How did speculative investing weaken the stability of the stock market?
This was a question I received just a few days ago during one of my consultations with a new client.
And while this might not be a very common question it is a question that a lot of individual investors would like to know the answer to.
We will spend the rest of this article speaking about my answer to this.
How Did Speculative Investing Weaken the Stability of the Stock Market?
There is a lot going on here…
And it reminds me of Wall Street’s job…
Which is to confuse you…
To eventually hand your money over to them so they can charge you fees.
But just like everything else, we here at Stony Brook Securities dig into what is really happening under the hood. Who knew a simple and reasonable question could have so much going on!
Above is a video by Pinnacle Advisory Group (I have no idea who they are) in which the author speaks about the differences between saving, investing, and speculating.
I tend to agree with close to zero about what the author is saying here. He lost a lot of credibility with me when he said:
To be a successful investor, you must invest your money for at least three years. That’s because, over longer periods, the value of your money will appreciate enough so that even if the value of your investment falls over a short period of time, it will still be higher at the end of the period than it would have been if your money had been sitting in a saving account.
Hey Pinnacle Advisory Group guy, was this a better investment (held for three years) than keeping your money in a saving account?
Yup, real winner there. Valeant is down over 90% in the last three years.
What is Speculative Investing?
Putting money in a savings account is not speculative (for the most part) as account $250,000 and below are FDIC insured meaning there is insurance on your money.
But all other forms of investments, bonds, stock, short term, long term, one of those crappy mutual funds…what do they all have in common?
There is risk!
They are speculative.
Buy a 30 year US Treasury Bonds…speculative.
Weaken the Stability of the Stock Market?
I don’t even know what that means either. If by weaken the stability they mean prices went down my next question would be…are we not at all time highs right now?
The stock market in the United States is the most stable market in the world as the most liquidity comes to the US.
The more liquidity and participation, the more stable the market has become.
There is one thing however that can mess with the stability of the market, thus the liquidity…
And especially regulators who have never made a trade in their lives.
These people know zero about liquidity and competition which can best be seen with their fight against high frequency trading, which by the way, is a system that provides a ton of stability to our markets. The short reason for this? Because they provide a ridiculous amount of liquidity. More liquidity = more stability.
So What’s Going on Here?
My client was specifically asking about the crash of 2009 when the market saw a 50% drawdown in a matter of a few months.
Excessive speculation did not cause this…
High frequency trading did not cause this…
The market did not lose any stability…
What really happened here was people traded too big and with too much leverage.
If a position went against a bank by 2%, they were leverages so much that those losses because equal to the size of their entire companies!
That isn’t any more speculative than someone looking to buy the Snap IPO next week…
All it was was people trading too big and with too much leverage. Plain and simple. And if that happened in a market outside of the US (with far less liquidity),
we would look like the above chart rather than back at all time highs today.
Liquidity & participation = stability
And there is no more stable market than the US stock market, period,