Is the Market a Rigged Game?

Your Daily Profit

October 19, 2009

*****Rigged Game

*****Knowledge is Power

*****Et Tu, Bill Gross?

Fellow Iinvestor,

In many ways, it’s a rigged game. The big money – the hedge funds, the institutional investors, the insiders – preys on the individual investor to boost their performance and line their pockets.

It’s sad, really, that the “system” sees us simply as dollar signs. But forewarned is forearmed…

What brings me to this discussion this morning is the arrest of the world’s 559th richest man. Raj Rajaratnam, CEO of Galleon Group, one of the world’s largest hedge funds. Raj is worth $1.3 billion. He’s accused of insider trading and his bail sits at $100 million.

Seems Rajaratnam has a little circle of insiders feeding him confidential information about corporate earnings and events. Intel (Nasdsaq:INTC), IBM (NYSE:IBM), Bear Stearns, Moody’s, Polycom (Nasdaq:PLCM), Akamai Technologies (Nasdaq:AKAM) – these are just a few of the companies where insiders were sharing information with Rajaratnam. And there’s no doubt, this is just the tip of the iceberg.

*****On some level, we all share the feeling that the big money plays by its own rules. But we don’t often get a glimpse into how exactly the big money operates to game the system. Turns out, sometimes it’s as simple as corporate officers picking up the phone and calling a hedge fund manager to report that his company will report disappointing earnings.

That’s just one of the scenarios included in the
SEC’s criminal complaint against Rajaratnam. No doubt there are others. And if you’re looking at the name “Moody’s” on the list and dusting off some conspiracy theories, you’re not alone.

If there are Moody’s insiders tipping off hedge fund managers about rating changes, what else are they doing? Could they have turned a blind eye to the obvious problems with certain mortgage backed securities, even as they rated them Triple-A?

*****For most if us, investing isn’t a game. It’s how we leverage our savings to make a better life. But as has been proven time and time again – Wall Street doesn’t care. In fact, these “insiders” understand that our investment loss is their gain. Don’t forget, those advisors who were leading their clients to the Madoff slaughter were paid hefty “finders fees.”

I, for one, can’t wait for some serious reform to come to Wall Street and the entire financial system. And if it costs firms more to do business, if added regulations somehow restrict financial “innovations’, then so be it. This is our money we’re talking about.

*****As I said earlier, forewarned is forearmed. There’s probably no way to completely squeeze unethical and criminal behavior out of the financial markets. And so it becomes critical for individual investors to be proactive when it comes to their money.

Of course I don’t mean pull all your money out of mutual funds and manage it on your own. That’s a full time job. And while I’ve made market-watching my full-time job, that doesn’t work for everybody. But you do owe it to yourself to learn about your investments, ask questions and be skeptical of the opinions and advice you hear in the financial media.

I like to think that Daily Profit is a useful tool to help individual investors. I’m not always right, but I am committed to asking questions, being skeptical and finding profitable investments that are overlooked or ignored by Wall Street’s greedy eye.

*****You’ve heard me talk a lot about bond fund company PIMCO. I have always had a great deal of respect for its Chief Investment Strategist Bill Gross. Gross has a phenomenal track record as the manager of the world’s biggest bond fund. And I always looked at him as a straight-shooter.

So it was with disappointment that I read the Bloomberg article that PIMCO is considering adding equity funds to its product line.

Why am I disappointed? It’s an integrity issue. And I guess I still have a wide-eyed respect for some of the investment gurus out there.

Now, I understand Bill Gross doesn’t hold sway over what PIMCO, the company, does. After all, PIMCO is owned by insurance company Allianz.

But equity investing and bond investing are, in many ways, diametrically opposed. For the most part, bonds do better when stocks are doing worse. So if PIMCO adds equity funds, does that mean it sees opportunity for equities? No. It means the company sees opportunity to make more money by selling equity funds to investors.

Again, call me naïve, but I find that sad. If you love and believe in what you do, great. I love small cap stocks and will probably always believe I can find money-making opportunity with these stocks. But I’ll never tell you to buy a certain small cap stock just because I think it will sell subscriptions to my advisory services. (After all, my fees are refundable – if you don’t make money from my recommendations, you can have your money back.)

Until tomorrow,

Ian Wyatt


Daily Profit

P.S. – D. Mead wrote in October 16, 2009 to say “I recently subscribed on October 3, 2009. Based on your recommendation I paid for my subscription on my very first trade. Thank You!!”

He’s referring to my latest Special Report called The 10 Most Profitable Small Cap Stocks for 2010 from SmallCapInvestor PRO. You can get your copy HERE.


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