The Stock (or is it “Stonk”?) Market Is Rigged: So What?

I need to get this off my chest. Over the course of January 2021, the financial markets saw the incredible Wallstreetbets vs Hedge Funds battle play out. The battle arena included stocks (or is it “stonks”?) such as Gamestop and AMC. I won’t rehash the whole episode. 

What I want to get off my chest is something I’m saddened by: The danger that many retail investors could lose their faith in the financial markets because of what’s happening in Wallstreetbets vs Hedge Funds. I’ve already seen people commenting (read here and here) that the market is “rigged” and that they are losing their faith in the system. Well the thing is, the market has been rigged for a long, long time but – and this is important – it does NOT matter. Two examples come to mind.

A long, long time ago…

The first involves Joseph Kennedy, the patriarch of the famous Kennedy family in the political scene of the USA. The family includes the US president, John F. Kennedy. 

In the 1930s, Kennedy played an actual con-game with the US stock market. This is recounted by Morgan Housel in an article he wrote for The Motley Fool:

“The repeal of prohibition in 1933 was bound to benefit companies that made supplies needed to make alcohol. One was a bottling company called Owens-Illinois. Rather than investing in directly in Owens-Illinois, [Joseph] Kennedy purchased shares of a company called Libbey-Owens-Ford.

“Libbey-Owens-Ford was an entirely separate company, which manufactured plate glass for automobiles, not bottles, but its name was close enough to the bottle glass company to fool unwary investors,” writes biographer David Nasaw. On news of the repeal, Kennedy and his partners traded shares back and forth between each other, pumping up trading volume to draw attention. That caused other investors to buy shares “on the mistaken belief that they were buying shares of Owens-Illinois, the bottle manufacturer.” After a surge, Kennedy dumped Libbey-Owens-Ford with a $1 million inflation-adjusted profit and invested the proceeds in his original target, Owens-Illinois.”

Not so long ago

The second involves convicted con-man Jordan Belfort, of The Wolf of Wall Street fame. In the late 1980s and early 1990s, Belfort used a similar technique – buying and selling the same block of shares between partners to manipulate share prices – to run his fraudulent stock market brokerage firm, Stratton Oakmont.

One of the companies that Belfort and his cronies ran his scams on was the shoe-fashion designer outfit Steve Madden. Belfort and gang took Steve Madden public in December 1993 via a pump-and-dump scheme. They owned up to 85% of Steve Madden leading up to the IPO, and dumped all the shares right after the listing, raking in US$23 million in a very short amount of time. Big money. But is it really?

Stocks, not stonks

This is where it gets interesting. According to Yahoo Finance, Steve Madden’s share price was less than US$1 right after its IPO in 1993. Today, Steve Madden’s share price is nearly US$34, and 85% of the company would be worth nearly US$2.4 billion.

Belfort could have been a legitimate billionaire had he held on to his Steve Madden shares, instead of being a convicted con-man who had to spend a few years of his life behind bars. And all that happened because of Belfort’s inability back then to see what the stock market really is – a market for participants to own pieces of living, breathing businesses.

Coming back to the deplorable behaviour of Joseph Kennedy, Housel wrote in the same article for the Fool (emphasis is mine):

“Companies didn’t report much information in the 1930s, but archive documents show Libbey-Owens-Ford earned somewhere around $1.1 million in profit in 1933. By 1985, profits were more than $70 million. Getting tricked by Kennedy didn’t matter much if you were willing to wait.”

Unrigging a rigged game

The stock market has been a rigged game for a long time. But it doesn’t matter for investors. This is because stocks – not stonks – have still managed to build tremendous wealth for investors legitimately despite the presence of the rigging. Since 1930, the S&P 500 (a broad stock market index in the USA) has turned a $1,000 investment into a massive US$4.97 million, including dividends. This works out to a handsome return of 9.7% per year.

There’ll likely be no end to having unscrupulous stock market manipulators pop up to rig parts of the market. But having patience, being diversified and disciplined, and having the view that stocks represent partial ownership of real actual businesses that will do well over time if the businesses do well (and that will crumble if the businesses crumble) makes it possible for you to unrig a rigged game. And, like we’ve seen with Libbey-Owens-Ford and Steve Madden, even companies that are the victims of manipulation can still do great things for investors – if the companies have legitimately good businesses and crucially, the investors are willing to wait.

Please don’t lose faith in the markets!

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I do not have a vested interest in any companies mentioned.