The Wall Street Jungle

How the stock market is really works and pulls back the curtain.

I love books that expose Wall Street’s ways. My review is more historical in how Ney’s great book fits with another giant who also took on Wall Street’s gambling habits, Jack Bogle, founder of the Vanguard Group and the creator of the indexing strategy. Richard Ney was ahead of many financial authors and thinkers and should be given more credit for helping investors understand and address how Wall Street works for its interests over investors.

This besting selling book introduced transparency of the inner workings of Wall Street. He documented with huge amounts of data how the insiders, the specialists, make money simply because they are in “the right place at the right time” with a “monopoly of information” about millions of trades. Ney said the individual investor doesn’t have a fighting chance. We end up paying for the specialist short selling, big block fees, special brokerage incentives and a myriad of other hidden and despicable, but legal methods which fatten Wall Street’s pockets.

Forty-four years after this book was published, the computer replaced human beings. This development didn’t help ordinary investors, it brought up another contemporary challenge not unlike what the specialists did decades ago. Does speed trading help the individual investor and for that matter our financial system and society? Ney would say no because it is still favors a few people who intervene between buyers and sellers of securities. The computer does all the work, but the fraction of a cent per trade that is deducted by somebody adds up. Ney would ask the same question he asked about the specialist’s interventions: How does speed trading with the associated costs benefit the average investor and society? What exactly is this individual doing stealing a fraction of a cent or our money in my trades and the entire political, legal and political system lets them get away with this? Ney said this similar activity of what the specialists did in Ney’s day is a form of larceny.

Jack Bogle and Ney shared this simple concept: corporate earnings, dividends, future prospects of the company and Gross Domestic Product (GDP) produce investment growth. Any investment strategy or product that claims to beat the above basic corporate growth parameters is pure speculation and gambling. Creating clever trading algorithms or exploiting legal loopholes for the sole purpose of squeezing more returns than what corporate America offers (dividends, earnings, future prospects and GDP) does not benefit our financial system, our economy, individual investors or society. Capitalism does best producing a good or service which the public demands and needs, which benefits all while making a legitimate profit. Both men equated these speculative maneuvers as unethical and harmful to the investing public and the financial system because of its costs, risks and gambling characteristics (2008 financial debacle is a prime example).

Ney’s most controversial and courageous recommendations were to regulate all the hidden operations of the stock exchange to control it like our regulated public utilities, gas, water and electricity. Can you imagine the richest and most powerful entity in the history of civilization succumbing to tighter regulations? Ney says the stock exchanges provide a public need, but the unseen and unknown operations are not in the public interests. If you are going to brag about “open market,” open it up for all to see! Investors cannot make good decisions when so much of the information investors need is obscured.

Ney was aware that our political system is not going to take on his regulatory recommendations given the nature of our political system. His letters to Wall Street and the politicians asking for change resulted in 100% push back from both. Even 45 years ago Wall Street’s weight into our political process was in full court press: a cabinet secretary (Secretary of the Treasury), Securities and Exchange Commission Chairperson and the Federal Reserve Board members including the powerful Chair are from Wall Street’s biggest and most influential banks and brokerage firms. Let’s never forget the hundreds of millions of dollars of campaign money to elect politicians friendly to Wall Street and the most recent Citizen’s United supreme court decision unleashed a permanent and secretive pouring of campaign contributions from the richest and most powerful people on earth to purchase our democracy.

Bogle was also in favor of regulations. He is so adamant against excessive trading that he proposed a small tax on trades in an interview on CNBC! The Wall Street guests opined loudly “OH NO!” they were so upset with Bogle’s comment.

Building on what Ney started, Bogle’s entire career was to inform the investor much of what Ney said about Wall Street but it was Bogle who created an ingenious product. In 1976, he launched the low cost S&P 500 index and created the Vanguard Group, which now is the largest most prominent investment company in the world. Vanguard’s philosophy fits the investors needs over Wall Street’s greed. His index and Vanguard simply skirts Wall Street’s self-interested and expensive trading culture. The millions of Vanguard clients rarely trade and the investment costs are low. Vanguard’s investment philosophy from the beginning has always been client centered with low cost, long-term and broadly diversified investments.

The corporate media, financial talking heads, remain perplexed about why the trading volume is historically low. Come on media! I guess they don’t get it. Take a look at these facts. $6.5 trillion in assets is out of Wall Street’s expensive, commission-laden greedy hands: Vanguard’s $3 trillion, Tiaa Cref half-trillion and 3 trillion in money market/fixed accounts which totals $6.5 trillion! This tremendous amount of money is rarely gambled on Wall Street, so the trading volume will be lower than years past when more assets were available for Wall Streets uncontrolled trading frenzies. This is great news for us buy and hold, long-term thinking investors.

Ney tried to educate the investing public with his two follow up books on how we might turn the specialists’ exploitation into our exploitation (I did not read the follow up books). IMO, Ney made investing more complicated and overly risky. Ney’s charting analyses was complicated and to follow the daily trading volumes on which sector might go up is not just wrong, but grueling, demanding and time consuming. But, Ney’s heart was in the right place for us average investors. At the time it was the only option he could find was to piggyback on that terrible existing system.

Bogle finished what Ney started by streamlining and simplifying the investing process, increased returns, reduced risk, with much less time and energy, and most important of all, Bogle skirted Wall Street’s greedy hands.

I thank Richard Ney in this book and John Bogle’s massively successful indexing strategy and his mutual fund company, Vanguard Group. These two great men made huge contributions in the thinking and knowledge evolution of regular investors to keep our money away from Wall Street croupiers and into our pockets!

Very good.

I’ve always believed that there are two things behind everything that gets done on Wall Street and in government. There’s the excuse they give you, then the reason. The excuse for the markets existing is that they provide a way for producers to hedge risk and to acquire working capital. True. This happens. But the real “reason” for the markets is to separate little guys like you and me from our money. The book is dated, but what he has to say is still applicable today.

The book is a must read for anyone who has no ability to see through the Wall Street trap. As the author says the only people who have any chance to make money on a consistent basis on Wall Street are those who know and invest in at least one of the floor traders. I once even heard some inside information, nearly ten years ago from an older woman as we were waiting for a meeting at the Chicago Council on Global Affairs. I was not surprised she acted as if this happens all the time. There are people attending those meetings who own LaSalle Street, Chicago’s Wall Street. They own the land the Board of Trade sits on, of course they may need some ready cash right away.