by Dr. Scott Brown,
The only way one can get rich is to sell a financial asset for more than you bought it for - buy low and sell high, or sell high and buy it back low. There is no other way to acquire wealth in the stock market. You will be pitched many different strategies as an investor, but all wealth-building, as opposed to income-producing, strategies simply amount to acquiring an asset at a much lower price than you sell it.
The reason buying low and selling high is so difficult is due to your social wiring. You live in a society where you go to specialized retailers for everything you consume. You have learned that when something you buy is a real bargain it is so because of inferior quality, in some way it is defective or spoiled. This has been programmed by direct experience into your thinking and helps you as a shopper but hurts you as an investor. Alternatively, if you notice something is high priced it is normally of higher quality. Even worse, you notice that when everyday commodities go up in price fast you never know how high they are going to go - gasoline right now is a case in point.
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In other words, if you see something cheap in your life it is probably bad and if you see something else going up in price it is probably going to keep going up a lot more. Both of these patterns are hard-wired into your thinking and are fatal to your investment life. This way of thinking works well for shoppers but it causes the inexperienced investor to lose lots of money in the stock market. First, the inexperienced investor is repelled from the stock market by low prices because he thinks, "there must be something wrong with these companies." Second, the inexperienced investor is attracted into the top of a bull market by media hype and any news of windfall profits because he thinks, "if everybody else is making a quick buck so can I." So the stock market goes through its shaky dance as it slowly rises from a prior crash and then abruptly falls to dismal depths from stellar heights. The savings of an inexperienced public who simply didn't know enough not to buy high are wiped out. Successful experienced investors have taken charge of their minds and reversed their thinking. These investors buy stocks when they look bad to the public - after they have crashed. In fact, when the stock market really stinks, like it does these days after a severe bear market, successful stock investors go on a buying spree while the rest of the public looks the other way.
You will be pitched many different strategies as an investor, but all wealth-building, as opposed to income-producing, strategies simply amount to acquiring an asset at a much lower price than you sell it.
So why does the stock market go up and down so much throughout the decades? There are three major forces. The first is the inexperienced public that reacts inappropriately to the market through negative feedback loops that make people pile onto rising markets to later get crushed on the down slide. The second factor is inside corporate executives that force their crony controlled boards to "gift" them employee stock options for free at very low prices after a market crash. These same managers then dump their options on the public at stellar prices after they hype the price up. The last force that drives the market is pools of investors that buy stock low to corner the float, then force up the price and sell high.
Why do people who are green to the market mess it up when it comes to stock investing? They are right in the middle of a price move and dead wrong at the top and bottom where it counts! The answer has to do with why people are susceptible to fraudulent high-yield investment scams.
Con artists are everywhere. These new "friends" move into your social circle with a new multi-level marketing scheme, showing you how "their best friend's girlfriend is receiving monster checks every month and has quit her job because of it." Most of us have to admit to falling for one of these at some point. This happens because we are shown by the promoter of the scheme that all you have to do to get rich is to get in early. The same thing happens in the stock market but on a less personal level. People see the stock market is low but they are afraid because they don't know if it will go lower and don't know a lot about stocks. The market rises and they hear a few stories of people getting rich. It rises even more and they hear more stories. Finally, after stock prices have risen a lot, more and more people buy in because they are afraid they are going to "lose out." Unfortunately most people buy in at, or near, the top of a bull market - or they then hold too long because they do not know how to read the signs of a bull market at its end. This is why people are right about the direction of the stock market in the middle of a major move but wrong at the top and bottom where it really counts.
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Arbitrage is risk-free buying and selling in the short term. When an inside corporate executive is able to acquire large blocks of stocks and later dump them on the public for huge gains - as they did six months before the end of the last bull market in 1999 and 2000 - this is called "long term equity arbitrage" in academic finance. |
Another powerful force in the market today is employee stock options (ESOs). These were designed to help corporations recruit the best talent into their key profit center processes; they were never designed specifically for upper management. What has happened is that inside corporate executives rise to the top more from deft corporate political maneuvers than management skill. They have intentionally wrestled control of the board of directors from the shareholders who actually own the company, and they have raided the employee stock option corporate treasure chest. The vast majority of stock options today are controlled by the CEOs of the companies that issue stocks you invest in. ESOs are not equitably distributed throughout U.S. corporations. This is akin to the manager of a McDonalds franchise becoming the boss of the franchise owner. The rigid control that many inside corporate executives have over the board of directors - which they are often also the president of - allows them to force the company to "gift" them billions of dollars of stock at no cost to the executive. This ultimately costs shareholders and public investors their retirement dollars. Employee stock options give inside corporate executives the ability to make risk-less profits in the stock market - in finance this is called long term equity arbitrage.
Furthermore, at very low stock prices, inside corporate executives are able to force the board of directors to gift them even more employee stock options as prices continue to languish. When stock prices are low, they are able to get their options gifted at the lowest possible price. The inside corporate executives and manipulators want either bad news or no news floating around the market at this time so that the inexperienced public ignores the stock. Inside corporate America now controls the board of directors of virtually all news media companies in the United States. This makes all company-specific news suspect, released by the media under the supervision of colluding inside corporate executives trying to increase the stock price of the companies that they manage, and hence the payoff on their employee stock options.
