#70 Your View Determines How You Play

Your View Determines How You Play – Stock Trading Strategy (#70)

Don’t you realize that what you do in life depends on your view or outlook about yourself and the world? Your actions, right or wrong, originate from your own view, and only change when your view changes.

Playing in the stock market requires a realistic view of the power of money, investment risks, and human psychology. The closer your view approaches reality, the more success you will be able to achieve.

Let me explain the realities of the stock market as follows. Hopefully, this will give you a fresh outlook and help you find a new way to play.

The stock market is a tremendous money game where big fish eat small fish legally by hook and by crook, but it is not casino gambling. The difference is that in the casino a bet relates to the present and is independent of any other bet. By contrast, every bet in the stock market relates to the future. What we don’t know is how far into the future, and what the big players think.

What’s happening in the stock market is not accidental but planned. In order to make profits, the big shareholders must somehow organize the market to do three things: to build up to a better future (creating a peak), build down to cash out (sliding to a low), or build flat with frequent fluctuations (seesaw market) according to changing economic conditions. Each of these build processes lasts from a few weeks to a few months. When the big guys have accumulated enough of a stock, its price is due to rise. They will invent a reason to boost its price. Likewise, when they plan to cash out, there will be a reason for the stock’s downfall.

With limited cash to play, you are a helpless small fish subject to being eaten. What should small fish do? They should swim closely behind the big fish rather than straight toward its mouth. Small fish should think about survival all the time. You are no investor because you don’t organize the build processes I’ve just described. You just buy and pray while the big shareholders buy and play. The fatal mistake of millions of small players is that they think they are real investors, and waste their time trying to be.

Believing wrongly that you are an investor means that you will never bother to find out who your opponents are and the tremendous powers they possess. How can you win if you don’t know whom you are dealing with? Who are your opponents actually? They are the ones who have plenty of cash to buy and plenty of stocks to sell. They include: wealthy individuals, venture capitalists, mutual funds, investment funds, insurance companies, big commercial banks, investment banks, brokerage companies, many corporations that trade on the side, and a shady group known as money launderers. All of them qualify as major shareholders by virtue of their large share holdings and cash reserves. They are the true investors because they organize the three build processes I’ve just described.

Thinking of being an investor, you waste your time listening to the experts about investing strategy, company performance, product analysis, etc. All those stuff are interesting but not particularly relevant to making money for you. Don’t you notice that all the experts and analysts are employed by the big players? Do you agree that people work for their paychecks? Their reports are produced for your consumption but certainly do not serve your interests. The reports are used to drum up or orchestrate public behavior to buy or sell stocks. Big players do not read those reports. Why should they? They have access to insider information by virtue of being major shareholders whom public companies are obliged to serve.

The passing of insider information by the company’s top management to the major shareholders is routine but done discretely to avoid conflict with the law. After all, those who own a major part of the company should be entitled to exceptional treatment. Secondly, top management owes their careers to the approval from major shareholders. All small shareholders are ignored because they don’t carry enough weights individually. A small guy holding some shares who thinks that he is an investor and an owner is too romantic a dreamer to play in the stock market.

Stock prices are set by auction using a system of ask and bid, not determined by supply and demand based on need and utility as in the case of PCs, cell phones, jeans, hamburgers, and autos, etc. When you buy a stock, you are only buying a dream. The stock certificate has no utility value. In modern electronic trading, the certificate is even replaced by a mere numerical entry in your brokerage account. That means your brokerage company knows everything about how you play. Remember, your brokerage company is a big player and your opponent.

The supply of any company stock is always limited, as shown by the existing number of outstanding shares to be set by the company’s board of directors. The supply is further limited by the willingness of the major shareholders to sell. If they keep on buying rather than selling, the price will run up pretty quickly. If they dump, the reverse will occur.

The demand for a company stock comes from basically two groups of people: small and big guys. The small guys (the public) base their buy decisions on what they see and hear, which is always second-hand materials fed into their heads. Usually, the small guys buy when prices go up, because rising prices signify good stocks. On the other hand, the big guys buy in big quantities when prices come down real low to make themselves bottom-heavy. After becoming bottom-heavy, they continue to buy up the price to increase the value of their total share holdings in order to prepare for an eventual cash-out. You should appreciate that being bottom-heavy in stock holdings enables a big player to control the stock price in either direction.

There exists the system of short-sell that should cause a small guy to raise eyebrows. If one buys stocks as investment for prices to go up, why does one need short sell? If you think deeper, the short-sell system is installed legally by the big players to serve their own purpose. Big players make prices go up and down and profit handsomely both ways. The short-sell enables them to make money on the way down.

The small guys should also raise eyebrows about the opinions of all the experts, analysts and rating companies as well. Collusion between them and the big players is inevitable due to the huge amounts of money involved, and the boss-subordinate relationship. Remember Enron, WorldCom, and the sub-prime housing bubble? What did the experts and the rating companies opine? They were all bullish about the prospects for the purpose of seducing the public to jump in. After everything had collapsed, they blamed the market, and the small guys too for panic sales, as if a disaster just happened by accident.

In conclusion, the stock market is a zero-sum game where one person wins and another person must lose. The people who win are those who have lots of shares to sell and lots of cash to buy, for they can control prices in either direction. Small guys become victims easily, especially when they have the wrong view or outlook, thinking that they are investors. In order to survive and win, small guys must follow the big guys closely and get a free ride from them as often as possible. You have to think of yourself as a free rider, not investor. There is nothing wrong with that except it hurts your ego.

www.stockfessor.com
August 2010

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