According to CNBC, in January 2021 an average of 6.6 million shares of stock were traded every day on Wall Street. As of September 2020, the total value of the US stock exchange is estimated at roughly $36 trillion. So whether you believe it’s a necessary component of the free market or a casino run by reckless addicts in suits, it’s worth getting to know a little better. Who knows, you might just get some money out of it. Or, according to the common wisdom, you’re more likely to lose money at it. But is that piece of common wisdom true? Let’s have a look at that and other surprising factors of the Big Board.
10. Algorithmic Trading
The days where trading was mostly in the hands of people yelling into phones are of course long gone, but it turns out the days where humans are involved at all in favor of automated digital trades have been going away for at least a decade. Back in 2013, Mother Jones reported that more than 50% of all stock trades were already being conducted without any human interaction at all, and sometimes executed within seconds of the original purchase. It shrank the average holding time of shares from around eight years in the 1960s to less than five days.
While clearly human error has proven disastrous for the stock market as seen during the Crash of 1929 and 1987’s Black Monday, algorithmic trading gives us plenty of cause for concern. For example there was that time in May 2010 when automated trades lost the market $860 billion. And that took only thirty minutes. It’s also seeped into broader aspects of the global economy, such as when in October 2016 the value of the British pound dropped 6% in seconds. In short it can change the very face of the economy in the span of a work break in potentially disastrous ways. But if you think you could make it work for you, there are a number of sites online that will tell you how to get artificial intelligence systems to control your portfolio for you.
9. What to Do If You Find an Old Stock Certificate
Sometimes people have found forgotten pieces of paper that were purchased by deceased relatives giving them percentages in companies that grew into behemoths, making the shares potentially worth fortunes. What a person who has found any such document should do is contact a brokerage and a transfer agent to see if there are records of said company being renamed, purchased, merged, or anything that could mean it’s worth a fortune. In 1989, Stock Search International founder Micheline Masse found $3 million worth of value in old certificates. One of the most valuable certificates ever found was in 1979, when one was found to be $4 million.
Unfortunately there’s no guarantee that even a fully notarized and official old certificate for a surviving behemoth company will be good for anything. Take the 2008 case where one Tony Mahron purchased an old share of Palmer Union Oil Company, which became an acquisition of the Coca-Cola Company. While initially the share would be valued at $130 million, ultimately courts sided with Coca-Cola and found the claim meritless. Which goes to show if your claim would be more trouble for a company to pay off than it would be to fight it in court, be ready for them to do that.
8. The Wall Street Bets Gambit
If you heard about the GameStop price manipulation but never looked too much into it, here’s a summary: Hedge funds (i.e. large funds from wealthy contributors) bought shares in cheap stocks from companies in fields generally believed to be on the way out, such as the store chain GameStop because analog video game sales were being replaced by online sales. On January 22, 2021, the value of GameStop shot up dramatically because the online community /r/wallstreetbets began heavily buying shares in a premeditated manner, in many cases going deep into debt to buy shares, also known as buying “on margin.” GameStop and companies like it went up as many as dozens of times their original value, causing the funds that had invested so heavily in them being low value to lose an estimated $40 billion in a little over the first week alone. As of June 2021, GameStop’s value is still over $200 per share, around sixty times higher than before /r/wallstreetbets began inflating it.
Several lessons were learned as a result. For one, coordinated middle class and lower people demonstrated that they could impact the market despite the gigantic wealth gap in America. For another, the fact several major online brokers such as RobinHood and E-Trade stopped all purchases of shares of GameStop and other companies /r/wallstreetbets did this to went to show the blatant market manipulation the market was willing to go to in an attempt to drive down prices for the benefits. Finally, the /r/wallstreetbets mass-buy also caught the hedge funds that relied on algorithmic trading off guard, which deserves emphasis because it validates a point made by another entry in this list.
7. The Secret Market
In the previous two entries we’ve seen evidence that the market is stacked against middle and lower class investors (who are often referred to as “retail investors”). It’s debatable whether that’s better than a massive part of the stock trading industry that most people don’t even have access to. As DR Barton Jr. reported in May 2020, there are around 53 private equity firms that exchange shares of companies without public access, often in unmarked buildings located in suburban neighborhoods.
These are by no means infrequent or trifling transactions happening at these private exchanges. Reportedly 42% of all stock trades total occur through these firms. The amounts mean hundreds of billions exchange accounts from 110 companies. It’s been a perfectly legal setup since 2005, albeit one with suspiciously little public scrutiny or accountability.
