The Stock Market (Part 2)

Okay, I have to be honest here. I left out a little something in Part 1 of this piece, only because I didn't want to clutter matters up.

There is another way to make money in the market.

It's called manipulating the market. Here's one of the many ways it works:

A brokerage firm has its salespeople call up their twenty largest institutional investors on a Monday afternoon, advising them to move heavily into Acme Titanium without delay.

It's very easy. All the salespeople have to do is drop strong hints that they have inside information. Being illegal, these hints can be somewhat subtle so you have to be alert and watch for the clues. One call I actually got from a broker went like this: "I got an inside tip on Ormont Drug that can't miss, guaranteed."

Bright boy that I am, I picked up on it right away.

The next step is for the broker to publish a very strong "buy" recommendation the next morning. We peasants pick up the newspaper or a stock sheet and see this recommendation, then we look up at the ticker and see that Acme has already shot up six percent since the market opened.

Wow, what a tip!

Of course it went up. All those big institutional guys who got the word the day before have been buying Acme like crazy, driving up the stock price.

Then we start buying it, and the price goes up even further, and we are all deliriously giddy and in total awe of the broker's powers of prediction.

Meanwhile, nothing whatsoever about Acme Titanium has changed in the slightest. Same management, same financials, same product. (Of course, management will brag in their annual report about how brilliantly they increased shareholder value owing to the detailed re-engineering of traditional administrative processes, a closer adhesion of the corporate value structure to the perceived needs of a dynamic marketplace and an increasing awareness of the globalization that presents a potential threat to the kinds of vertical integration that have felled less worthy competitors.)

But nothing is free. One of these days, someone will peek beneath the veil of "irrational exuberance" and realize that the stock price is way too disproportionate to the fundamental worth of the company. He will start dumping the stock, which would tend to drive the price down, if he's a big enough holder.

This is the point where the brokerage firm will drag out the standard "don't panic" speech, complete with the implication that anyone who starts dumping this stock is a coward with a small penis. (If the holder is a woman, she gets the "can't play up there with the big boys" treatment.)

Believe it or not, this usually works.

The real reason I'm not in stocks is because I'm dead convinced that the only thing sustaining this tenuous house of cards is the same kind of mass hypnosis that made everyone think the naked emperor was really wearing new clothes. I believe that one of these days it's going to come crashing down with such force it will make 1929 drop look like a rounding error.

Incidentally, shortly after I bought Ormont Drug, the company went bankrupt. Merrill Lynch sent me the worthless certificates which I framed and kept them on my office wall back in my business days as a constant reminder.

 


from: A Practical Guide for Everyday Living, by Lee Gruenfeld
* Copyright 1996, 1997 by Steeplechase Run, Inc. - All Rights Reserved

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