From: gts (gts_2000@yahoo.com)
Date: Thu Jun 05 2003 - 21:05:56 MDT
Harvey Newstrom wrote:
> Consider it this way: Selling stock to someone else is a sales
> transaction of property. You are offering to sell a known commodity
> that is described by public disclosure statements. If you know those
> statements are false due to insider information, and you sell the
> product to a buyer who believes those public disclosures are true, you
> have cheated the buyer.
Yes I know that argument. I spent more than a decade as a licensed general
securities broker, and like you I also have an education in business,
including business law. I know all the regulations and the theories behind
them. I was bound by those regulations for many years. Fortunately I am no
longer in the investment business, so I can speak freely. :)
Just to be clear, we are not talking about fraudulent public disclosures by
the company, which are and should be a crime.
We are talking about private investors profiting from new information about
a company obtained before that new information is widely publicized. For
example you might obtain knowledge that the next earnings report from XYZ
Corp is going to be higher than expected. Should you profit from that
knowledge by buying stock in XYZ? The law says no. It is legal to act on a
*guess* but not on a *fact*. The only exception is when everyone already has
access to that fact, in which case there is no excess profit to be gained
from your knowledge of the fact as it is already discounted in the stock
price.
I believe the market should be seen as a competition between investors to
acquire and act on the most profitable information, such that "cheating the
buyer" has the same meaning as "out-competing the buyer." After all, you are
attempting to "cheat the buyer" any time you sell a stock because you think
it's going to drop in price. You are hoping someone less savvy than you will
buy it from you and take a bath in it instead of you. This element of
"criminal intent" is present regardless of how you arrived at your negative
forecast of the stock price.
In theory the market should be a game in which superior knowledge about
companies buys the investor a superior return over the market averages. It
should be a game in which the investor who knows the most, makes the most.
This is after all the way most US investors *think* the market works.
Investors and their brokers and analysts all operate on the (false)
assumption that good knowledge gained from public sources will buy one an
excess return in the market. This belief is what drives the market. But it
is not the way the US markets work *in reality*. The US markets are so
efficient and regulated that knowledge buys one absolutely nothing unless it
is so-called "inside" knowledge, in which case Uncle Sam says it's a crime.
And that problem is exactly what I'm railing against. It is in effect a
crime in the US to have more knowledge about a company than the investor on
the other end of the transaction. You can *pretend* to yourself that you
have access to more and better knowledge than the other guy, and this is
exactly what Wall Street *wants* you to think, but if you actually *do* have
access to such superior knowledge then you're looking at a prison sentence.
As I mentioned, this is not the case in every country. Taiwan has a vibrant
stockmarket but they have no insider trading laws (last time I checked
anyway, which was admittedly quite some years ago). In Taiwan, the game
works the way it should work: investors who know the most, make the most. In
Taiwan it pays to do your homework. Smart, knowledgeable investors make more
money than dumb, ignorant investors. That is the way it ought to be.
But studies show that in the US, knowledge obtained through conventional
public means buys one absolutely nothing. One might just as well throw darts
at the newspaper to pick stocks. This is a primary reason that I got out of
the business ten years ago: after spending more than 12 years in the game,
and after doing some in-depth statistical research, I realized to my great
disappointment that *public knowledge is worthless*. So-called inside
information has value, but the rules make its use a crime.
The business section of the newspaper is an interesting story about the
drama of American business but otherwise it's just a waste of trees.
-gts
This archive was generated by hypermail 2.1.5 : Thu Jun 05 2003 - 21:16:01 MDT