Having ignored the stock-picking competition for my first week of work, I spent most of Sunday at the university library. No one had returned the book that I lost, and I made a note on my phone to pick up new ones for the library. I found another book similar to the one that I lost and spent some time getting informed on how public companies worked and how they reported to the public.
Public companies were required to post quarterly reports showing how they’d done over the previous three months. They were also required to publish annual reports. The book explained that there was usually a lot of market activity in the weeks leading up to the reports being published, as investors would use any clues they could find to guess at the company results before the report came out. Once the report was published, those investors would buy or sell the stock based on the actual results. This was called the “buy on rumor, sell on news” strategy. It was like talking to your friend as she gets ready for a blind date and guessing as to how it will go and comparing notes afterwards to see how it actually went.
It was these clues and rumor part that interested me the most. I read some more about that and found analysts and journalists to be the main purveyors of wisdom. The analysts studied an industry and its key players. They looked at trends in the industry, such as what other companies had already reported, new challenges to the industry or new regulations or new innovations that could cause any upheaval in the industry. Then they went out and met with senior managers at top companies in that industry and asked them lots of questions. Finally, the analysts looked at the suppliers to those top companies to see how they were doing. For example, if the suppliers were hiring people, then they were probably expanding, and it could be due to large orders from their clients. The analysts themselves usually worked for large financial institutions and these in turn would sell the analyses to their clients or feed small tidbits to the financial journalists, who in turn wrote these insights into their columns. On and on it went, everyone seeming to know so much, but it was all built on educated guesses.
Sometimes the guesses weren’t very educated. Sometimes the guesses were spiteful, because someone didn’t like the company or the industry and wanted their stock price to plummet. Sometimes a disgruntled employee wanted to leave a parting jab to the company by exaggerating problems within the company. Sometimes politics played a role and true analysis was set aside in order to create a narrative. Experts would be brought in to show how an industry was harming the environment and explained why shareholders should divest themselves of their shares in that industry.
The real problem was that even if you were able to sift through the real from the fake news, you’re still faced with the issue that two people can look at the same set of facts and come to entirely different conclusions, even without either of them having any personal stake in the company or any biases for or against the company. It was just human nature. Their own personal experiences and quirks would lead them to different conclusions.
The only people who knew the truth were the upper management of those companies and they were required to divulge that truth every three months. Although they were allowed to spin the truth with their comments and projections for the future, you could still get a solid understanding of the short-term situation of the company.
After a few hours, my brains started to melt. There was so much to take in and it wasn’t very interesting to me. I discovered very quickly that becoming a financial analyst was not in my future. But I still needed to participate in the competition and I still wanted to help James. Even my own foundation would eventually need to invest its money. With so much information out there, both factual and guesswork, how was I going to make money by picking stocks? People made their careers studying the stock market, and most of them didn’t become rich.
Maybe that was the question that I should be asking. Who’s making money by picking stocks? At first glance, it seems like an easy question to answer. Financial institutions made a ton of money, that’s their whole reason for existence, after all. But they made most of their money from charging their clients fees or from lending out other people’s money at a higher rate than they borrowed it, not from buying and selling stock. Financial advisors or money managers often made a very good living, but like dad said, if they were that good at it, they be too rich to bother working for someone else.
Big institutions, like pension funds and university endowment funds, often grew their funds by huge amounts, but they had at least three advantages that I didn’t have. They were long term investors and had years to achieve results, while I only had around eight or nine months. They had large diversified portfolios, meaning that they were invested in so many industries that it wouldn’t have much of an effect on them if a few had a bad year, because there would always be a few industries that would offset that by having a good year. While I could diversify a bit, I didn’t have the funds to diversify to the extent that they did, even if I bought an index fund like the Dow or the S&P 500. Finally, ‘It takes money to make money’ is an old but very true saying and they mostly started off with a lot of other people’s money. I only had my own, and maybe some of dads’ money to work with. The institutions were so big that their trades could affect the course of a company or even an entire industry and they were often courted by financial institutions with special access to investment opportunities that the little Abby sized investors couldn’t get and weren’t even aware existed.
Stolen from Royal Road, this story should be reported if encountered on Amazon.
Upper management made a lot money from trading their own stock, but they were required to report the stock they bought or sold to an online, searchable, database within two days of the trade. That information then becomes public knowledge. Those trades were watched very closely, not just by the analysts who would wonder why the managers of the company were buying or selling their own company stock, but by the Securities and Exchange Commission that regulated such trades. Since I wasn’t upper management at a publicly traded company, I couldn’t make money that way.
The last group of people that made huge sums of money from stock-picking were those that practiced insider trading. Insider trading consisted of using information that wasn’t available to the public to make your trades. For instance, if Uncle Magnum were the CEO of a large company and he told me about a new secret breakthrough at his company and I used that knowledge to buy stock before it was announced to the public, then I’d be trading on knowledge that was only available to insiders of the company. Insider trading is illegal. Marth Stewart, a woman who started her own company and became a billionaire, went to jail in 2001 for using insider information to save herself a $50,000 loss. The authorities take insider trading very seriously and they made an example of her. I thought that putting her in jail was silly. She wasn’t a danger to society and a different penalty could have been more useful.
There are exceptions to every rule and sometimes insider trading is allowed. Members of the US Congress are basically exempt from insider trading laws. They get a pass on using non-public information, that they obtain in their committees, to make trades. If a congressman sits on a committee to overhaul healthcare, they can place trades on companies that will be affected by the changes that they’re helping to make. However, in 2012, when the Stock Act was passed, Congress was no longer exempt from insider trading laws. Unfortunately, a year later Congress quietly passed legislation that considerably watered down the Stock Act and instead of having the same rules of disclosure as upper-management types had, they changed the ‘public disclosure’ from an online database to a paper report filed in the basement of a building in Washington DC, that you had to visit in person and pay to get a copy of. The reporting was also changed from two days to 45 days. The new rules also didn’t seem to carry a stated penalty for congressional insider trading, nor does congress have to comply with an investigation into insider trading by the SEC.
I thought about that for some time. One of the founding principles of the United States is that no one is above the law. Yet here was a clear example of rules for thee, but not for me. They wrote the rules, exempted themselves from those same rules, and they made millions of dollars off of it.
The politicians got a free pass, upper-management gets a free pass with disclosure, large institutional investors get special deals because of their size, and the financial institutions make money whether stocks go up or down because they charge fees on the stocks that they manage for others.
Realizing all this, I started to get upset about the whole situation. The game was rigged. How was I supposed to succeed when the big guys had all the advantages? Then I realized how whiny I sounded in my head. So, life isn’t fair. Big deal. This wasn’t news to me. I volunteered at the hospital and seen accident victims and four-year-old cancer patients. I’d worked at a soup kitchen with dad for awhile and talked with people who lost their homes to flooding and to drug addicted mothers trying to feed their babies. My mother had been taken by human traffickers and I haven’t seen her in almost 12 years. You could sit and cry in your cornflakes or you could keep living your life and do the best you can with the hand that you’re dealt. It’s cliché, but it’s true.
If they used their advantages to get what they want, then I’d use mine to get what I wanted. Maybe it wasn’t the most ethical decision that I’d ever made, but I comforted myself that at least I’d be doing it to help other people and not just to enrich myself. I was pretty sure that James wouldn’t approve, nor dad, but I wasn’t them and if there were any consequences, then I’d deal with them.
With that decision made, I used my phone to look up which public companies were within a few hours drive. I planned on paying them a visit and seeing if I could get some of my own insider information.