I'm always a bit amused when I hear people complaining about how unfair it is out there for the individual investor. Maybe that's why the latest fad seems to be getting aboard the "individual investor isn't qualified to pick individual stocks" parade route.
Insider trading, high frequency trading, computer driven algorithms and short sellers. Almost sounds like a Billy Joel song.
Naked short selling? Lack of enforcement of the uptick rule? Glass -Steagall? "Repeal of Glass-Steagall? All evil and all easily excuses for our own shortcomings.
While still in high school I was preparing to make a U-Turn on what was ordinarily a very busy street in The Bronx. I'd made that turn many times in the past and I knew to check in both directions before I crossed over the 2 sets of double yellow lines.
Besides the always present oncoming traffic, I was aware the area was well patrolled by police. But I was also aware of the time of day and realized that as creatures of habit, the patrol cops were sitting down for their regular lunch break at The Blarney Stone.
Petty criminals or traffic miscreants as I could be free to run a muck. for 30 minutes each afternoon. Although I didn't think of it at the time, in hindsight, I'm certain that one of my high school classmates, who would later go onto become CFO at Goldman Sachs (GS) probably would have been much more respectful of the double yellow lines, as he has remained an under the radar personality even with all of the tumult and controversy surrounding Goldman Sachs.
Then, as always, when I sensed the "all clear" I made my turn. As I settled into waiting at the curb, I heard an unexpected rapping on my driver's window. Startled, I looked up and there was a beat cop, with a toothpick in his mouth, back in the days when there were lots of foot patrol policemen and floss had not yet been accepted by the masses.
Shaking, I rolled down my window. The policeman just looked at me and said "It's not so bad that you made an illegal turn, but what's bad is that you made it in front of me. Don't ever do that again."
With that, he just let me go. Never even asked for my license or registration, instead treating me like a friend or inside circle family member. I had clearly committed a crime. had clearly broken the rules, but for some reason he gave me a free pass and valuable lesson in life.
Keep it under the radar. Don't flaunt it.
That incident colored my outlook on crime for life, as did the concurrent Watergate affair. The lesson learned from that was don't get caught and don't cover up the crime.
Fast forward 40 years and crime is all around. There are crimes today that didn't exist back then, such as tapping into your neighbor's cable hook-up or phishing. There are also crimes that are just a twist on old favorites, but now instead being perpetuated by Nigerian royalty.
Those of course, are all examples of some form of theft. But the particular crime that now interests me is "Insider Trading." It is also considered a form of theft, but to me that categorization defies logic, as does even referring to it, much less prosecuting it as a crime. What other forms of "theft" result in capital gains taxes?
Insider trading, or in the most recent case, non-trading, has once again received attention, as Morgan Stanley (MS) is on the receiving end for allegedly providing relevant information to a select group of investors, who may have used the information to not purchase shares of Facebook (FB) via the IPO. That's what they get for beating out Goldman Sachs for the coveted "Lead Underwriter" role in what will become a Harvard Business School case study.
In Morgan Stanley's case that puts an entirely new wrinkle on insider trading allegations. In this case, the non-public information was not used to initiate an action. It wasn't used to buy or dump shares. Instead, it just lead to inaction. Can there really be a crime committed if no one did anything?
In the days before we had instantaneous access to information and a 24/7 cycle of "Breaking News," my stockbroker and I had a discussion about insider trading. He posed the hypothetical situation of an investor flying overhead ready to land and noticing that the main factory of a company in which he held shares was ablaze. If he knew of this potentially crippling fire before anyone else due to his special vantage and then sold his shares as result, did that constitute insider trading?
Unfortunately, I don't recall the outcome of the discussion, but after years of being on the bandwagon that sought to blame people creating advantage for themselves, I now look at it from a very different perspective.
Having placed my lot with Goldman Sachs shares in 2007, near its peak, I couldn't understand why it wasn't in the Dow Jones 30. During my early days of ownership I'd noticed that intra-day movements in shares seemed to presage market movement, so I would trade in and out of a market mirror, ProShares UltraDow ETF (DDM). That relationship seemed to last until Goldman Sachs began its swoon in 2007, as the smartest guys began to lose their luster before the market had realized what was going on.
I was able to ride its back by purchasing additional shares once its price plummeted and climbed out of the 2007-2009 abyss, I have a soft spot in my heart for all things Goldman. Of course, that soft spot was not so blind as to not take advantage of always selling call options on my holdings, just in case. Some things don't change, as I'll be hoping to sell weekly calls as the market opens on Monday (June 4, 2012)
Interestingly, since mid-2011, it appears that the GS and DDM dance may be once again in synchrony, although I haven't acted upon that, as I've already gotten my fair share of dumb luck. But Goldman and market concordance may be a good sign of order returning to the universe.
Still, I can understand the vitriol that is hurled Goldman's way and how it has emerged as the very essence of all that is evil in the opaque world of finance.
Insider trading rumors, sweet deals on AIG debt, trading against its own clients are just part of the list.
Although I certainly have nothing to back up my beliefs, I think that it takes much more than simply being the "brightest guys in the room" to consistently be on the winning end of deals. Although you can make a case for meritocracy being the very basis for advancement within the ranks of Goldman Sachs, life after Goldman, seems to be more related to plutocracy, aristocracy, corporate nepotism and cronyism.
Not that there's anything wrong with any of those.
