STOCKS, IRA’S & 401K’S: THE PUBLIC
IS THE SUCKER!
“Listen, here’s the thing. If you can’t spot
the sucker in your first half hour at the table, then you are the sucker.”
People don’t seem to realize that when they sign-up for that
401k through their employer or have their union bargain for additions to a
pension fund invested primarily in stocks, they are unwittingly sitting down at
the table to compete against the exact same players in the exact same arena as
if they were personally trading stocks, despite their
protestations otherwise. These people would do well to look around at the
entire financial system and ask themselves “who is the sucker at this table”. I am pretty sure it isn’t JPM or
Morgan Stanley.
Every trade is a zero-sum game, and for every winner somebody has to have taken the other side of that trade. There are equal numbers of winning and losing trades, but these trades are by no means evenly distributed within the market. Think about these headlines:
Goldman’s trading desk made money every single day for an entire quarter in 2013… 63 straight days of no losses
Total number of trading days in 2013 in which JPM’s trading desk lost money: Zero
For generations now, the investing public has been the sucker at the table, they just haven’t known it.
Every trade is a zero-sum game, and for every winner somebody has to have taken the other side of that trade. There are equal numbers of winning and losing trades, but these trades are by no means evenly distributed within the market. Think about these headlines:
Goldman’s trading desk made money every single day for an entire quarter in 2013… 63 straight days of no losses
Total number of trading days in 2013 in which JPM’s trading desk lost money: Zero
For generations now, the investing public has been the sucker at the table, they just haven’t known it.
The other day I re-watched one of
my favorite movies, one that I hadn’t seen in a long time. I was thinking
about the markets and metals at the time, and the combination caused me to come
to an unforeseen conclusion: Pretty much everything you need to know about
investing in the 21st century
is contained in the poker movie Rounders.
If you haven’t seen it, Rounders revolves around the underground world
of poker players in New York City, and the plotline is pretty simple- a
talented former player who has tried to move on to a more “upstanding”
profession (he is attending law school) unwisely vouches for a childhood friend
who runs up a huge poker tab that is ultimately owed to Russian mobsters. To
save himself and his friend, the player is drawn back into the world of
underground poker and has three days to work his way through various games to
try and come up with the money.
The real insights come about the observations of the game
itself. The writers spent two years getting to know the world of poker
from the inside, interviewing and spending time with everyone from world-class
poker players, to the “rounders” who make their living playing in the
small-stakes games portrayed in the movie, to the casual games they played in
all over the country from firehouses to VFW halls. The core insight they
gleaned is that poker is not “gambling” in the sense that everyone has the same
chance to win (as statistically they should) but that poker is instead wholly a
skill game, a brutal contest of strategy, will, and game theory where the
casual players, given enough time at the table, would lose to the pros
virtually every single time. Indeed, though people steeped in the
“investors” mindset would probably recoil at the comparison, poker is extremely
similar to trading in that chance, dealing with the unforeseen, calculating
risk and return on every hand and pot, and most crucially playing against the
other players (or market participants) are all shared characteristics of the
two contests. Professional traders would have a great deal in common with
professional poker players.
The running commentary of “Mike D” (played by Matt Damon) provides
the central narrative of the lessons, or insights into this world and how it
works, during the film. The writers wanted to distill some of the more powerful
lessons they learned, and some of these quotes came straight out of the mouths
of the professional players they interviewed during their research.
.
Rounders starts
with one of the best opening movie quotes of all time, and it sets up the
entire premise:
“Listen, here’s the thing. If you can’t spot the sucker in your
first half hour at the table, then you are the sucker.”
Wall Street has gone through various cycles of mass-participation
by the public in stock investing, and public fervor for stocks has waxed and
waned through the years. The famous “shoe-shine boy recommending a stock
as the harbinger of the 1929 crash” represents one peak of this public
participation, and in the aftermath of that crash stocks were viewed as too
dangerous for most people for a generation. The “go-go market” of the mid
60’s was another peak, and the decline that followed discouraged yet another
generation of people, but the cycle always returns. In each and every
case, the public IS the sucker at the table, but advertising and sales pitches
have employed more and more sophisticated strategies and have effectively
convince them that this is not the case. Greed always overwhelms fear
eventually.
As a result, we see strange contradictions in ordinary people’s
attitudes towards investing. On the one hand, they will say “I don’t play
in the stock market” and claim “trading is dangerous” because Wall Street is
too slick, too powerful, and has too great an informational advantage and will
beat the small-time trader every time. On the other hand, they have no
problem buying in to 401k’s or retirement accounts based primarily on
stocks. In their minds, those things are merely “prudent investing” and
not “trading”. For some reason, people hear the words “buy and hold” and
“diversified asset allocation”, sold to them by uncounted television ads by the
very same Wall Street firms they claim to distrust, and they have no problem
gambling at the exact same casino because it has been sold to them as a
responsible and prudent thing to do.
