Is The Stock Market Rigged?

A short story by Billy Peterson – CFP®, CDFA®

John and Walt sat in their usual spots in the local café drinking coffee the same way they had done for 30 years. People came and went, hurrying in for morning breakfasts and then hurrying back out with places to go and things to do. John and Walt never paid much attention to the outsiders.  They spent most mornings discussing important issues like the weather, local community events, the obituaries and of course politics. Today however they would end up having a conversation unlike any other.

At around 9:15 am, just as they were finishing their first cup, an elderly gentleman of about 80 years walked in who seemed in no big hurry like the usual patrons. He had a smile on his face and a surprising bounce in his step for a man his age. With a newspaper folded under one arm he asked if he might sit down with the men.  Dale said “sure, have a seat. We were just discussing this crazy country, Obama and the stock market- ha-ha.  Walt here came into some money recently and decided it would be smart to invest in the stock market. I tried to tell him it was a crazy idea.  Heck it’s plain to see the stock market is rigged.  The waitress approached and refilled both coffee cups than asked if she could bring anything to the newcomer. The old man ordered 2 scrambled eggs, wheat toast and a Coca-Cola. When she walked away John continued. “I’m John and this here’s Walt as I mentioned.” The old man shook both of their hands and said “nice to meet you, I’m traveling through and saw this little café so I thought I would stop in for a bite. I enjoy getting to visit with locals in every town I travel through.”  Both Walt and John chuckled.  “Well I can tell you that we’ve seen it all in this town”, said Walt. “Whatever you want to know, just ask.

After some time had passed discussing local town issues to which John and Walt both expressed their anti-growth views, the old man asked John to elaborate on his feelings about investing. “So John, why do you feel the stock market is rigged?”  Without a beat John said, “I’ve followed that thing for years and I watch the nightly news. The market is up, the market is down- it’s a fool’s game and I know lots of folks who lost everything in that darn thing. You can’t trust those slick Wall Street boys. They will skin you like a cat. I wouldn’t put a dime in that market and I’ve told Walt a dozen times that he doesn’t have a chance in hell.  Have you seen how high that thing is?  Last time it got up to this level, it crashed and burned and people lost their whole life savings.  Doesn’t take a genius to see what’s coming. I’m keeping my money in the bank where it’s safe and sound.”

The man nodded and took another sip of his coke, allowing those words to hang in the air a moment. Then, turning to Walt he asked, “Do you feel good or bad about your investment decision Walt?”  Stammering a bit Walt said, “Well I guess I’m not quite sure yet.  My son has been investing in it for a long time and he claims he has done really well. “Heh”, said John. “I’ll bet he’s lost his you know what just like everybody else”.  Partially acknowledging that possibility, Walt continued on, “I don’t claim to be an expert or anything like that. I see it go up one month and back down the next. I see that most of the time the markets are reacting to one thing or another and it’s kinda frustrating to be honest. Why should a newspaper report in China about a slowdown in Chinese construction wreak havoc on the entire United States market?  I’m wondering if John may be right. What do you think yourself sir? Say we didn’t catch your name. The old man wiped his mouth and said “I understand your concern and your frustration. If you watch the news or read the papers you’ll see a hundred opinions on what to do with your investments and they can change from minute to minute. I have a fair amount of experience in this area so let me tell you what I know. I’ve been investing for nearly all of my adult life- close to 65 years now- in my experience and opinion, I have found the markets to be very rewarding. First of all, you aren’t exactly investing in the stock market per se.  You’re simply using the market as a means to purchase shares in a company or companies that you wish to own. Take those cups of coffee there you are both drinking. My guess is the coffee is made by Folgers of which I’m sure you’re familiar.  JM Smucker Company owns Folgers and a whole host of other well-known brands like Jif, Carnation, Eagle Brand, Sara Lee, Pillsbury, Hungry Jack, Crisco and many others to go along with their famous Smuckers jellies and jams. JM Smucker Company has been in existence since 1897 and they have a very long history of providing shareholders with meaningful returns. So instead of looking at the investment landscape as a sea of confusion with rapid buying and selling, Wall Street scandals and risk, I would offer a different view. Consider it a mechanism that allows small timers like you and me the opportunity to invest in great companies with great management teams and share in the extraordinary system we know as capitalism. For most of its existence, JM Smucker has been a private company. But on June 28th 2002, the private owners decided to take the company public. That means they listed the company on the New York Stock Exchange and offered it for sale to the public. Now if you could go back and invest in that company on its public offering, would you?” Walt and John looked at each other and then said in unison, “I would”.  “Wise decision gentlemen”, said the man. “If you had each invested just $10,000 in the company stock on that day, you would each be sitting on over $38,000 in SJM stock and would have received several more thousand in dividends along the way. You would have seen the shares fluctuate wildly over those years but through it all you would have continued to receive your dividends and see your investment compound at close to 20% per year growth over that 14 year period.”