The most recent highly publicized case of insider trading revolved around the Goldman Sachs boardroom and resulted in the conviction of a portly individual, Raj Rajaartnam, who allegedly received inside information from Rajat Gupta. There was a spate of weight related jokes and lots of sanctimonious Talking Heads railing against the evils of insider trading. Sort of like Newt Gingrich tearing Bill Clinton a new one over some marital issues. Maybe it's because of my soft spot for the Tamil Rebels that may or many not have held me hostage, Rajaratnam is certainly no criminal, at least he wasn't a good one. He got caught and he lost money.
The more cynical that I become, the more I believe that catching a big gain in an individual stock is either random, due to blind luck or inside information, but I'm not upset at the likely prospects of the latter. I would be upset if someone had an inside track on blind luck, however.
Theoretically, we all have access to the same kind of sophisticated data. You no longer need to depend on blind luck to be flying overhead during the early stages of a fire. We can all get our hands on different analytical tools. It's not as if you have to go to the public library and tear out a page from the huge Value Line binder or find yourself in the position that someone else beat you to it.
Those days are gone. Every bit of information can be found somewhere and crunched on a laptop that doesn't need to cost more than $300.
Egalitarian? You bet. Just as it is egalitarian to take the data, draw the various lines and come up with diagnoses and opinions that may be diametrically opposed by someone else with a $300 laptop or a turbocharged supercomputer.
The problem, if any, is that there is a data overload, similar to what intelligence services now deal with, as so many streams of data come in, yet there aren't enough resources to analyze the streams.
And with access to all of that data, as well as teams of research analysts toiling away in the background, we've all seen the equally qualified high profile technical analysts look at the same data and come up with their conflicting recommendations.
I know the old expression, in that's what it takes to make a market. Basically some one has to be right and someone has to be wrong. But I think that the best and the brightest just alternate the right to be wrong. They just do so with larger sums of other people's money and they do so predominantly on blind luck.
So consistently doing well in the market can't be due to a sustainable intellectual process and it certainly can't be due to proprietary rights to random events.
Dumb luck is another reasonable answer, but how random is that? Totally. That's why it's called luck and to believe that performance is due to luck is itself dumb.
So the only remaining alternative that can explain consistently good trading results in the markets is insider information and trading on that information.
At this moment, it's not necessary to say that Raj allegedly had insider information. He had it. The difference is that while he had it, we wanted it.
But why didn't we have the kind of information that Rajaratnam had?
Well, look no further than the tip of your own nose.
There's no reason why any of us should complain about not having such information. We are each our own limiting factor.
Why could I not have gone on a path in life that would have taken me to those kinds of inner sancta? No one ever denied me those opportunities, I just never tried to take them. Instead if making U-turns in the Bronx, I could have wined and dined those with the kind of knowledge that I might have found useful? I could easily have become and then stayed lifelong friends with David Viniar.
Of course I could. No one ever denied me that opportunity.
The essence of insider trading is that you had access to information that was not available to the general investing public. But really, whose fault is that? All it takes is the initiative to develop a circle of friends, confidantes and business partners. Anyone can get access to potentially helpful information.
In America we all have the opportunity to sit in The Goldman Sachs conference room and to then get a sleek cell phone and transmit information to anyone at all.
Of course, the second part of the "crime" is that you acted on that information. Presumably if you made a profit as a result, you just might be the kind of guy that the SEC and Department of Justice may want to prosecute.
But who gets hurt when profits are made after trading on information that was never denied to anyone with the initiative to dig it out from among the avalanche of data?
No one. In fact, the money surely gets spread around to staff, other investors, charities, home builders and all of the cogs that in the economy that need to be primed.
No one gets hurt because there was bound to be a loser anyway on the transaction, if you believe in Zero Sum kinetics. If anything, the Rajaratnam series of events indicates that what is so called "insider information" doesn't even necessarily lead to profits. Instead of acting on the inside information that Warren Buffett was preparing to pick up a sizeable piece of Goldman preferred shares in September 2008, he could have been like the rest of us that stumbled into the shares through blind luck and faith as they started their upswing in November 2008.
Of course, I understand the concept of stacking the deck and how that may be inherently wrong. But the reality is that there is potentially an infinite number of such insider bits of data on any number of stocks occurring as a continuum. They just all fly under the radar.
People are always winning and people are always losing, regardless of their intellect and regardless of their connections.
While I may not have a choice in the degree of my intellect, I do have a choice in the development of the inter-personal connections that may add critical data points to the equation.
Rajaratnam hurt no one, just as a policeman recognized years ago that I had hurt no one, other than my future self, perhaps, by making that turn.
Which brings me back to yet another victimless crime on that very same street in the Bronx.
You guessed it, I made another U Turn, once again pulling my car to the curb to wait and pick up my father. Is it a crime if no one sees it occur?
No police in sight, since it was about midnight or so. As I waited for my father, I leaned over to unlock the door, at precisely the time that a very buxomly lady of the evening was walking by. She apparently thought that I was summoning her for some sort of service. She opened the car door, sat inside and started talking.
The words escape me now.
I was stunned. And then I saw my father coming out the door, I was really at a loss for words. He peered into the car and saw a strange enough sight, for him to give me one of his patented fist shakes that meant "you son of a gun" and he proceeded to walk to the corner to catch the bus instead of interfering with my plans for the evening.
I'm glad that officer wasn't there that night, although I think he would have given me the same fist shake and a wink.
As he should have.