6 Stock Market Risks That Have The Odds Stacked Against You
If only investing in the stock market is as fair as the textbooks tell us. Then we can truly trade with complete acceptance that success and failure is down to how well we decide on buying and selling calls.
Many like to attribute the emotional aspect of the market as the primary factor that causes odd market movements.
But that is like blaming a riot on the public instead of the key perpetrators power bank.
I’ve had my share of fortune in beginner’s luck. I’ve experienced the shock hopelessness of getting trapped in a trading halt. I’ve also suffered the irony of a backtracking stock while a corporate takeover was in the works. The one that was the most fun was the quick “in and out” in a hyped up IPO.
Yet even with all that fun in trading, I know deep inside that as the regular individual investor, it is never fair game.
While most individual investors think that they are the best around, they must be out of their minds to think that they can beat the system that is so heavily laden with ambiguous risks that they seldom have first hand information on.
1) Creative accounting
Even with the standards of accounting set by Exchanges for listed companies, it boggles my mind that corporations are still able paint a beautiful picture of their business operations when it is rotting from the inside.
I’m no accounting expert. But if equities are made available to the public, then the authorities should be setting accounting standards that layout financials whereby the average man on the street can understand.
And if the authorities are to feature numbers like the P/E ratio or NTA, then they should be enforcing protocols that make these numbers credible.
While the big majority of companies implement accounting practices that are truthful, there will always be a few mavericks who play the system to the full extent without breaking the rules.
Companies can now suffer hefty losses for the whole year, yet step into the black just by acquiring another company and absorb it into it’s financials. There’s a whole lot of fancy stuff going on these days that is tough to detect for the average person.
This means that being the meticulous calculative investor that you are will make little difference when number are rigged.
And there’s nothing you can do about it…
2) Mass media hype
You do realize that newspaper and television reports are often cleverly disguised advertorials paid for by companies, do you?
So shockingly biased some of these media coverage are, that you wonder why they even bother.
TV for example, like to “invite” brokers onto shows to get them to talk about certain stocks and shares. But behind those LED screens, these brokers often come from brokerages that have a stake in how well the stock being discussed performs.
Then you have the online newsletters bombarding your inbox every other day giving you the inside scoop on the next technology titan.
They start with disclaimers that they are just offering information and opinion. But when the average investor sees these reports from established media outlets, they tend to think that these information are expert and objective opinion.
The masses then drive up stock prices. The insiders exit at the peak, and the small investors are left holding the bag.
It is never fair. And I think you know it.
On top of my head, I can already think of quite a few companies who became darlings of the media when their IPO was impending. Yet their share prices have remained stagnant for over a decade. Some even fell over 90%!
Yet these companies continue to be darlings of the media.
3) Preferential treatment
The biggest reason why big time investors are able to consistently generate great profits for themselves and their clients is because they get better prices.
If you think that a 20% fall in prices of an IPO stock means that everyone is losing money, you are wrong. Because there were a lot of people who got in at a much lower price than the launch quote.
You will never get a bite at the pre-pre-IPO cherry unless you have some connections.
In fact, many high level investors actually buy their shares at a discount just months before an IPO.
So if you were pretty happy with yourself in your last IPO subscription because you thought you got in on the ground floor, it might be a shock when you discover the world of pre-pre-IPO one day.
Startup companies raise funds on an ongoing basis. Some even make fundraising a perpetual ongoing activity instead of developing their business. They even market their own fundraising activities with fancy marketing terms like series A, series 1, tranche A, founders club, etc.
My point is that floating their share on the Stock Exchange and having you buy it could actually be their end game. You were never meant to make money out of it.
4) Sudden failures
I don’t know how these things can happen.
But sometimes, companies can be worth a billion dollars today and go bankrupt the next. Totally wiping out the holdings of investors.
If the stock market is supposed to provide a transparent and efficient market place for the public to trade in, how can these things even happen?
Surely there must be data for investors to scrutinize before such events happen? Corporations don’t just go belly up the next morning upon waking up.
The constant news of such events happening and leaving shareholders stumped is an obvious sign that this game of the stock market is not fair.
And you know what?
After the dust settles in these occurrences, you will find that some investors were able to get out just before the whole thing imploded. How did they get out when there wasn’t even time to blink?
You didn’t even had the chance to make a selling decision…
5) The system is not built to save you
The best example of how the system is stacked against the individual are trading halts and circuit breakers.
A stoppage of trading both denies you a chance to profit from good news and cut losses from bad news.
Yet massive trading activities are often observed just before a halts is put into place. No one would question your suspicions if you think that those trades are conducted by players with insider information.
You will always be acting on second-hand information unless you belong to the “in the know” network.
6) CEOs are not always on your side
I just find it fascinating that failed CEOs always seem to have another top job waiting in the wings.
They draw million dollar salaries, drive companies they are put in charge with into the ground, then start all over with another company.
The irony doubles when many of failed CEOs are championed on media outlets.
Remember that CEOs seldom have your interest at heart. Of course it would be great if they can make shareholders happy. But that is seldom their prime objective.
Even when they have a stake in the company, losing money on their stakes is a drop in the ocean when you put their million dollar salaries into perspective. So don’t just assume that a CEO is trying to extract maximum value from your assets just because he is a shareholder too.
The only real way when you can trust a CEO is when his compensation is tied to share price performance.