Zack Morris - Story of My Life

Image from digibarn.com

    Ordinarily I love Google. It is the closest thing to an AI (artificial intelligence) that I have come across, and has made me 100 times more productive (ok and more lazy) than I was growing up. But that doesn’t mean that it is perfect. The good old boy mafia that runs our country is always trying to get a piece of the action, and they have done a brilliant job with Google. In order to prevent companies from becoming too powerful, there are rules that make a company publish its records to the SEC once it makes a certain amount of money. Ordinarily that is a very good thing, for scary companies like Microsoft or Enron. But Google is not a regular company. Google is a geek’s paradise, doing everything the “right way” and curiously making outrageous sums of money as it runs circles around the competition. My complaint is not so much with Google, but with the fat cats and market makers that understand human nature and how to exploit the poor.
    Google went public today at $85 per share. There has been discussion at slashdot about why this number is so important. In my humble opinion, this isn’t about market cap and valuation, this is about human nature. I would bet all of the money in the world, all of the money ever printed, that when a good company opens at $85, it will very quickly go over $100, due to psychology. That is precisely what happened. Now that in and of itself is no big deal, until you consider who makes the profit.
    Say that I would like to open an account and buy some stock at etrade. I could do it the old fashioned way, buy some stocks and hold them for a year, watching as my money trickles away due to the poor economy. Or if I actually want to make money, I could try day trading and make 1-5% per day on average. To do this seriously, I would want to open a margin account. A margin account is one that allows you to buy roughly twice as many shares by borrowing the amount of money you have in the account from the firm. Say you want to buy 10 shares of Google at $85 for $850 plus commission, well on margin you can actually buy about 20 shares for $1700 because you borrow another $850 from the firm. When the stock goes up and you sell, you only have to pay back the original value of the loan. If the price goes to $100, you now have $2000, but you only have to pay back $850, leaving you with $1150 (a $300 profit). Note that if you had only bought 10 shares using a normal account, you would have only made $150. In essence you have doubled your profits.
    Margin accounts also allow you to sell short. Basically selling short amounts to making a wager with the firm that the stock will end up at a certain price. So if you think a stock is going down, you can sell it short and treat the loss just like you would an ordinary buy when the stock is going up. They allow this because margin accounts have minimum balances, and rules in place where the firm will pull the plug on you if the stock goes the wrong way after you have sold short. In other words, if you predict incorrectly and the stock goes up instead of down, they will take your shares away from you when you have lost the money they loaned you. This is done to protect them. This makes selling short risky, because you can lose a lot of money. There is no limit to how high a stock can go. But for the most part you can treat selling short just like buying, as long as you are fairly certain which way the stock will go.

Image from herbertwarmstrong.com    The golden age of day trading of the late 90’s (where the average person could play the investing game with the big boys) is over. New rules make it so that if you want to use a margin account for day trading (and make money on BOTH the up and down swings), you will get the rug pulled out from under you. They quietly imposed a $25,000 minimum balance on margin accounts, which has effectively stolen day trading from everyone but millionaires. They did this in the name of protecting people who don’t understand day trading. Of course we all know they did this to protect the millionaires that were having their profits reduced by day traders.
    What does this have to do with Google you ask? Pretend for a moment that you are a millionaire, in a position to buy a stock that is essentially guaranteed to go up 15%. You open a margin account, buy a bazillion shares, and after the stock has gone up 15%, you have just made 30%. Actually, another trick in day trading is to ride every single wave, meaning a 15% profit could very well become a 50% profit, since you have traded on every up and down swing. But that will be left for another discussion. The important thing is that you have just made a guaranteed profit of 30% in one day.
    Say it is certain that the stock will go down the next day, because everyone hears about Google, wants to get in on the action, and what a surprise, the stock goes down. This is done because millionaires understand human nature, they know that people will sell when the price is high, which actually drives the price down. Think of friends and relatives that were burned by Yahoo when they invested their life savings just before the stock crashed. This is never an accident, just like Enron was not an accident. Whenever a stock goes down, a millionaire makes money. Remember that.
    So you have just made 30% the first day by buying on margin, and 30% the second day by selling short. That is a GUARANTEED 60% profit in 2 days. For everyone thinking “there are no guarantees in life”, I say “the stock will actually go to $125 instead of $100.” Yes, there is that tiny outside chance that the experts are wrong and the stock will do something unexpected, but that’s what investment firms are for. They protect millionaires from the uncertain.
    Now I will present the facts. Everything I just talked about is outside the reach of the average person. They had their margin accounts stolen by the good old boys. Everyone knows that the stock will go up, so this is a bit like insider trading. It’s this precalculated country club “old white man only” mentality that has shaken my faith in America once again. Google should have opened at $125, it was the right thing to do. But they did the wrong thing, and made a killing. It doesn’t matter who is responsible for this. All that matters is that Google and the men in suits stood to gain, and we all pay. Our measly 15% (if we’re lucky) profit turns into a 60% profit for anyone with money.
    Now that Google is public, our quality of service will decline. Google’s priority is with the shareholders now, not the users. Worst of all, nobody will ever do anything about this. How about getting rid of the margin account rule? How about raising capital gains tax? How about restructuring the laws so it isn’t so compelling for a company to go public once they are forced to give up their records? How about incorporating psychology into the stock marget laws to protect the small investors from the sheep mentality in a real way? Why has no politician brought this up? After all, it’s why your coworkers and grandparents lost a good portion of their life savings due to Enron and the precalculated internet bubble burst. I am furious about this, it is one of the many reasons I started this site. Or perhaps I am just angry that I couldn’t get a piece of the action…