Noel B. Swain

Is Wall Street Corrupt?

Yes, probably. But this admission is not a revelation. Wall Street has always been a place where people made money and tried to gain advantage over one another. If you don’t have one, then you can just try making some up. That leads to corruption. However, that doesn’t mean that everyone is corrupt. There’s a difference between what we’ve seen on the news lately and investing for real.

In the GameStop saga, several hedge fund managers teamed up to overthrow a company. You thought GameStop was a good candidate. So you’ve cut the stock (short selling is a practice of “borrowing” stock in a company and immediately selling those “borrowed” stocks in anticipation of losing the stock price. If the price goes down, let’s say from $ 10 $ 5, you buy it back at the lower price and return it to the company you originally borrowed the stock from and pocket the difference).

Hedge funds do this all the time. You see an endangered population and band together to finish it off, much like you see it on nature shows where a lion pride works together to separate a wounded zebra from the herd, and then take it down for them to all eat . As you can see in these shows, the lions win almost every time. Likewise the hedge funds.

Enter a number of day traders by the name Reddit who communicate on social media. They saw what the hedge fund managers were doing and decided to fight back by buying GameStop stock. There were so many day traders that they overwhelmed the stock the hedge funds were selling and the price of GameStop rose. It was like a flock of yellow jackets were protecting the wounded zebra, and thousands of them attacked the lions before they could mine the zebra. GameStop sold more video games and some of the hedge funds were ruined (at least temporarily) for selling GameStop stock at a relatively low price (with the expectation that it would go to zero), but then it rose to 20 times the price that they sold it to.

That should not happen! Hedge fund managers don’t like being beaten at their own game, so they changed the rules. They did it so that the individual day traders could not buy GameStop, they could only sell it. The Robinhood app (which billed itself as the small investor’s friend), which the day traders used to buy the stock, joined in the day trader’s restrictions and was just as corrupt as the hedge funds.

Then Google exposed its own corruption by simply wiping out over 100,000 negative Robinhood reviews. Anyone who paid attention realized that the system was tampered with, leading many to renounce the stock market as so corrupt that they cannot trust it to be a fair steward of their hard-earned retirement money. But hedge funds and day traders aren’t the whole story, they’re a very, very small part of it.

If you own part of a hedge fund or sit at your computer all day trading stocks, you are not an investor but a gamer. You’re just like the guys who go to Las Vegas with a “system” to win at blackjack.

When you are an “investor” you have a very different mentality. You buy into a company because you believe in its product and management, and you believe that over time the company will make money and increase the value, and therefore the price, of its stocks. You have patience and over time that patience can be well rewarded.

Or maybe you don’t have a particular company that you believe in, but you believe in a part (sector) of the stock market, like the technology sector, which has done so well during the pandemic. You are investing in a fund that invests in many different technology companies. When technology falls out of favor and the real estate sector warms up, transfer your wealth to a real estate fund. That invests. Getting in and out of stocks several times a day does not mean investing, but gambling. I would rather be an investor.

Noel B. Swain can be reached at [email protected] He is a certified financial planner and has worked in Spartanburg for 36 years. He is the agent of an investment advisor to and Securities and Investment Advisory Services offered by Cambridge Investment Research, Inc., a member of FINRA, SIPC and a registered investment advisor.