The Hugely Profitable, Wholly Legal Way to Game the Stock Market (But isn’t this just smart? Not “gaming”)

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I post this because I feel like retail investors (most of our readers who invest) should be more informed about the markets into which they put their money. It’s not a game. There are inefficiencies in information relay. Sometimes such inefficiencies are created by governments (such as when the Fed leaked minutes to big banks before the minutes were released to the broader public) and this is totally wrong. Other times such inefficiencies (and opportunities for profit) present themselves because of the shifting nature of the market. Either way it is good to have at least a sense of what one is up against.

And a special note to mutual fund investors – Check your expense ratios and keep them low. 

(From Bloomberg)

The tactic, in some ways, resembles illegal front-running – – but in this case, it’s perfectly fine. The traders are simply buying stocks before they’re added to the indexes that, by definition, index funds must track.

As the popularity of index investing soars to new heights, the emergence of index front-running is raising fundamental questions about so-called passive investment strategies, as well as how indexes are compiled and the role the funds themselves play in elevating costs. By one estimate, it gouges* owners of funds tracking the Standard & Poor’s 500 Index to the tune of $4.3 billion a year, a sum that can double or even triple the cost of such investments.

“Portfolio managers are aware of it, but some of them will say ‘My clients demand an index fund, and I’m going to give it to them come hell or high water,’” Michael Rawson, an analyst at Morningstar Inc., said from Chicago. “Yes, you matched the index return, but the investor is now worse off. You don’t hear about that as much.”

Click here for the article.

*There is no such thing as “gouging.” There is a market price and one can either pay it or not. There’s nothing immoral about dynamic prices, even if they are more than you want to pay. Now, if the government sets arbitrary prices (even in the name of “fairness”), that IS immoral and a form of fraud.