Since the rapid run-up – and equally rapid crash – in shares of GameStop (NYSE: GME) and other struggling companies, including BlackBerry (NYSE: BB), AMC Entertainment (NYSE: AMC) and Koss (Nasdaq: KOSS), I’ve heard a lot of populist complaints about the “rigged economy” and “rigged markets.”
And you know what? They are rigged.
Just not the way the new Reddit traders and social media warriors think they are.
They insist that their recent losses have been caused by short sellers, hedge funds, trading apps, online brokers and a lack of regulation in the financial industry.
That last claim is laughable.
With the exception of healthcare, no U.S. industry is more strictly regulated than financial services.
A lot of factors explain the whipping that young online traders took in these stocks over the last couple weeks.
But to see who is most responsible for the losses they incurred, they need only stand in front of the mirror.
Most don’t want to do that, of course.
We live in a society where gun manufacturers are responsible for violence, snack food companies and fast-food restaurants cause obesity, and people with too much mortgage or student loan debt are victims of “predatory lenders.”
A sense of agency or personal accountability is never encouraged.
So it stands to reason that if you trade your savings – or government stimulus check – down to zero in a matter of weeks, someone or something else must be to blame.
This way of thinking has been around for centuries.
Psychologists tell us that human beings have a strong tendency to accumulate pride and shun regret.
We do that by imagining that we are primarily responsible for our successes while circumstances, bad breaks or other individuals are responsible for our failures.
Sometimes entire societies think this way.
Historian and scholar Bernard Lewis used to point out a key difference between repressive Islamic societies in the Middle East and free societies in the West.
When things don’t work out as planned in the West, we tend to reflexively ask, “What did we do wrong?”
But when things fail in those Islamic countries, according to Lewis, the common response is “Who did this to us?”
There is a lesson here for the WallStreetBets folks.
They have to face up to the fact that their losses were largely the result of their own ignorance, cupidity or gullibility. Not some systemic failure.
So how, exactly, are the economy and markets rigged?
The economy is rigged in favor of men and women who get educated or acquire marketable job skills and then work assiduously, despite problems and setbacks.
This leads to greater household income.
The markets are rigged in favor of people who live beneath their means (since that provides capital to invest), are smart and disciplined in their investing, and do everything they can to minimize investment costs and taxes.
Successful traders and investors don’t follow fads. They don’t get caught up in short-term manias. And they don’t chase $400 stocks that insiders were selling two weeks earlier for $30.
(Are you listening, GameStop traders?)
There has been a lot of talk about how we are in a brave new world where small online traders in the aggregate can and will manipulate market prices.
If so, it probably won’t be for long.
A small percentage of these folks – the early ones – made money over the last few weeks.
But, collectively, they lost billions in their earnest efforts to “stick it to the man.” (Whatever that means.)
As more and more of them lose money, their conviction, influence and combined trading power will wane.
But – like angry Islamists – they are already starting to complain, “Who did this to us?”
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