The Stock Market Is For Speculation, Not an Income Source

Everyone in financial media is now talking about Vanguard and how it controls more than 80% of the money invested in index funds. Have investors forgotten the recent brutality of the stock market or are they just convinced that another 50% drop will not happen?

There is an element of moral hazard in recent investor behavior cultivated by central bank policies. The reason such policies should not be instituted in the first place is because of this moral hazard effect: investors get convinced that the profits belong to them and the losses will be shared with everyone else. But this market socialism fails when “everyone else” has no more money to cover the losses of the speculators.

Actually, this author believes that the stock market is a place for speculators, not for those who seek income stream. It is the bond market that provides income under certain conditions that can be explained by a competent financial adviser. Even diversified portfolios, the simplest being the 60/40 allocation in stocks/bonds, have extreme left tail risk (loss) in case something inconceivable happens and both stocks and bonds crash.

When looking at a total return chart of the S&P 500, one must conclude that this market since 2000 has been brutal to investors. Why do people think this is going to change? Actually, they are overestimating the power of central banks to redistribute wealth. Wealth-redistribution has a limit that is reached when the victims have nothing more to donate.

After the peak of the old bull market in 2000, which was essentially a stock market bubble fueled by irrational exuberance, the brutality of the stock market took its toll on investors. No one talks about the victims that lost everything just 14 years ago and can now not afford to pay for basic living expenses if they are still alive. The financial media hypes the flood of new investors to passive funds with most being either uninformed or having extraordinary expectations. Of course, here we separate investors (speculators) from insiders. The latter kind mostly profits by taking advantage of the appetite of the former kind for risk.

On a total return basis it took 7 years for those who bought stocks near the top of the 1990s uptrend to recover their losses. And the brutality became worse at that point. They did not even get a year of relief or chance to break even. The market collapsed due to a manufactured financial crisis by market agents who were looking to buy lower and then profit from income redistribution.

Then it took three and a half more years for 2000 top investors, at least for the few that remained invested after two drops of about 50%, to recover again on a total return basis, or in total, eleven and a half years from the 2000 top, as shown on the above chart. This was accomplished, as already mentioned, by central banks redistributing wealth, current and more importantly future wealth.

Does anyone get the impression that in the last 17 years this market has been kind to investors?

Why are all these investors willing to hand their money to passive index funds? Do they think that stock market gains will provide an income stream, which they did not for the most part after 2000, or is everyone a rogue speculator?

In my opinion, people are over-optimistic that another 50% drop will not happen. And it may not, maybe in the next 100 years. But if it happens, most will be sellers at a huge loss and the income stream will remain a wild fantasy.

Some years ago when I started my journey in the markets, there was a consensus that investing is a speculative activity. Lately, we are witnessing a significant paradigm change to the effect that many people view the market as a potential income source. At the same time, financial advisers are under attack for having underperformed the market, which is a ludicrous requirement but it serves well the objective of a centrally controlled market.

In my opinion this is happening because politicians are afraid of negative effects of market corrections and they want to centrally control stock market behavior by having just a few passive index funds doing that. They do not care about market price discovery since central banks will distribute losses to everyone, even to those who do not invest. This is also one reason traders are under attack with negative publicity that started some years ago and attributed to them all market evil when they were the ones providing the liquidity. Nowadays, the system relies on fake quotes from HFT that move the market in any direction they need to entice the herd of passive investors to commit funds. This market socialism has an expiration day because socialism and free markets are not compatible notions. The risk is that if something goes wrong with this scheme a lot of people will lose a lot of money. Let us hope not.

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