There’s very little correlation between a company’s real value and its stock price or between its earnings and its stock price. If there were, anyone could safely invest in American companies, knowing in advance what their return on investment ought to be. Instead, stock prices reflect only what some sucker is willing to pay for it. Or, more precisely, what a whole bunch of suckers are willing to pay.
The little guy supposedly has no chance in such a volatile and irrational environment, and so he’s strongly encouraged to let a mutual fund manager play with his money (and skim off a couple of percent for the effort.) Even then, stock prices often have no relation to real-world circumstances. Nobody knows what anything is truly worth — or, more precisely, everyone knows, since a prodigious herd stampeding to buy or sell dictates the daily and long-term fluctuations in price.
As the recent show-trial of Martha Stewart reminded us, insider trading is illegal. But it seems to us that the best way to restore order and fairness to the stock market is to allow and embrace insider trading. The reason is simple: Although we pay money managers billions of dollars for the privilege of sharing in their special knowledge, their alleged precognition of what companies are really worth and what they’re going to be worth in the future, the fact is they don’t really know anything we don’t know. (If they did, they would be guilty of insider trading.) The only ones who truly know what’s going on at any given company are the people cooking the books. We ought to allow these people to buy and sell their company’s shares based on non-public information. True stock value will become readily clear.
Most people are resistant to insider trading because it offends their sense of fairness and propriety. These same people apparently don’t realize that the “honest” game they’re playing is already rigged against them, as gaffed as a magnetized roulette wheel. And it’s irrational, unpredictable, and dangerous. No amount of “research,” the kind glorified by brokers like E-Trade and Schwab, will glean useful stock market information, since that same information is already available to millions of other “researchers.” If you have a friend who works at MiracleCure who tells you one day before FDA test results are released that his company’s cancer drug is going to be approved as an alternative to radiation, by law you have to wait to buy shares until the next day when the announcement is made and everyone knows — and then you have to hope your modem is faster than the next guy’s. (Good luck!) A tiny cadre of insiders who are privy to the true direction their company is heading holds the only original and powerful knowledge.
We say let them loose. Yes, the Captains of Industry will make money off their position. In case you haven’t picked up a newspaper in the past two years, we’ll hip you to a mindblower: It happens every day in the most egregious and abusive ways imaginable. Why not let their natural impulse toward greed work to the benefit of the stock market? Why not let the Captains of Industry transform the American equities market from a gambling den into a legitimate, value-based investment? Only then will the absurd race to “know” something that others don’t yet fathom go the way of loaded dice and marked cards.