Wrestling giants (The Financial Athlete #19)

Sumo strikes some Westerners as an unfair sport because there are no weight classes. One wrestler may encounter an opponent with a weight of more than a hundred pounds than his own. I don’t find this objectionable. Capitalism operates with unequal weights. Take for example, the stock market. Figuratively speaking, it has no weight classes.

When you step into the ring, you got be tough and smart, even if you’ve got more blubber than most. When you purchase stock, you enter a virtual sumo ring against a giant opponent, who is known as Mr. Market.

Unless you have millions at your disposal, you are no match against a potential tidal wave of selling from Mr. Market (vice versa for short sellers). Respect the muscle and might of Mr. Market. Abide by the common refrain: “Don’t fight the tape.”

You are called a retail investor for good reason. You pay retail prices stocks, but not everyone pays retail prices. When a publicly held corporation needs to raise cash, private placement investors can buy at a discount to market price. In addition, they often receive warrants, giving them the right to buy more shares for an agreed upon price by an expiration date. Unless you’re an accredited investor, you probably don’t qualify to participate in a private placement. Furthermore, senior management are usually granted heaps of bonuses and options with expiration dates extending several years later than the warrants given to private placement investors. Clearly, the scale is tilted toward senior management and to a lesser degree toward private placement investors who are hindered by one draw back: their purchased stock remains under restriction (shares cannot be sold) typically for one year.


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