These people don’t seem to realize that when they sign-up
for that 401k through their employer or have their union bargain for additions
to a pension fund invested primarily in stocks, they are unwittingly sitting
down at the table to compete against the exact same players in the exact same
arena as if they were personally trading stocks, despite their protestations
otherwise. These people would do well to look around at the entire
financial system and ask themselves “who is the sucker at this table”. I
am pretty sure it isn’t JPM or Morgan Stanley. For generations now, the
investing public has been the sucker at the table, they just haven’t known it.
When the investing public plays (knowingly or unknowingly) at the
Wall Street casino, they do so in the context of a carefully crafted fairy-tale
that goes something like this: “Freely traded markets will go up and
down, but the prosperity they create will raise all boats over time so if I
just buy and hold, I will grow my wealth eventually. In the short-term,
however, there will always be winners and losers and this is just how the game
is played- everybody places their bets and takes their chances”.
The fiction is that everyone at the table has a clean shot at winning. They
don’t.
“Why do you think the same five guys make it to the final table of
the World Series of Poker EVERY YEAR? What, are they the luckiest guys in Las
Vegas?”
Every trade is a zero-sum game, and for every winner somebody has
to have taken the other side of that trade. There are equal numbers of
winning and losing trades, but these trades are by no means evenly distributed
within the market. Think about these headlines:
Goldman’s trading desk made money
every single day for an entire quarter in 2013… 63 straight days of no losses
Now most people think of
all those high-powered firms and traders and would think “Well yeah, they
are pretty cutthroat, but the fierce competition between those folks
is what makes a market”. Does it really?
In one scene the two protagonists make a run down to Atlantic City
where they unexpectedly run into a half-dozen other Rounders from New York
sitting at a public poker table at the casino. They all know each other
and while they are exchanging greetings and insults, two regular guys at the
hotel for a convention sit down at the table. With their cheap suits and
nametags, they might as well have targets painted on their chests. As the
pros exchange knowing smiles, the narrator tells us that these poor schmucks have
no idea what they just stepped into.
“We’re not playing together. But then again, we’re not playing
against each other either. It’s like the Nature channel: You don’t see piranhas
eating each other, do you?”
The two conventioneers think they know how to play because they
sit in on a Thursday night game back home. They have no idea that,
through the ruse of an “even-odds game”, they are going to be harvested by the
sharks at the table no matter what cards they draw. And all of the pros
at the table are holding to another hard and fast rule:
“It’s immoral to let a sucker keep his money”
will be interesting to see what
happens when the current big-stakes game of financial liars poker is
done. We have pyramids of market bets by the big financial players,
topped by even larger pyramids of derivatives bets. All of the players at
the table are the risk counterparties to all of the other players at the table,
and the understanding among them is that if they all lose- if the markets they
are harvesting so aggressively get away from them entirely – the US taxpayer
(via the Federal Reserve) will make all of them whole again if anything goes
wrong. They have every reason to believe this will be the case, because
it has always been so. From Long Term Capital Management to the Bear /
Lehman / AIG fiasco of 2008, the US taxpayer has always made them whole when
things go wrong. But is this an endlessly viable option?
It seems to me that the financial system and their partners the
Federal Reserve are backed into a corner. If the Fed allows interest
rates to rise, the interest on the 17 trillion dollar national debt (against
just 3.5 trillion per year in tax revenues and a trillion-plus yearly deficit)
would begin to accelerate, compounding upon itself as the debt is rolled over
and could quickly undermine what remaining confidence there is in the US
dollar. To keep interest rates low in the face of a market that doesn’t want to
buy any more US debt, the Fed has become the buyer of last resort and has now
taken 4 trillion dollars on its balance sheet already. If they keep
taking on more, their own credibility will be undermined. Damned if they do,
and damned if they don’t.
And backstopping the whole thing is the American taxpayer, the
people whose productivity and labor ultimately have been pledged as collateral
for the entire financial circus. The problem is that these people are
knee-deep in debt, they are watching their purchasing power evaporate thanks to
the Fed. They‘re just hanging on by their fingernails and praying that their
paltry 401k bet will come through. The situation they are in, if this can
be believed, is even worse than the Fed. They will have zero tolerance
politically for yet another bailout of the Wall Street gamblers who treat them
like marks then demand their money to be made whole when the schemes go
belly-up. The public has been squeezed dry to the point that there is
simply nothing left.
“I’ve often seen these people, these squares at the table, short
stack and long odds against them. All their outs gone. One last card in the
deck that can help them. I used to wonder how they could let themselves get
into such bad shape, and how the hell they thought they could turn it around.”
At what point will these people look around the table, realize
they have been suckered in the most egregious fashion, and simply get up and
walk away? After all, the game can only go on as long as they are still
willing to ante-up. The day is coming when the public will either push
away from the table or they will be out of chips. Either way, it’s game over.
Keep stacking.
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