Many people regard the stock market as a safe investment that provides good yield in the long-term, and can be used for saving for your pension. In this article I will describe several reasons why this is a lie, and why the stock market is a big pyramid scheme.
Stock Market is a Zero Sum Game
Money is never created in the stock market, only the illusion of money. To claim your gains on your stocks you must sell, and in fact find the next person to enter the market. Even if the market seems to rise, if all the participants attempt to sell their stocks at the same time, the market will plummet in seconds (which is exactly what happened in the crash of 1987). Whenever one side buys a stock, another must sell it – money is entering and exiting the market and wealth is never created, just exchanging hands. In fact, when considering the commissions for buying and selling we reach the conclusion that stock trading is a negative-sum game, where the only people who make money are the people who run the game: the stock brokers and financial institutions.
Whenever you see a surge in the stock chart and total optimism, it is simply a speculative bubble that is not based on anything solid but only hopes of the investors. Remember that no matter how high the stock market is, if people try to close their positions and take their actual money back – the market would immediately fall.
Not many people are aware of it, but within any major index there exists a special coefficient called a Divisor. For example, for the Dow Jones Industrial Average there is a DJIA Divisor which is used to calculate the index: a weight average of all the stocks in the index is divided by the divisor to reach the value of the index. This was originally intended to account for events such as stock splits, such that the index won’t be changed too drastically. But now it is used to keep the index intact when stocks are removed from it. This is a total fraud, and the fact that the divisor is now at 0.13 shows that the index is far inflated above its correct value. If a certain stock has been removed from the index due to losses, it should be reflected in its value and not hidden under a mathematical technicality!!!
Baby Boomers Funded the Market, but Not Anymore
The baby boomers right after World War II have been funding the stock market for 60 years, and exactly when most of them retired and started to cash out their pensions, the economic collapse of 2008 began. This is no coincidence.
When you have 20,000 people who take money from the market on a daily basis, an equivalent number of buyers must also be present to keep the market at its present level – however there are many more baby boomers who are claiming their pensions than investors at this time, which makes the market fall. Since the market is a zero sum game, the daily withdrawal of billions puts a lot of bearish stress on the market and shows that it is not a good long-term investment option. For the last 60 years we had more adults who funded the market than retirees, but now it has changed and we see the results on the charts.
Consistently Beating the Market is Almost Impossible
When looking at many mutual funds, it is clear that very few of them actually beat the index. And when testing them at a longer time frame of several years or even decades, the number of people who consistently beat the market can be counted on one hand. This shows that regardless of expertise, money, knowledge and researchers, beating the market is almost impossible and practically a waste of money and time.
If beating the index is hard, and even the index loses money in the long-term, it gives us a very disturbing image about the market and shows us that profiting or even preserving our investment is very hard.
Buy and Hold Fails
Another final proof that buy and hold is a failed method can be seen in historical charts of Dow Jones. It is said that investing in a buy-and-hold manner (just buying every month a constant amount without attempting speculation) is a good long-term strategy. This is not true, as the historical charts show us that the average yield per year, when considering inflation is only 1.5%-2% (depending on the index you invest in). This is not a good yield at all, and is about as profitable as a bond but with much more risk. However, when considering the entry, exit and even holding commissions that financial instutions charge to hold the position, we reach the conclusion that the strategy of buy-and-hold is almost not profitable at all.
Another point that is worth mentioning is that buy-and-hold assumes that you never sell your investments no matter how low the market gets – and in the last 40 years there have been serious falls in which the market collapsed by more than 50%. You have to be very strong minded to maintain your positions even after such losses, and most investors will undoubtedly liquidate their positions after such losses. When taking this into account, the average gain falls even more and shows that buy-and-hold is a losing strategy in the long term.
In conclusion, the stock market is a zero-sum game that lives upon the hopes and fears of its participants. Even in times of euphoria and optimism, the money that seems to be created in the market is nothing more than a charade that is exposed as a lie as soon as the masses try to get their money exchanged for their stocks. Smart investors would not enter the stock market and should do their best to avoid exposure to such investments.
Steve Sollheiser is a writer and a stock trader. Visit his site StockChartPatterns.org for more articles about trading chart patterns.