6. Not Just for the Rich
Despite what we’ve just seen about the hurdles that small-time investors can face if they enter the market, the conventional wisdom that the market is the playground for the wealthy is hardly true. As of 2019, 53% of all American families had money invested in the stock market. Thirty years earlier, it was a relatively modest 32%, much of the difference no doubt due to the convenience the internet provided for stock trading. While it’s also true that the top 10% of families own 70% of shares, many in the middle classes still own a substantial amount. For instance, the median (i.e. the most common amount, not the potentially highly misleading average) household savings in stocks is about $40,000. Even among the poorest quarter of Americans, roughly a fifth are invested in the stock market.
The 53% of households that own shares skew Caucasian to a significant but hardly overwhelming degree. Roughly 61% own them while it’s 34% among African American households and 24% for Hispanics. They similarly skew towards older owners, too, with 65 and over owning 43% of the shares. Yet across demographics, a relatively low percentage own shares through going to a brokerage and directly buying them. It’s about 15%. For the rest it’s through retirement accounts.
5. The Wash Sale
As mentioned in entry #10, the length of time that people own shares has shrunk since the internet and artificial intelligence became involved. So it’s common for shareholders to see some news story that drives the value of very recently purchased shares up or down abruptly, and decide to sell to cash out or cut their losses. If there hasn’t been enough time for the initial purchase to have been fully processed when the sale is initiated, it’s what’s known as a “wash sale.”
There is something that tax-paying shareholders should especially know about wash sales. Generally, if a shareholder sells shares at a loss, that lowers the amount of taxes due by decreasing net income. That is not the case with wash sales at a loss. Brokerages won’t deduct that amount from annual income. Wash sale gains, however, will still be taxed.
4. Overwhelming Day Trading Losses
There’s a common belief that most people who engage in the stock market through direct purchases lose money. Unfortunately for most people, it’s not only true but potentially disastrously true. As reported by CNBC in November 2020, roughly 85-90% of retail investors lose money in the market at the end of 300 days. Considering that $15,000 is the median investment for middle and lower class families, that can mean quite significant losses at that income level.
For those who might blame the jitteriness if not flightiness of this new generation or the current economic situation, we have something for you to consider. Financial experts reported that 2020 marked 25 consecutive years of amateur direct stock traders performing below the market average. So it’s definitely not the internet’s fault, even if it didn’t help enough for the average trader.
3. Hedge Fund Slump
But it turns out that even the supposed “experts” aren’t as reliable as they’d like us to think, either. Even before the 2020 pandemic even reached America and wrecked the market, hedge funds were down 3% for 2020. S&P 500, the most famous of all, was down a whopping 8.27%. That had been only part of a decade-long trend of hedge funds under-performing the general market, according to the Wall Street Journal.
Famed investment billionaire Warren Buffet got bragging rights when he predicted that money just passively parked in the market would do better than money given to hedge fund managers overall, which was rubbing salt in the wound with particular cruelty considering the fees that fund managers charge. Not that any of this has prevented hedge funds from growing into a $3 trillion industry.
2. The Best Day Ever
So, now that we know both average traders and hedge fund managers aren’t really that reliable, let’s move on to the subject of which trader lucked out the most. Without checking, who would you guess that is? The aforementioned Warren Buffet? Bill Gates? Jeff Bezos? No, it’s not anyone generally famous. It’s David Tepper, who made $7 billion in 2009.
Where Tepper’s story goes from being a novel bit of trivia to being useful is his methodology. His winning investment was in banking stocks in 2008 when the real estate bubble burst and overdrawn banks seemed on the verge of collapse. While everyone else was thinking that banks were doomed, Tepper’s investment paid off the fastest and one of the largest amounts any investment has ever paid off because the banks were famously bailed out. It goes to show that when it comes to the market, sometimes the most rewarded play is the one that goes hardest against the flow.
1. Disaster Impact
The death of President Kennedy on November 22, 1963 was one of the most traumatic moments of its era. For decades after people remembered where they were and what they were doing when it happened. Wall Street joined the rest of the nation in such shock that it closed the market as the nation plunged into sorrow and uncertainty.
Well, it did for two days, anyway. That was how long it took for the market to completely recover all the losses from the assassination. When the 9/11 attacks shocked the nation even more than Kennedy’s death, it only drove the market down for a month before there was a full recovery. In short, the market is very resilient in the face of tragedies that primarily have a psychological impact over disrupting supply chains and other disasters that have a more material effect on the economy.
So if there’s a single lesson to be taken from all these entries, it would seem to be that you should have some liquid assets on hand in case a major disaster happens that you can ghoulishly take advantage of. Algorithms probably aren’t sophisticated enough to take advantage of it properly, and you don’t need to rely on a hedge fund manager. But if the plan blows up in your face and you sell quickly, don’t expect to be able to write it off on your taxes. Happy trading!
Get yourself a copy of Dustin Koski’s book Return of the Living so he can recover from his losses in the market.