The stock market is rigged. In this article and video, I’ll talk about why and how the market is rigged on many levels and why the odds are stacked heavily and impossibly against you. Then I’ll talk about how despite the impossibility, you can still make a lot of money. I’ll tell you how you can re-rig the game in your favor so you can win and win big.
Do you believe the stock market is rigged?
Well, you probably do! According to a survey by Bankrate, 56% of Americans believe the stock market is rigged. If you belong to the 56%, you’ll actually be right.
The market is not only rigged, it is so rigged its only purpose is to take money from you.
Well before I tell you how, let me make an analogy. Do you believe casino games are rigged? Well, they absolutely are, but they’re legally rigged and they tell you upfront. In roulette you have two green slots, zero and double zero, so no matter what you bet on, whether it’s red, black, or any numbers, the odds of you winning is always smaller than 50%. In blackjack players have to make the first move so they can bust without the dealers doing anything, so that’s to the dealer’s advantage. And in poker, which is my favorite game, you’re not playing against the house per se but the house takes a percentage or rake from you every hand you play.
Every person who walks in the door of a casino, they have the dreams to make money and in the short term, some people make money and some people lose money but over the long term, the only people who consistently make money are the casinos themselves. Otherwise, how do they always build another beautiful, huge, state-of-the-art casino to attract you to gamble more? In 2019 the US casino industry made 43.6 billion dollars. Where do you think that money comes from?
Now casinos are rigged but they, at least the large ones, do it upfront and in your face. No matter how bad you think the casinos are, the stock market is way way worse. In fact, compared to the stock market, the casinos are like non-profit organizations designed to give you free puppies and remove excess body hair because instead of blatantly rigging the game, the stock market does it subtly and secretly in favor of those large institutions, hedge funds, investment banks, against small retail investors like you and me. The stock market is rigged against you in four ways.
In a perfect world, every investor, big or small, has access to the same technology with the same functionality and speed to make trades. Well, the perfect world is like food that tastes like donuts but functions like celery.
It doesn’t exist!
In reality, retail investors like you and me use apps like TD Ameritrade, Vanguard, Fidelity, or Robinhood. Personally, my favorite app is M1 Financial. I’ll explain why in a later video and article, but in one sentence: their pie-based investment is perfect for love investing. Use my sponsored link above to download the app, start trading, and get up to $500 in bonus.
Now, M1 Financial is great for us, but for those large investors, their trading technology is built way differently. In fact, nowadays over 80 percent of the trades are made by computers. Trading against computers like a random dude after a couple of drinks decides to challenge the most complex artificial intelligence player which can defeat human world champions with ease.
Fine, computers are everywhere nowadays. At least with chess, every player will take a turn and make a move and that’s fair but in the stock market that’s not the case. Many of these large institutions would have high-frequency trading machines. They can buy and sell orders way faster than we do.
Basically, they’re like lightning-fast scalpers. After they detect that we want to buy some stocks, they can buy the same amount of stock from someone else with a little bit lower price and sell it to us with a little bit higher price. All before our trade order can go on to the open market.
This is called the front running. They can legally siphon away a little bit of money from people like us every time we try to make a trade. With billions of trades happening every day, they make billions of dollars every year, automatically, with no ability to fail.
They say information is power. In the game of stock trading, information is everything. Knowing the health of a company and its business is key to deciding when to buy hold and sell a company’s stock. In the perfect world, a company would give its financial information to everyone at the same time through quarterly earning reports which is a snapshot of how well the company is doing financially and all investors would have the same chance to make investment decisions based on the same information. Well, a perfect world is like a Costco store that allows you to walk out without having to spend $200.
It doesn’t exist!
In reality, any information you hear through the quarterly earning reports or financial media, all the large investors and the superpower computers would have acted way before you have a chance to log on to your app, to make any moves. Any stock prices you’re seeing are already baked into any good news or bad news, but more importantly some people, many people, already have the access to the information way before you do.
It’s called insider information. For example, a company’s executive would most likely know the good or bad news about the company way before anyone else in the world does.
According to an article published by Citigroup in 2008, if you build a portfolio simply by mirroring what company insiders would trade, that portfolio would yield 23.5% a year. That’s better than the vast majority if not all hedge funds in the world.
And moreover, people working in governments also have insider information that we don’t have access to. In a paper written by Stanford and Wharton professors, employees at banks who previously worked at the Federal Reserve and the US Department of Treasury significantly outperformed the market in the 2008 financial crisis, when the government was bailing companies out left and right.