Lastly, there are men who force stock prices to move with sheer buying power. We have journalistic evidence of market manipulation in the 1800s. Men like Cornelius Vanderbilt, Jay Gould, Daniel Drew, and J. P. Morgan were known to secretly buy up stocks low while spreading bad news about the company. Once they owned most of the outstanding shares of the common stock - called the float - they would spin on their heels and spread good news about the company. The small amount of outstanding stock allowed to "float," combined with sudden good news, forced the stock price upward and squeezed short sellers into a corner - hence this manipulation is called a "bear corner." The creation of the SEC in the 1930's, as well as market reforms and the imposition of reporting requirements of inside corporate executives and large shareholders, forced market manipulation underground. Yet even today, the SEC routinely prosecutes manipulators that have cornered shares in the penny stock markets - watch the movie "Boiler Room" starring Ben Afleck. Though this movie is fictitious, history shows that these "invisible insiders" may be more real than most think.
The history of publicly recorded market corners indicates that some were very quick - occurring over a few days or a few months. Quick corners attracted undesirable "stags" into the market for a particular stock being cornered in two key ways. First, people noticed that the stock price was rising very rapidly. Second, they noticed that there was a lot of trading volume in the stock from the fast and heavy buying of the manipulators. When manipulators buy up a stock they want to do everything possible to keep it a secret. This means that they don't want any obvious traces that they are doing it. The best way they can accomplish this is to spread their purchases out over the long term when prices are low for a number of years.
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You may be thinking, "This is all great, but how can it make me money?" The answer is that if you understand these key underlying market forces you can use this knowledge to read long term price charts correctly and invest profitably with the "smart money." These three market forces allow you to understand why the stock market, as well as individual stocks, go through wide price swings from low to high and back to low again in an endless cycle that will continue as long the stock market exists. Most people are terrified of buying low and selling high, but this is exactly how people got rich when they sold at the end of the eighteen year bull market that ended in 2000 - selling the stock they bought dirt cheap in the languishing markets of the eighties.
In a nutshell, manipulators have been forced to become hidden insiders in the long term over multiple years. They have the staying power of experienced investors who buy low and hold over long periods of time while working together intentionally or unintentionally with inside corporate executives who network with other insider controlled boards. These factors work together to make the stock attractive to inexperienced public investors who are then attracted into the top of the market by all the media hype - hype that is directly or indirectly controlled by inside corporate executives. After WWII, corporate America virtually bought up all media sources - all financial news you read or hear may be under the direct or indirect control of inside corporate executives.
Once experienced investors, hidden insiders, and inside corporate executives have sold all of their stock holdings to the feverish public, the price drops to record lows and the public begins selling out in discouragement - losing a large part, if not all, of their personal retirement savings. Members of the uninformed public who prudently buy stock at low prices are the experienced investors who have learned over the years the vital need to do so. It is at this point when stock prices are very low compared to the top of the last bull market that corporate attorneys work overtime for the CEO to secure large employee stock option gifts through their crony controlled board, thus setting themselves up for the next bullish multi-year price run.
The most reliable way to spot a buying opportunity as a technical analyst is to learn to recognize the most powerful reversal pattern known - the 'saucer bottom' or even better yet the very flat saucer bottom that has been termed a 'bonanza bottom.' The bonanza bottom is a very gradual turn from down, to very flat sideways, to up. This technical price pattern can only be seen on weekly and monthly charts. These long term trading ranges are where inside corporate executives can exert the greatest power for the gifting of stocks from exasperated firm shareholders who have given up hope. In addition, experienced buyers gradually buy up the float from the inexperienced public who bought at high prices years before. They continue to sell out of a plummeted stock to smart money as share prices just refuse to go back up. At the bottom of a bear market, this creates a constant downward pressure on prices. As manipulators and experienced investors gradually buy these low priced stocks that seem to refuse to rise, this exerts a constant upward pressure on prices. Alternatively, as the public sells out, this creates downward pressure on the stock price. The net effect of these two forces is to create a narrow trading range between which the stock price oscillates, forming a bonanza bottom. This name for this special price formation was chosen because a bonanza is an especially rich vein of precious ore or a happening that brings good fortune - an opportunity to make lots of money.
You may be thinking, "This is all great, but how can it make me money?"
If you can learn the subtleties of reading long term charts like the one above as well as the nuances of when to buy and sell, you can become very wealthy in the stock market. Look at the chart of Sun Microsystems (SUNW) below. Would you have had the fortitude to buy this stock low in the late eighties and early nineties and just wait when it wasn't doing anything? Would you even have recognized the opportunity? People who did had the opportunity to sell out their holdings at over a hundred dollars per share in the late nineties.
Bonanza bottoms can set you up for the very large profits that will come from the next bull market to the wise few who buy low today. There are many bonanza bottoms now in the market because of the severe market crash from 2000 to 2003.
Because of the market crash, the public believes that opportunity is "nowhere" but you know the rest of the story, and more importantly, that for you opportunity is truly "now-here" in the stock market!
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