Why Fewer People Trust the Stock Market

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The Facebook IPO, one of the biggest and most publicized in the last few years, hurt “retail” investor confidence in the stock market. There was the hard sell by brokers (think Boiler Room style). Then investors not actually knowing, for a few hours, whether their brokers executed trades and at what price, which led to the $40 million fund to pay for the glitches (which probably isn’t enough).

For a lot of regular people, it was the last straw and I don’t blame them. There was the freak out flash crash in 2010, when, in five minutes, the Dow dropped 600 points only to recover most of that 20 minutes later. The investigation later revealed that high frequency trading, while not the cause, contributed to the crash and brought HFT into the spotlight. I read one BusinessWeek article that said about 70% of the transactions in the stock market come from these traders.

Now, a study is showing that some hedge funds are getting an early peek at research analyst’s recommendations (the buy, sell, hold recommendations) when those analysts answer questionnaires sent by the hedge funds. It happened when analysts revealed their opinions about Facebook’s IPO to their large clients, which is what prompted the inquiry.

Elevation Partners’ Roger McNamee shares his thoughts about the stock market:

I think many people can excuse incompetence like the Facebook IPO debacle. I think many people understand that it’s an unfair playing field from a technology standpoint – we aren’t really competing against high frequency traders picking up pennies, nickels, and dimes all day long. What I don’t think people can accept is an unfair playing field from an information standpoint or the possibility of another flash crash.

Oh yeah, let’s not even talk about the LIBOR scandal – which has a far reaching impact beyond the financial markets.

I think the stock market is best used as a convenient way to invest for the long haul (minimum five years) in quality companies, or index funds. I don’t mess with IPOs, I’m not really hurt or helped when analysts make surprised changes to their opinions (because we invest in the long haul), and high frequency trading doesn’t impact us (again, long haul). But I do worry that as fewer and fewer people get involved in the market, because of this lack of trust, our little stock market Ponzi scheme is going to run its course. 🙂

Has your opinion of the stock market changed as a result of the last few years of revelations?

{ 8 comments, please add your thoughts now! }

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8 Responses to “Why Fewer People Trust the Stock Market”

  1. I hate to say it, but my confidence in Wall Street is rock bottom. My reasons include:
    – The explosion in high-frequency trading
    – The 2008 bailout’s effect of encouraging Wall Streeters to feel that taking risk won’t, ultimately, have consequences for it (just for the taxpayers)
    – The transition of Wall Street from facilitating the growth of public companies to facilitating gambling
    – The continued charade by money managers that they’re worth the money they earn (by consistently generating superior after-tax returns)
    – My sense that the average person is nothing more than a pawn in a gargantuan money game (think Las Vegas)
    I could go on, but that’s enough for now. 🙂

    • Jim says:

      My feelings on the 2008 bailout are incredibly mixed. On one hand, I realize that what was done had to be done to avoid an even bigger disaster BUT it does contribute to the feeling of “heads I win, tails you lose” mentality. That’s dangerous.

      You should go on… 🙂

  2. Jim you were right on when you said you don’t invest in anything less than 5 years. That eliminates all the BS day trading, IPO’s etc.

    Anyone who thinks hedge funds, fund managers aren’t getting inside information is an idiot. There are tons of back room deals that go on that affect prices and they use that info to make money for themselves. That being said, there’s still an opportunity to make money without being a genius. Invest in low cost index funds, and hold on for the long haul. Pretty simple strategy IMO

    • Tony says:

      May 05 2006: SPY = 132.52
      May 18 2012: SPY = 129.74

      The era of buy and hold is over my friends. You better have an alternative plan because in 5 years the market could be down even more. Just look at the Japanese market twenty years ago.

      • NateUVM says:

        That’s why the key components to achieving your investment goals have always been Time and Contributions. Start early and continue to contribute.

        That, and you have conveniently 1)cherry-picked a ridiculously bad period for the market, one that is hardly indicative of the market’s overall historical performance, and 2) forgotten about dividends.

  3. NoviceFinancialExpert says:

    I often get upset when I hear how Wall Streeters use schemes to make money at other’s expense. However, they have been doing this for decades and stock investors still come out ahead of any other type of investment. I’m staying in the game for the long haul, also. I recommend reading “A Random Walk Down Wall Street” if you want a great historical perspective.

  4. fabclimber says:

    The 401k law feeds a continuous stream of money into the market. The money has to be invested. Most in equities. That causes prices to go generally up for while. Then the big guys sell what they have been holding but just enough to prevent alarms from going off. Then they buy back in at the lower prices and hold for the next round. The fund managers that do this best get the $100 million bonus and buy luxuries and have fun with your “tax deferred” money.

    The NEW Wall Street.

  5. zapeta says:

    It’s hard to trust the stock market, and it’s hard to pass up the possible returns so I just try to match the output of the market with index funds and a few dividend stocks.

  6. zapeta says:

    I don’t trust Wall Street but the yields have historically been attractive. Not many other choices so I just try to match the market with index funds and select dividend stocks.

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