How can this be?
The only conclusion?
That people inside the companies and governments were trading on insider information. Now, insider trading is supposedly illegal. In the United States the Security Exchange Commission, or SEC, exists to regulate insider trading. However, it’s way overworked and understaffed. Among all the insider tradings that are happening every day, only a small fraction gets prosecuted and investigated.
In reality, the useful financial information you can use to make investment decisions is like delicious food. What we’re seeing in the news is pretty much like dried poop.
They have all been chewed, swallowed, regurgitated, re-swallowed, digested, defecated, and left in the sun by all the insiders and fast-moving AI’s long before we can use them.
In hand-to-hand combat, size matters way more than people like to admit. One punch from a 170-pound boxer might hurt the 250 pound one somewhat, but the punch the other way around might be an instant knockout. It’s just physics. That’s why in boxing, or MMA, fighters are put in very strict classes based on their weight to make the fights fair. In investing size differences are even more profound, but there are no weight classes. In the perfect world, all investors would make trades based on their analysis, and everyone’s trade would have an equal impact and hopefully no impact on the stock price. Well, the perfect world is like underwear that serves its purpose but doesn’t squeeze your balls and make them itchy.
It doesn’t exist!
In reality, if you make a trade, for example, if you want to sell 10 shares of Spotify, it will make no difference in the stock price, but a large institution, like a hedge fund, if they were to sell 1 million shares of Spotify, it would tank the price. Both are decisions made by individuals but because of the sheer size difference, you will be at the mercy of their decisions and your existence would make no difference to them. And the size difference isn’t constrained to just money, but also influence.
Once you become a well-known influencer in the financial world, you can take advantage of that stature. You can buy a large chunk of stock and hold it for a few months. Then you will tweet out some positive news or why you love the company to the millions of followers you have. You can artificially inflate the stock price. Then you can just sell the stock and reap the profit.
It’s called a pump and dump. Now just like insider trading, it’s illegal to do it blatantly and SEC is on the lookout for people who do this. But again, it happens every day and only a small fraction of people get caught and punished. Compared to these large investors or influencers who can impact the market with their trays or tweets, we’re like ants living in the land of dinosaurs.
Do skills matter? You bet they do! In everything, from playing soccer to scratching your back…
You wouldn’t assume you can beat the world champion, Djokovic, in a tennis match, would you? And you wouldn’t believe you can be part of an orchestra after training for piano for a week. And in investing, skills also matter. In the perfect world, everyone will have the same education with the same training and same experience, accessing the same information and tools, making trades that will benefit themselves. Well, a perfect world is like kids who don’t ruin your walls.
It doesn’t exist!
The Wall Street firms often hire the smartest graduate from the best colleges in the world and they train them extensively to make investment analysis and trading decisions. And as I mentioned, they also have access to the most advanced tools while accessing better information.
I remember at graduate school I knew this girl. Her name is Jessica. She could just do things with spreadsheets like voodoo magic. She was so smart that I was sure I couldn’t beat her on anything that involves numbers. She was eventually hired by Goldman Sachs, a big investment bank. These are the professionals we’re going up against in the game of investment.
Now I can go on and on about more sophisticated ways that the stock market is rigged but because of time, I’ll just say: you got no chance. People use analogies of unfair fights like bringing a knife to a gunfight, or David against Goliath, but in reality, retail investors in the game of stock trading is like bringing an eraser, like a weapon, in a hypersonic missile fight, against the most advanced military in the world, who knows all the information before you do and knows every move you’re about to make.
Now, do you think you can still win and make money in the game of investing? Well, if the answer were no, I wouldn’t be making this video.
Yes, we can.
You’re not going to win by playing their game; you have to change the game that’s played. By doing so, you negate all the advantages they have and essentially rig the game yourself.
In 2019, famous author Simon Sinek wrote a book called The Infinite Game. Here’s an example of the Vietnam War in the 60s and 70s. On one side, you had the United States who had 200 million people, with the most advanced military in the world. They had the best weapons, best training, best information technology, and best transportation tools. The American soldiers could fly in and out of the battlefields in helicopters like they were Gods.
On the other side was North Vietnam whose soldiers were mainly peasants who were poorly trained and had very basic weapons. They had no navy, no air force. They could only move from place to place on foot. Throughout the Vietnam War, hundreds of battles were fought and Americans won every single battle. They had a casualty count of 58,000 people while North Vietnam lost over 6 million people, but in the end, it was North Vietnam who won the war.
