Is the Market Rigged Against Small Investors?


Is the Market Rigged Against Small Investors?

You Are What You Eat

Year-End Crosscurrents

Several readers in recent weeks have mentioned the challenge of competing against giant institutions when investing.

With greater resources, faster computers, and (sometimes) inside access to information before it becomes public, institutions do have obvious advantages.

But there are several advantages that you have that they never will, and the sad thing is, experts seldom tell you how lucky you are. Reminding you of these advantages is my focus today.

Your first advantage is the relatively small size of your account, which confers maneuverability. If you want to get out of Apple (AAPL) or Google (GOOG) today, you can probably sell your whole position easily, without even moving the market.

But if an institution like Fidelity wants to get out of Apple or Google, they need to do it over days, if not weeks. And the faster they try to get out, the more they risk disrupting the market, and pushing the stock down. They simply own too much to be able to move quickly. The same advantages pertain to buying, too.

Your small size, in short, confers the advantage of nimbleness, which is not to be taken lightly.

Second, as the manager of your own portfolio, you have free rein to put your money anywhere you want. You can focus on big liquid growth stocks, or sleepy illiquid value stocks, or undiscovered penny stocks.

Or you can go farther afield, and take it out of stocks altogether, choosing to own cash, or REITS, or silver mines, or bitcoins or condos in Florida.

Most institutional investors, on the other hand, are restricted. Many need to remain nearly fully invested at all times, because that’s their mandate. You can sidestep bear markets by moving to cash, but few institutions even try to practice market timing, in part because their large size makes it impractical.

Also many institutional investors are restricted to owning specific industries, or stocks of minimum market capitalizations, or stocks paying dividends, or companies with records of earnings, all of which confine the manager to sectors that are at times uncomfortable, if not costly.

You, on the other hand, can do whatever you want.

Of course, there is a downside to this. With so many choices, it’s easy to make bad ones. But that’s where Cabot comes in. Each one of our expert analysts specializes in a particular successful investing style, and each one will happily guide you down that path, with the goal not just of helping you make money but actually making you a better investor.


Switching to local news for a minute, a study this week (by University of California at Irvine) concluded that repeated exposure to media coverage of the Boston Marathon Bombings (six or more hours a day), resulted in more acute stress than actually being at or near the marathon. Media counted include television, social media, videos, print and radio. With every additional hour of media exposure, stress increased.

The study’s lead author said he was very surprised by the findings, but I’m not.

My philosophy is, “You are what you eat.” It applies to what you put in your mouth, and it applies to what you put in your brain.

I think we all know that to some extent; for example, most people agree that it’s important to protect children from adult-themed content. But when it comes to adults, we pretty much let people consume what they want, whether it’s a non-stop diet of Bloomberg TV or the Food Network or Fox News or National Public Radio or NFL football or World of Warcraft.

As the study proves, this isn’t always good.

But what, exactly, is good? Unfortunately, it depends who you ask.

For the leaders of China, “good” is whatever contributes toward achieving their five year plan. Typically, this includes a steady diet of media programming that trumpets the values that leadership wants to emphasize.

Similarly, in Russia, “good” is what keeps the country together. Vladimir Putin recently closed the main state new agency, and one of his main goals today is bringing Ukraine back into the fold, in part by promoting a Russia-centric view of Ukraine’s current unrest.

In Ukraine, where the media is owned by private companies, information flows more freely, and a Western mind like mine says that’s good, in the long run.

Interestingly, while rummaging around on this topic, I stumbled on Voice of America, the U.S. government information service that began in 1942 as part of the Office of War Information, and currently operates under the Broadcasting Board of Governors, “an autonomous U.S. government agency, with bipartisan membership … established as a buffer to protect Voice of America and other U.S.-sponsored, non-military, international broadcasters from political interference.”

In fact, until July 2013, in the name of protecting the American public from propaganda actions by its own government, Voice of America was forbidden to broadcast directly to American citizens!

But Voice of America is far more than a radio service these days; it also distributes its objective news via television and the Internet, in 45 different languages. It’s a very professional operation, with an annual budget of $206 million.

But is it worth it, when the electronic world is swarming with news and opinion, and people are just as likely to tune in to the opinions they prefer as the “objective” truth? It’s hard to know.

I’ll be checking on it from here on to test the waters, just as I check a wide variety of media sources every day, from various points of the political and economic spectrum.

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Last week I mentioned that I would discuss year-end crosscurrents in the market this week, so here we go.

There are 10 trading days left in the year.

For most investors, it’s been a good profitable year, so there’s little appetite to take on additional risk here. Most investors are happy to stand pat.

But some investors, particularly those who need to show their clients what they own at the end of the year, are now buying up all the year’s top performers, so they can look smart in their year-end report.

At the same time, they’re selling the year’s worst performers, so they don’t look dumb.

Also, investors who have actual losses in stocks are selling those losers to offset gains, for tax purposes.

The net effect of all this is that stocks that have done well this year are likely to continue on that track for the next 10 trading days, while stocks that have floundered this year will continue to scrape bottom.

And that creates an opportunity, because those cast-off stocks actually have a very good chance of bouncing higher in 2014, as bargain hunters pick them up near the end of 2013.

If you’re a long-time reader, you know where this is going. It’s the announcement of Cabot’s 10 Favorite Low-Priced Stocks for 2014. Last year’s crop did exceptionally well, as last December gave us a great market bottom, and I don’t expect this year’s crop to do quite as well.

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Yours in pursuit of wisdom and wealth,

Timothy Lutts
Chief Analyst, Cabot Stock of the Month
Publisher, Cabot Wealth Advisory

P.S. Prepare your portfolio for the successful New Year with the recommendations featured in Cabot Stock of the Month. Each month, I select one stock that has the potential to hand you double- or even triple-digit returns, along with recommendations for when to buy, how much to pay and when to sell, plus follow-up analysis on every stock I recommend. For more details, click here now. 

Timothy Lutts can be found on Google Plus.

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