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Tuesday, November 23, 2010

Insider Trading Scandal

Many market observers accept the idea that markets are basically efficient. This means that knowing and analyzing publicly available information isn't really useful for achieving exceptional performance over the long term. For example, when your next door neighbor works himself into a frenzy over Walmart going into China, you shouldn't run out and immediately reallocate your IRAs to Walmart stock. Why? Because everybody and their brother already knows this. It is reflected in the price of the stock.

But inside information is different. Inside information gives an edge. Imagine you knew that the Food and Drug Administration was on the verge of rejecting a company's application for a cancer drug, and it wasn't publicly available information. This is valuable information. Acting on it could get you Bubba as a roommate (or the equivalent of the female version of Bubba, as the case may be).

Well guess what? The government is investigating all of Wall Street on insider trading charges. I'm hearing the sarcastic parrot from Disney's Aladdin saying over and over, "Why am I not surprised?"

Of course, if you see yourself as a stock picker, you could be buying the stock from the person with the insider information.

IMHO this is just another reason to avoid stock picking and market timing. If you can't avoid it, understand that you are buying and selling to the likes of Goldman Sachs and some of the biggest hedge funds in the country - those named in the probe.

Stick with funds that track the market. The innovative U.S. and global economy will overcome the stupidness of the monied players in the long run...again, IMHO.


  1. Who would have thunk it? Wall Street trying to fix the game to their advantage.

  2. Slowly killing the goose that lays the golden eggs...doing Jack proud.

  3. No surprise there really, human nature. At least the government is attempting to do something about it in the US. Anyone heard of the government taking action in Canada? I did not!

  4. It is human nature and that is one of the things that makes it hard to prove. At the highest level think of someone who has worked at Goldman Sachs for 20 years and is now a high official at the Treasury Department or on staff at the Federal Reserve and they have lunch. It seems to me that it is almost impossible to avoid information that the public doesn't know.
    I have always wondered how Goldman got out of Russian debt in 1998 before Russia defaulted after the U.S. hadn't come to its rescue like previously, when other investment bankers got caught flatfooted.
    Worth noting I think has been Buffett's practice of getting on boards (ala venture capitalists) over the years, especially on his investments. That is a way to be privy to all kinds of information.