When it comes to the public markets retail investors are lambs among wolves, gnus running with lions. We are the main course on the menu when big market players sit down to dine.
The retail crowd is constantly being bombarded by information that is ultimately worthless, fundamental data.
Check the earnings, look at the revenue, don't forget debt, watch out for dilution, read the filings. The mountain of information is overwhelming. Insider and executive profiles, analyst forecasts, sales, book value, Its almost endless, if someone took the time to pour over every single piece of data available, by the time they finished...Three more months of reading material would have piled up and would be waiting.
And I'm going to argue that the only way fundamental information matters is in its potential to influence buying and selling decisions. And even then it depends on what the big boys do.
Retail players need to be aware of what they're up against, the money that's in play. You have thousands? Tens of thousands? Maybe even a few hundred thousand? Its peanuts. There are bigger fish lurking in the oceans that are the public markets, sharks and killer whales with hundreds of millions, even billions.
Think of it in terms of Texas Hold 'Em. Even when you've been dealt good cards, your stack is chicken feed compared to what the big boys are playing with. Their stacks are so big you can't even see who you're playing.
What am I talking about? Listen to famous and infamous Jim Cramer in an early interview talking about the stratagems used by the market whales, hedge funds.
You can be long on a quality stock, one with positive earnings that might even be paying a dividend. A company with a business that is growing month over month, quarter over quarter, year over year. But maybe there's a big player looking to accumulate a large position who will raid the stock, borrow all that's available and start selling it short, using multiple brokers to create the impression of a broad based sell off. As noted by Cramer in the linked 2006 interview, some writers and talking heads might even start talking it down.
I can hear some saying...."I don't buy on margin, they can't borrow my shares" Or, "I have Level II, I can see what's happening".
A company with outstanding shares of 100 million or more, even if some investors don't have shares available to be borrowed for shorting purposes, there are plenty others who do. And level II is no panacea, don't be fooled, not with the ability of big players to use Iceberg orders. "Iceberg orders"??? "What the hell are iceberg orders"???
Iceberg Orders
Just as with an iceberg where only a small portion is visible above the water, so too with an iceberg order where only a fraction of the actual shares available to be bought or sold can be seen. Let's say there's a big player looking to dump 1,000 lots of some high flying stock trading at say $10, that's 100,000 shares worth $1,000,000 at $10. Rather than displaying all the shares he's looking to dump the big fish will only show a fraction, maybe 50 of the 1,000 lots. The remaining 950 are still there, but they're below the water and retailers looking at their Level-II depth won't see it.
Think this is new stuff? That these are games that have come along in our internet age. This kind of market activity has been going on for decades, manipulation has been around since the first merchant started putting his thumb on the scale. In 1937 Richard Wyckoff detailed the way big players are able to prey on smaller fish. Here's a link to an article on what I'm talking about:
And here's an excerpt from the above linked article:
It takes a while for a pro to accumulate a position in advance of a big move – buying too many shares at once would cause the price to rise too quickly.
"The preparation of an important move in the market takes a considerable time. A large operator or investor acting singly cannot often, in a single day's session, buy 25,000 to 100,000 shares of stock without putting the price up too much. Instead, he takes days, weeks or months in which to accumulate his line in one or many stocks."
Instead, here's how he sets it up: first, he'll "shake out" the little guys by forcing the stock lower in order to get a better price.
"He prefers to do this while the market is weak, dull, inactive and depressed. To the extent that they are able, he, and the other interests with whom he works, bring about the very conditions which are most favorable for accumulation of stocks at low prices...
"When he wishes to accumulate a line, he raids the market for that stock, makes it look very weak, and gives it the appearance of heavy liquidation by sending in selling orders through a great number of brokers."
"When he wishes to accumulate a line, he raids the market for that stock, makes it look very weak, and gives it the appearance of heavy liquidation by sending in selling orders through a great number of brokers."
Still want to play? And is it possible for a retail player to still win? Yes, but it isn't easy.
If you want to play and win at this game then you have to know the golden rule. No, not the one Jesus talked about, doing unto others as you would have them do unto you. No, its the more cynical version: He who has the gold makes the rules.
This is a game dominated by big players, and its a zero sum game as I keep repeating. Some players end up with cash, the others with shares. Nobody is going to win every time, play the markets long enough and you're gonna take some lumps.
For my own part I look for stocks that are either out of favor or below the radar. I keep a close watch for too much promotion and hype, and I rely heavily on technical analysis. But no method, no matter how effective, is going to work 100% of the time....it can't. A market requires buyers and sellers, everyone can't be buying and selling at the same times.
Bottom line, the small retail player has to try and by in sync with the big market players, as much as she or he is able. And don't worry if you miss buying the bottom, or if you get out too early and miss selling the highs. As my late great Father told me many times: "You'll never go broke by taking profits".
For those wanting a spoiler on my next blog posting, its going to be about Ziopharm which trades under the symbol ZIOP. I think the trading of ZIOP over the past 2 years offers up a prime example of why and how retail investors sell low and buy high, while the big market players do the opposite.
Peace Out.
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