Why the 1% will always win against the 99%

Remember the trader who told the BBC that “Goldman Sachs rules the world”? He’s our new columnist

Our new columnist Alessio Rastani is the self-proclaimed trader who shocked the world by declaring live on BBC News that he goes to bed “every night dreaming of the next recession” and that “Goldman Sachs, not the governments, rule the world”. He’s a controversial figure, not least because he’s a self-taught non-institutional trader with no FSA license. But he certainly isn’t shy about sharing his views. Do you agree with his words? (His words are his own, and in no way endorsed by LondonlovesBusiness.com)

Have you ever seen a fly hit a window?  If you have, you may have observed what the fly usually does next – it has another go and hits the window again.  And then what does it do?  It has another go. 

Until finally… it drops dead.

Believe it or not, that is precisely what people looking to invest in the markets are doing every year, if not every day – hitting their heads against the metaphorical window that is financial investing.

Successful investing requires an understanding of how the world and the markets really work. 

Not how they should work.

Not how you hope they should work.

But how they really work…

The truth is that it does not matter what politicians and the financial news channels tell you about what should or will happen. NONE of that matters.

The “muppet” masters

In March 2012, Greg Smith, the former executive director of Goldman Sachs, resigned his position because he claimed that the company was “ripping off clients” and treating their clients like “muppets”.

The news came as a shock to some, but not a surprise for those who are familiar with how the City operates.

There are two facts I need to share with you.

The first is that institutional brokers and traders can only make money by manipulating and exploiting basic human irrationality and ignorance of the markets.

The second is that most people are completely unaware that making correct investment decisions often means doing the exact opposite of what comes to them naturally – i.e. doing the opposite of how your human emotions want you to act.

Here is a case example. 

In May 2008 as Crude Oil prices were sky rocketing at nearly $130 a barrel, Goldman Sachs released a report stating that they expected Crude to reach $200 a barrel within six months to two years time. In reality, two months later Crude Oil prices peaked slightly higher at $147 and then plummeted by 77 per cent to $33 within six months!

Commentators such as Oppenheimer’s Fadel Gheit have said openly that: “This is another form of market manipulation. They [Goldman Sachs] are influencing the market.They are doing things that could be beneficial to them but harmful to the rest of us.”

He admitted that this is not exactly illegal and that banks need to make a profit. 

Financial institutions have often used such tactics to dump what they know are junk, worthless assets on to the uninformed retail investors, because that is the easiest way to free up their inventories.

My argument is not about the morality of such actions.  That is for another discussion. 

I am merely rejecting any argument that government intervention – as advocated by much of the 99% – to “slap” financial institutions for such backhanded ways of “influencing” the markets (to put it mildly) is going to resolve anything.

Markets can be “influenced” because human beings can be influenced.  And since we humans are arguably emotional and irrational creatures, we have an irrational market.

Trading other traders

Let me tell you a bit more about how markets work.

Most people don’t make investment decisions out of logic, but by reacting to their common human emotions of fear and greed – as well as a deep ignorance of the mechanics of the market.

Traders are in fact “trading” not just a market, but really the actions of other traders.

At the time of writing, I am watching the stock of a giant technology company spiralling hyperbolically higher each week – to the extent that it has outperformed the major stock markets.

There are unconfirmed rumours that the stock could “double in value” due to speculations of a merger. I usually treat such rumours with suspicion as it is unclear who the sources (or what the motives) behind them are.

To me, such speculations are simply alarm bells to my contrarian mind that it is time to sell, not to buy.

The smart money – i.e. the informed investors – got in on this stock much earlier. Now, as the smart money start to slowly unwind their long positions on this stock, they will sell their shares to the herd of late-comers who enter the scene out of the fear of “missing out”.

Unfair? No. 

The markets are a zero-sum game – where individuals who rely on information for the classes win, and those rely on information for the masses lose.

Educate yourself out of being a muppet

It is easy to blame brokers and banks for the 1% versus the 99% situation. I have often been asked about my opinion of the Occupy Wall Street (and “Occupy London”) movement.  No matter how well intentioned the force behind the movements may be, protesting against the financial institutions will not bring about any form of “justice” or meaningful change.

As long as human nature stays the same, financial institutions will always win in the end.

The only weapon you have at your disposal is to learn to adapt. 

Ultimately you are left with three choices: 

(1) You can continue to carry on with your life as normal, go to your job, get your pay cheque at the end of the month; or

(2) You can protest about why the world and financial markets are so “unfair”; or

(3) You learn to adapt and understand how the world and the markets really work.

My money is on that you will choose number 3. 

The technology crash of 2000, where I also was one of the unlucky “muppets” of a false bubble, was a huge learning lesson for me. I realized that the only way I was going to succeed in investing was not by relying on financial “advice” or “tips” but only through an understanding of how the markets operate.

So before you invest in the markets, first invest in yourself.

Learn as much as you can about the markets. When people wisen up, the muppet masters in the City will have a tough time making money from them.

Alessio Rastani gained fame and caused controversy last year by stating live on BBC news that he “dreams of another recession” and that “Goldman Sachs, not governments, rule the world”. The YouTube clip has since bee
n watched over two million times, and Alessio has subsequently been interviewed by figures such as Sir David Frost. His website is LeadingTrader.com.