the middle of your house… eventually the water will evaporate, leaving just worthless residue in your glass…

So are we the little investors at an disadvantage? Yes and No.

The “Yes, we are playing a fool’s game” argument:

  • The institutional investors (mutual funds, hedge funds), have trained professional that do investing all day!
  • They can control the momentum of a stock, with their buy orders alone.
  • They have access to the target company CEO and other executives.
  • They have the education and skill to play derivatives to hedge there losses
  • Most retail small investors (us), only play the “buy and hold” game.  We are a one trick pony.  And for the most part, that is a good thing actually…

The “No, we have an advantage” argument:

  • We can capitalize on the institutional investor’s momentum, so we can skim of off some of the price appreciation that the institutional investors create.
  • We don’t have to worry about the numbers and competing against other institutional investors, esp. quarterly performance numbers.
  • We can take positions in smaller companies that are too small for the institutional to gobble up.
  • We are fortunate enough to be able to examine the financial statements of all publicly traded companies.
  • Expensive Transaction fees are no longer the concern they use to be.
  • The internet provided financial information quickly, vs the past.

I do know if decent stocks are purchased and if they are left to grow (basically ignored), they can appreciate to have high levels.  This happened to me as a kid growing up.

I guess it’s all what you are comfortable with.  I will say that today, I see the downturn in the market a buying opportunity, especially in the non-financial sector (why are these segments down today anyway, most because of fear.  I follow Warren Buffett’s advice ).

If you don’t have time to invest, then consider mutual funds or etfs.

Readers, what is your opinion on the matter?  Do you think the stock market (or any financial market for that matter), is rigged gains us small investors?


15 Responses to Is the Stock Market A Fool's Game For Us Small Investors?

  1. This Goldman deal alarms me. However, the choice isn’t between investing in the stock market and putting money under the mattress. There are other paths. I’ve built up a substantial nest egg by saving at high levels, putting the money into guaranteed accounts (certificates of deposit, savings bonds, t-bills, annuities, etc.) and taking advantage of compounding.

    I don’t understand the stock market and don’t have time to learn about it or to keep up to date with it. And I definitely do not want to give my money over to someone else to manage it for me. More power to those who can invest in stocks successfully. But it is not the only road to accumulated wealth.

  2. K.C.
    Thanks for the great different perspective. There’s more than one way to skin a cat…

    I’m currently invested a bit too agressively, but I’m going to rebalance my portfolio soon.

    Thanks for stopping by!

  3. I don’t recall the stats but I understand the little guy is out of the market at the moment. If you are ahead of the crowd, don’t you stand a good chance to gain?

  4. @LeanLifeCoach
    It’s true, for the most part the retail investors are on the sideline. I don’t blame them, it’s been a rough last few years. Personally I’m still down thousands of dollars, but I’m almost breaking every! Or at least I’m getting close.

    This is going to sounds weird, but I found the downturn in the market fascinating… heartbreaking, but fascinating. I feel like I should create, sell and wear a t-shirt that says “I survived the GREAT RECESSION, and all I have to show for it is this lousy t-shirt…”

  5. We are still pretty heavily invested in the market. A lot of people I know took all their money out of stocks about 18 months ago, but I did not. Fortunately, stocks did real well the last year or so. I do have some cash on the sidelines that I am not quite ready to commit yet. Based on the never ending bad jobs reports, I do not have as much faith in the current rally as many do. But, I live in Michigan where I am subjected to more bad news than many areas of the country. I do not have much confidence investing in any one individual stock. Even the tried and true (GE for instance) can take a hit. I would go with a mutual fund if I had to right now.

  6. MR-
    For me personally, I have a pretty good balance of International/Domestic investment, at least for what I am comfortable with. I am considering a biotech fund of some sort. I have considered buying an individual biotech stock, but I get so nervous that the value will plunge if the latest medical trial doesn’t go well. Do you know of a good bio m/f?

  7. Kris
    My core holdings are in my 401(k) plan and in a mixure of domestic and international mutual funds. With about 10% of my money, I play in the stock market. About 1/4 is in high beta chinese stocks like BIDU, and a few solar stocks. The other portion is in slightly less risky REIT dividend stocks like “Realty Income”.

    This is my “hit it out of the park” speculative money though, and I can afford to lose it with just a few tears 😉

    Sorry, I don’t know of any good biotech mutual funds…

  8. I am contemplating TRowe Price health sciences, but need to think a little more. I have to really define how much I need in my emergency fund before committing more of my money. Thanks for all your responses!

  9. Is the stock market rigged? I don’t know, but I do believe some are more equal than others! But then, these are the really big players (GS is certainly one of them).

    But as individual investors, we have certain advantages the big players don’t have. For instance if I want to cash out all my stocks, I can do so right away.

    Imagine Warren Buffet trying to do that! The minute he starts selling, the prices will start falling not netting the current price. Buffet cannot move large amount of stocks in and out like the smaller players without impacting the prices.

    But always, be cautious and protect your investments with trailing stops.

  10. I think stock investing for the “small investor” depends on homework. I follow Jim Cramer and agree that how much you put in is usually how much you get out.

    If you are looking to be a daytrader and make fast money, then YES, there is a disadvantage unless you are really on top of the game and have connections to up-to-the-minute news and trends.

    The best tip is simply, look for dips and buy low – always has been and always will be…take advantage of stories the “media” has blown out of proportion.