Chris Mayer

The stock market may be rigged…but not always against you.

Lots of people believe the stock market is a playground for well-connected insiders. This is an old complaint…but it is one that seems to hang particularly thick in the air these days. The Facebook IPO only confirmed people’s suspicions that the game is unfair. Here was the biggest IPO in the history of US markets. And we learn that big banks and hedge funds got the early dope that Wall Street analysts dropped their estimates for Facebook’s earnings only days before the IPO. The small investors, who were not in the know, were led like pigs to slaughter.

Facebook’s stock is down 29% since it opened at $42.05 per share on May 18. This grim result is causing a lot of howling about the IPO process and those “damn Wall Street banks.”

Of course, you could take the view that investors who fool around with hyped IPOs get what they deserve. My sympathies lean in that direction. If you play with fire, you might get burned. Regardless, I agree with this comment in yesterday’s Wall Street Journal:

What could have been a model example of the market’s strengths — an eight-year-old company with 900 million users raising billions of dollars from a cross-section of the investing public — ended up as a case study of the power wielded by insiders over outsiders.

In short, Facebook is another black eye for a market that already has a lot of black eyes. In the last dozen years, we’ve suffered through two 50% drops from peak to trough, plus a long list of scandals and shenanigans. Facebook just added to the feelings of disgust and revulsion people already felt toward the stock market.

You can see that revulsion in what people do. They’ve been yanking a lot of money out of the market — something like $1.4 trillion since 2007 and record amounts last year. This year, the outflows continue with gusto.

Some people cite these outflows to say the market can’t or won’t rise. I think that’s a lot of baloney. Michael Santoli of Barron’s had a good column about this over the weekend:

Bears, who claim that broad investment flows are needed to hold up stocks, should note that the US market just doubled in three years with retail selling into the move.

Stocks, as an asset class, then, perhaps are getting a bad rap.

People remember the headline-grabbing stories about certain stocks that “blew up.” But meanwhile, there are many stocks that just keep plodding along. There are many, many companies with good managers and decent businesses that give a fair shake to their owners. On a portfolio basis, such stocks can make the little guy a lot of money over time.

But you have to know where to fish. IPOs, such Facebook’s, are not an ideal fishing hole.

In my investment letter, Mayer’s Special Situations, we look for opportunities that are off the beaten path, where the odds clearly tilt in the investor’s favor. Two classic Special Situations are “spinoffs” and “thrift conversions.”

A spinoff is when a parent company decides to carve out a business and give stock in this business to its shareholders as a standalone entity. Much research over the years shows that such stocks outperform the broad market.

A thrift conversion occurs when a little savings and loan (S&L or thrift) goes public. It does so by offering shares in its IPO depositors. These are not typical IPOs where the money raised goes to the selling insiders. Instead, all the money raised (less underwriting fees) in a thrift conversion goes back into the bank. At the end of the day, shareholders own the cash they put in plus a bank.

Again, research shows that thrift conversions are consistent winners over time. I have recommended five different thrift conversions to my subscribers and, so far, all five are in the plus column.

Are thrift conversions boring? Yeah, kind of. But then again, they come with a lot less risk than many stocks. Thrift conversions are for patient people who like to make money patiently… and hate losing it.

The process of how these particular Special Situations come to be almost guarantees that the odds favor you as an investor. Nothing works 100% of the time, of course. But it’s like poker. If you start with aces, you have the odds in your favor.

These are just two examples, but there are other investments — like “stub stocks,” for example — that routinely deliver the goods.

So is the market rigged? Yes. But it’s not always rigged against you.


Chris Mayer
for The Daily Reckoning

Chris Mayer

Chris Mayer is managing editor of the Mayer's 100x Club and Mayer's Special Situations newsletters. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas. In April 2012, Chris released his newest book World Right Side Up: Investing Across Six Continents. 

  • gman

    “And we learn that big banks and hedge funds got the early dope that Wall Street analysts dropped their estimates for Facebook’s earnings only days before the IPO.”

    good infestors!

    “The small investors, who were not in the know, were led like pigs to slaughter.”

    caveat emptor! sink or swim! survival of the fittest! due diligence! “I say, let ’em crash!”

    I mean, if the small infestors don’t lose money, then how will the good infestors win money? can’t have a casino without losers!

  • gman

    “such stocks can make the little guy a lot of money over time.”

    come on little guys. get back in the game. you can’t win if you don’t play!

  • Omar Best

    It is way to early to start panicking over the price of FB stock. Remember the price of stock is based on buyers and sellers. More sellers and less buyer the price of a stock goes down if you have more buyers than sellers then the price goes up. I think that the reason that the price dropped is because you had a lot of FaceBook employees who were multi-millionaires on paper because of their stock wanting to cash out. And they really didn’t care about the price because they paid nothing for the stock. Investors need to relax. In my opinion FB will be okay.

  • Bruce Walker

    Omar is quite the optomist! I would hardly consider facebook as a good model company for investing in an IPO. Unless, of course, we are talking about investors who missed the CB radio craze and didn’t get a chance to buy in at the top in 1976. For them, another opportunity to lose big by buying into fb at an outlandish valuation. I won’t say the company is worthless, but its hardly the next Amazon or Google, which is what a lot of little investors are thinking if only because of their own familiarity with using the fb website.

    As for the insider double-dealing on the IPO, it couldn’t come at a worse time for President Obama. Most of his former supporters from 2008 who are bailing out on him, are incessed about his sucking-up to Wall Street. This latest fiasco simply sends that more voters over a cliff, either into the camp of Mitt Romney, or perhaps more likely, into the camp of those voters who are so disillusioned that they won’t be wasting their time to vote come November.

    In either case, it’s a great example of the culture of greed and corruption that dominates Wall Street, a situation that many voters sent Obama to Washington to clean up. In the end, the result will be a crushing defeat for Obama come Novermeber, and he will have no one to blame but himself for his own inability to properly police the markets.

  • rowdy

    Thanks for sharing such a nice post with us.

  • CT

    infestors are infestors, big or small.

  • dontbedumb

    like GMAN said in his last post without intendting to..THE MARKET HAS TURNED INTO CASINOS..

  • Shroomduke

    Think how many lottery tickets you could buy instead of giving it to the wall street crooks and banksters…

  • Hawkeye249

    I am leaning toward believing there IS stock market manipulation.

    My feeling is because there are heavy swings without enough reasons given.

    If people(s) know in advance, they can profit greatly.

    But, if the market recovers, then no damage, right?


    Consider: (Percentage exaggerated to make the point.)
    Investor has $1,000 in the market.
    Market drops 10 percent.
    Investor now has $900.
    Market goes up 10 percent.
    It is reported the market fully recovered.
    The Investor now has $990. NOT FULLY RECOVERED.

    To “fully recover”, the market would have had to go up a bit over 11 percent.


    I am looking for the highest rate available on a CD.

    Keep in mind:
    The market only moves on trading days.
    CD’s, even with low rates, earn interest Every Day of the Year.
    And are insured against loss up to $250,000.

    You are Not investing in the Market, you ARE gambling!

    01/30/2014 the market went up significantly
    There were no employment reports, earnings reports, nuclear wars, etc.
    01/31/14 the market is plummeting.
    I made money on my modest investment on the 30th.
    I am losing all of the gain, or more, today.
    Had I had a clue, I could have moved my investment to government bonds, or some such.
    But I didn’t.
    I suspect big players knew…

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