The old man went on about this company and that, still without offering his name but by now John and Walt didn’t care as they were busy contemplating his explanation of how downright simple things really were when you stepped back and looked at how companies made profits and how shareholders shared in those profits. “I heard you say that you watch the nightly news John.”  “Every night, and I see that Dow Jones jumping all over. I just don’t trust the market. It seems like the big boys have the system rigged so they make all the money.”  “Well I can see how someone might feel that way, especially if he watches the market daily and expects it to go up and never down” the man said.  “I know that even the commentators say the small investor has no chance in a market now dominated by erratic behavior of the big boys. This conclusion is dead wrong: Such markets are ideal for any investor- small or large- so long as he sticks to his investment knitting. When shareholders react to news and decide to toss their shares back into the pool in mass quantities, share prices can fall. The extent of the decline is directly related to the amount of hysteria amongst the owners. If they fear the worst and suddenly assume that a solid company like JM Smucker is no longer going to be in business or that the share price will plummet to zero, shares will be available for purchase at lower prices in many cases. This type of opportunity is why I love the stock market. It allows me to purchase stock in great companies at what I consider to be inexpensive prices from so-called investors who want nothing more than to discard their shares and convert shares back into cash. Every single market decline, correction, crash, bear market or otherwise period of lower stock prices has been followed by a new high for the overall stock market. The S&P 500 has averaged slightly over 10% since 1926. *vanguard That would have been realized only if an investor was truly uninterested in the various down turns which is why most people never invest in stocks. They can’t handle the uncertainty so they sacrifice what could be have been a very prosperous endeavor.  So no, the stock market isn’t rigged, it just has a way of feeling that way with all of the in and out trading going on.  Remember, every sale requires an opposite and equal buy in order to make a transaction happen”.  Someone or some institution will end up owning those shares.  I’d propose that you decide to be an investor and long term owner and not forsake your interest in a good company or companies just because the share prices went down temporarily.”

The old man sat back and finished off his Coke. Looking at his empty glass he said “I’ve owned Coca-Cola stock for over 50 years.  I can tell you with certainty that I have benefitted handsomely over those years and love the idea that people all over the globe are purchasing Coca Cola products every minute of every day. I’m sharing in those profits.” As a matter of fact, do you know how much a $40 investment in one share of Coca Cola would be worth today if you had purchased it in 1919 when Coke went public?” “I’d guess a fair amount, said John. Say around thirty grand.” Walt shrugged and said, “I’m more optimistic than John so I’ll guess it would be worth fifty thousand. Their new friend chuckled and cleared his throat. “The actual value would be nearly 400 thousand if you had received all dividends in cash, and if you had reinvested all of the dividends your forty dollar investment would be worth $9.8 million today.” Walt choked on his coffee and wiped his mouth. John stared in disbelief. “Is that really possible?” “It’s as sure as the sun setting”, said the man.

With that the old man placed 7 dollars on the table to cover his ticket, picked up his paper and rose to leave. “I wish you both the best of luck. Walt, I would build up your investment account with the help of an advisor who understands the concepts I’ve laid out here today. It’s the time owning stocks, not the timing of owning them that matters.  Don’t become emotional at the wrong time and decide to sell out like so many people do.”  Turning to John he said “nobody loses everything by buying high quality, profitable companies and holding those shares for a long stretch of time or forever- which is my favorite holding period.  What actually happens is people sell their holdings at the market low and accept a loss in value- sometimes a steep loss.  Or sometimes the investments that were made were not well thought out and could be better classified as speculation rather than investing. Unproven businesses will often fail. I do not advise chasing hype or highly leveraged and unprofitable businesses.” 

Both Walt and John stood and extended their hands. “Thanks a million”, said John.  “I think I need to reevaluate my plans.”  Walt felt a huge relief wash over him as he was shaking the old man’s hand. “I’m sure glad you happened by this morning. You make a lot of sense.  Where are you from?”  “I come from Omaha.  Lived there my whole life. My friends call me Warren.  It was nice meeting you both.”  With that, the oracle of Omaha smiled and walked out the door. 

This is a hypothetical story for illustration purpose only and does not represent an actual investment. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Billy Peterson and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The NYSE Composite index is an unmanaged index of all stocks traded on the New York Stock Exchange. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Dividends are not guaranteed and must be authorized by the company’s board of directors.

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