One of the premises of investing in the stock market is that everyone has access to the same information.
That’s not the same as everyone having the same information.
Some investors are too lazy to do their homework while others study hard.
When the test of success in the market comes, guess who succeeds more often than not?
However, when information is provided to some investors, but not to others, that borders on illegal or unethical.
If an investment company offers you a chance to buy a particular security, you should have confidence that the company believes you will benefit.
What would you say if you discovered the investment company assembled the security knowing it was designed to fail?
Furthermore, another investor knows the security is going to fail and takes a short position to profit from the security’s collapse.
This other investor knows the security is going to collapse because they helped the investment company design it to fail.
In poker, this is called a “stacked deck.”
When the deck is stacked against you, it delivers a poker hand that is good enough to make you bet more money, but is never good enough to win.
The sucker often doesn’t know this is happening because they are so close to winning, but never do.
This is the scheme Goldman Sachs is accused of running.
Imagine Goldman is the dealer in a crooked game of cards.
It keeps you (the investors) in the game by making your cards appear strong, but the dealer knows another hand is always better.
It knows this because it rigged the game.
This is what Goldman is accused of doing to investors.
How often does this kind of scam happen on Wall Street?
No one knows for sure (which is kind of scary in itself), but you can rest assured Goldman isn’t the only one playing “heads they win and tails you lose.”
How can investors protect themselves from such scams?
First, never buy a security (stock or otherwise) that you don’t understand.
Second, insist on complete transparency. If you don’t get answers, pass on the security.
Third, deal with people you trust – sure, this won’t protect you from an outright crook, but it is important.
Fourth, if it seems too good to be true (high returns, low risk), it probably is either untrue or you don’t really understand the investment.
The unfortunate bottom-line is investors will always be at the mercy of investment professionals.
Fortunately, most are honest and want what’s best for you, but always verify what anyone selling a product tells you.
That’s not the same as everyone having the same information.
Some investors are too lazy to do their homework while others study hard.
When the test of success in the market comes, guess who succeeds more often than not?
However, when information is provided to some investors, but not to others, that borders on illegal or unethical.
If an investment company offers you a chance to buy a particular security, you should have confidence that the company believes you will benefit.
What would you say if you discovered the investment company assembled the security knowing it was designed to fail?
Furthermore, another investor knows the security is going to fail and takes a short position to profit from the security’s collapse.
This other investor knows the security is going to collapse because they helped the investment company design it to fail.
In poker, this is called a “stacked deck.”
When the deck is stacked against you, it delivers a poker hand that is good enough to make you bet more money, but is never good enough to win.
The sucker often doesn’t know this is happening because they are so close to winning, but never do.
This is the scheme Goldman Sachs is accused of running.
Imagine Goldman is the dealer in a crooked game of cards.
It keeps you (the investors) in the game by making your cards appear strong, but the dealer knows another hand is always better.
It knows this because it rigged the game.
This is what Goldman is accused of doing to investors.
How often does this kind of scam happen on Wall Street?
No one knows for sure (which is kind of scary in itself), but you can rest assured Goldman isn’t the only one playing “heads they win and tails you lose.”
How can investors protect themselves from such scams?
First, never buy a security (stock or otherwise) that you don’t understand.
Second, insist on complete transparency. If you don’t get answers, pass on the security.
Third, deal with people you trust – sure, this won’t protect you from an outright crook, but it is important.
Fourth, if it seems too good to be true (high returns, low risk), it probably is either untrue or you don’t really understand the investment.
The unfortunate bottom-line is investors will always be at the mercy of investment professionals.
Fortunately, most are honest and want what’s best for you, but always verify what anyone selling a product tells you.