It was inconceivable, but it happened.
Well, they were playing two different games essentially. There are two types of games in the world: finite games and infinite games.
Finite games are defined by known players, fixed rules, agreed-upon objectives, and a beginning and an end. Some examples are basketball and chess. Or fantasy football, which I just won this past week. Yay!
An infinite game however is defined by either known or unknown players. There are no fixed rules, no winning, and no agreed-upon ends. The goal is to keep the game going without dropping out. Examples include businesses, marriages, or friendships. The game only ends when all other players lose the will or resource to fight on and drop out.
When finite players and infinite players are pitted against each other, the finite players, no matter how powerful or skilled, often find themselves in the bind because they have limited time, resources, and will to win the game, while the infinite player doesn’t. They will fight and they’ll lose everything.
For example, if a high school team were to play a game of basketball against the Los Angeles Lakers, who have the best players in the world, they will get killed. However, if they challenge the LA Lakers to an infinite game, like a basketball game that lasts for 30 years with no limitation on the number of players, no fouls, and they can throw avocado toast at them any time they want, they will win, because very quickly the Lakers will find themselves in the game they don’t want to play, with rules they don’t like, and risks they can’t afford to take. They will bow out very quickly.
In the Vietnam War, the United States was playing a finite game, with objectives to be winning the war without losing too many American lives. For North Vietnam, they were playing the infinite game, with the objective of fighting for their lives and their country. That’s why they could take on the body count, battle losses, and resources spent without giving up while the Americans couldn’t.
Now, let’s get back to the game of stock investment. If you play a finite game of who can make the most money in the next day, quarter, or month, against the most seasoned professionals from large institutions and hedge funds, who have access to the most advanced technology and information, you will lose probably a 100 out of 100 times.
However, if you change the game to an infinite game, with objectives such as your own financial freedom, retirement, or generational wealth, you will not only have a chance to win, you’re likely to win.
So, how do you change the game to an infinite game?
You do so by stretching your investment period to a long-term horizon such as decades or even an infinity such as generations. Then you’ll find a strategy that works for you and your situation and lastly, you’ll relentlessly stick to your strategy no matter how the market is doing in the short term.
In fact, Love Investing, the investment philosophy I’ve adopted and advocate for is an infinite game strategy. It involves you buying and holding stocks of companies you love in real life and you will not sell no matter how high or low the stock goes, as long as you still love the company. Love might not last forever, but it often lasts for a long time. And when you stretch out the timeline of this game, you negate all the advantages that these large players have by rigging the game and you rig it yourself to your own advantage.
When you have an infinite time horizon, those high-frequency trading machines don’t matter anymore. Sure, you might lose a few pennies for every Amazon share you have, but if you hold it for decades, it might go up 5, 10, 15, 50 times. Who cares about those little losses?
While you don’t own the insider information that might move the market in the short term, you possess another insight that these professionals don’t have. How good are the products and services of these companies and how much do people love these companies?
Over the long term, that information is much more useful.
In fact, if the company starts making products that are terrible and start pissing off its customers, it might not reflect its financials in a month, but it will in quarters and years. By the time the financial market moves on the news, you would have acted long before everyone else did.
Yes, large institutions can impact the stock price when they make large trades, but you don’t care about the price fluctuation. The prices going up and down in the short term doesn’t mean jack squat when you are holding the shares for years and decades.
In fact, size will become a disadvantage in an infinite game, because these large funds institutions will need to be responsible to their investors, who will scream at them or fire them if they don’t perform in the short term, while you can sit on your investments forever, through the ups and downs.
An active-passive, long-term investment strategy, like Love Investing, requires very little skill for every trade because it doesn’t require many trades at all. You just use your intuition to rank the stocks you love, and buy and hold them for the long term. In fact, by stretching out your investment horizon, you gain something that’s much more important than information and skills: time and patience, which large investors can’t afford to have.
In my video How to Get Rich With a Normal Job, I talked about how you can compound your investments over the decades and how crazy they can get.
Whether you like it or not, you are playing many games in life. Some are finite, like fantasy football. Some are infinite, like health, career, and happiness.
By switching your game from a finite game to an infinite game, and letting time become your ally, you’ll become a very very powerful player in a rigged game of stock investment.
Remember, always play the game with your rules, not theirs.
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