Wall Street--Let's Not Regulate The Impossible

Do you remember a few years ago when everyone was telling us that putting our Social Security money in the stock market would assure us of a bigger, better return? Or that brokers and analysts would do better for us than a government run Social Security Administration?
Let’s pause to reconsider one more time. Recently a chimp was allowed to pick stocks at random and his performance was measured against skilled money managers on Wall Street. Guess what—the chimp got better results.
I suspect he would have done reasonably well at Monte Carlo or Las Vegas. After all, the stock market—since its inception under a butternut tree on Wall Street in 1792—is now and always has been essentially a crap shoot, a roulette play or a game of black jack.
People do win at the gaming tables. They also lose. Ditto Wall Street. Nobody talks about it any more, but in 1960 or so, Merrill Lynch took all the listings on the Big Board before the Crash of 1929 and took the names off them.
Referees gave all the data available at that time—annual reports, financial statements—on those stocks to a team of analysts. Pick stock A or F or Q. They then took a large round dart board and gave each stock a narrow pie shaped piece and glued all of them to it.
Analysts working with data (not knowing the names or having any clue as to subsequent, real life history of those stocks) vs people throwing darts (the actual name of the stock known only to the referees). Merrill Lynch was betting on the analysts.
Bad bet. You would have done better with the darts. (That’s why you don’t ever hear about that little project.) If chimps and darts can do better than the trained analysts you depend on when investing or buying a mutual fund, it should give you pause.
Especially as Congress is looking to reform the Street yet another time. One more effort will be made to make it fairer, more sure, safer. The idea that this can even be done rises out of a wholly absurd notion of what the Street is all about.
For one thing, it is and always has been a venue for rich men to get their hands on other peoples’ money so that they can gamble—and leave the risk to others. It has not been a bad system for those who understood it. Those who invest with their eyes open to what’s really going on can supplement their retirement income quite nicely.
But so can people who use the casino as an instrument for investment. Winston Churchill used to pay for his French vacations by judiciously applying himself at the roulette wheel. I knew people who would pay their own way to the Caribbean and then earn plane fare back to New York at the casinos. That’s not all that different.
But neither the casino nor the Street are about fairness or retirement safety. Trying to legislate these qualities into either is a form of silliness. The Market wasn’t “fair” in Jay Gould’s day. It isn’t “fair” today, and we cannot make it so. Anymore than the Volstead Act stopped people from drinking. All Congress has ever been able to do is impose a form of “prohibition” on Wall Street.
There are all sorts of laws to prohibit Wall Street brokers from talking shop. When they play poker on a Saturday night in the Hamptons, they may chat about opera or compare Chinese and Russian ballet troops—but they may not talk shop.
Teachers may, factory workers may, physicians may, salesmen may—but brokers and analysts are forbidden to gossip about work. (Not too long ago, they even charged some brokers for talking shop over a poker game one night.) It’s called “insider information”. It’s a big no no. But trying to imagine any one making serious money on Wall Street without it is like trying to imagine Al Capone swearing off booze.
The laws don’t stop it. They just make it riskier—like going to a speakeasy during Prohibition. I could probably give other examples, but let’s stick with this one—it’s a good example of what’s wrong with how we PERCEIVE Wall Street today. More tomorrow.