I always wonder about the articles alleging the stock market will “blow up” or that we have a number of danger signs and indicators. The reality of finance and the stock market is that we really cannot predict what will happen individually, and even sometimes retrospectively struggle to see what went wrong. Basing our predictions for the future market off of past patterns is only human nature—we want to think we know what will happen, but an individual has no way of predicting a market comprised of hundreds of millions of individual actors. What’s to say the next person doesn’t consider the tapering of quantitative easing to be a positive sign, and trade opposite you?
My take on the market and economy is that it is constantly changing and adapting. Sure, there may be technical or other shocks to the market, but as long as money can be made—even by one person—the market will continue to exist. This isn’t to say we should regulate and tax people to the point of taking away almost all their profits, just that perhaps markets change.
Banking and finance today is vastly different than it was pre-2008 crash. The introduction of massive amounts of regulation like Dodd-Frank has complicated financial processes and reduced profits for financial firms. There is a lot of complaining going on from the finance industry that these levels of regulation are killing the industry. This may very well be true, or the market may simply be changing due to new parameters. We won't know which is the case until it's in front of us. But what about this regulation? Is it a positive thing?
The key question we must examine here is: Who does the stock market exist for? Fixing the market (or just accepting it as it is now) relies upon the answer.
If the market is for the wealthy & financial professionals, then the pre-2008 way of doing things might be best. As we learned the hard way, a de-regulated system where the rewards can be immense amounts of money will lead to manipulation and gains made at the expense of many less fortunate. You could even argue that we should eliminate prosecution for insider trading, as it will be reflected in the market prices and create a more efficient market overall.¹
If the market is for all the regular folks out there to make some money, we need to increase transparency and educate on investing. The legislation that has been implemented attempts to make the market more “fair”, but has done so at the expense of efficiency for actual market participants. It is a waste of everyone’s time and money if the very people the market is intended to be fair for don’t participate in it.
The notion that investing is for everyone isn’t a widespread one. But really, it’s not that hard. If you blindly buy a stock, you will either make or lose money. There are only 2 options for how the stock can behave (go up or go down), so you just have to decide which one you think has a higher likelihood. Investing, like many things in life, is merely informed guessing. You can read my very brief guide to beginning to invest here.
It shouldn’t be surprising to anyone that the government has created a structure in the name of fairness while making things less efficient. This is literally what the government does all day, and they are very good at it. Economic theory (Mankiw’s principles) does tell us that government intervention can sometimes make markets more efficient—including scenarios like taxing negative externalities (think pollution from energy production). In this case, however, I think most financial professionals would tell you that regulation is killing the market.
So, we are at a crossroads in some respects—should the market be maintained as a finance-professional only space, or should investing be for everyone? There will never be a perfect market, as we are all human and quite imperfect, but I hold that by increasing transparency and making investing accessible to many² we can make sure all this regulation wasn’t for nothing.
¹This assumption is contingent upon the belief that trading upon the most up-to-date information you personally have is the best way to ensure prices are accurate.
²Lots of people are already working on making investing more accessible, like the creators of the forth-coming Robinhood, which allows you to buy stocks without paying any fees! It’s been invested in by big names like Andreessen Horowitz, and could change the face of trading as we know it. This solution is a great start, but only addresses problems for those who already know they want to invest.
I would argue that in order to be truly effective, investment education should be extended to high schoolers and more. Some states, including Utah, require a personal finance class to be taken before graduation, which is a good start, but should be nation-wide.