Is Wall Street Corrupt?

Well... yeah... probably. But that admission is no revelation. Wall Street has always been a place where people went to make money. If your goal is to make money, you’re going to look for advantages over the next guy. If you don’t have any (think Bernie Madoff), you just may try to invent some. That causes corruption. That doesn’t mean, though, that everyone is corrupt. There’s a difference between what we’ve been seeing on the news lately and real investing.

The GameStop saga is one in which several hedge fund managers (“Hedge Funds," they just sound corrupt, don’t they?) got together to take down a company. They thought GameStop would be a good candidate because they had physical stores that they thought would go the way of Blockbuster. So, they shorted the stock (shorting is a practice in which you "borrow" stock of a company, then you sell that "borrowed" stock immediately in anticipation of it losing share price. If the price goes down, say from $10 to $5, you buy it back at the lower price, giving it back to the entity you borrowed the stock from in the first place, and you pocket the difference). Hedge funds do this all the time. They see a vulnerable stock and they gang up to finish it off, much like you see on nature shows where a pride of lions work together to separate a wounded zebra from the herd, then take it down so they all can eat. As you see on these shows, the lions win just about every time. Likewise, so do the hedge funds.

Enter a bunch of day traders who communicate in the social media, called Reddit. They see what the hedge fund managers are doing, so they decide to fight back by buying GameStop stock, communicating and coordinating with each other on Reddit. There were so many day traders that they overwhelmed the stock the hedge funds sold and the price of GameStop soared. It was like a swarm of yellow jackets decided to protect the wounded zebra and thousands of them attacked the lions before they could take the zebra down. GameStop lived to sell more video games and some of the hedge funds were ruined (at least temporarily) because they’d sold GameStop stock at a relatively low price (expecting it to go to zero), but then it went up to twenty times the price they sold it at.

That was not supposed to happen! Hedge fund managers do not like being beaten at their own game, so they changed the rules. They made it so the individual day traders, temporarily, couldn’t buy GameStop, they could only sell it. The app the day traders used to buy the stock, called Robinhood (which billed itself as a friend of the small investor), participated in the restrictions on the day traders, revealing themselves to be just as corrupt as the hedge funds. Then Google revealed its own corruption by just wiping out over 100,000 negative reviews of Robinhood. It became obvious to anyone paying attention that the system is rigged, causing many to swear off the stock market as being so corrupt they cannot trust it to be a fair custodian of their hard-earned retirement money. But hedge funds and day traders are not the whole story, they are a very, very small part of it.

When you own part of a hedge fund, or you sit at your computer all day and trade stocks, you’re not an investor, you’re a gambler. You’re just like the guys who go to Las Vegas with a "system" for winning at Blackjack. When you’re an "investor," you have a different mentality altogether. You buy into a company because you believe in their product and their management, and you believe the company will make money over time, increasing the value, thus the price, of their stock. You have patience, and over time that patience can be well-rewarded. Or, maybe you don’t have a particular company you believe in, but you believe in a portion (sector) of the stock market, like the tech sector that has done so well during the pandemic. You invest in a fund that invests in many different tech companies. If tech goes out of favor and the real estate sector heats up, you move your assets over to a real estate fund. That’s investing. And that’s what we do at ProVest Wealth Advisors. We don’t day-trade your money and we don’t invest in hedge funds. But we do follow trends, and we have no problem being all the way in the market, or all the way out of the market, based on the trend we see going on in the market. Because we follow the trends, we will not usually get in the market at the bottom or out at the top. Even though, because of our trend following, we will not go up as much as a bull market will, our goal is to not lose as much as a full bear market because we’re stepping out of the market before it has gone down very much.

So there you have it. Hedge funds and day traders are gambling with their money, we’re investing with it. But we don’t believe that to invest you necessarily need to ride a bear market all the way down. So, we at ProVest, don’t. The bottom line is; if you don’t want to gamble with your money, and you don’t like the puny interest rates you can get on any interest-bearing account, you can invest in a way that gives you the opportunity to make stock market returns while potentially reducing much of the risk. And you can do it right here at ProVest Wealth Advisors. Give me a call right now at 800-277-0025.