The Wallstreet Game

The Wallstreet game serves as a stumbling block for retail investors, especially for those who are new to investing or unaware of how Wallstreet works.

Wallstreet’s competition and structure has become advantageous to itself and its clients. As an example, a Wallstreet analyst can influence the stock market by simply publicly stating a positive or negative recommendation on any publicly traded company. A hedge fund can short a stock and then write a scathing report on it after-the-fact. In either case, Wallstreet is competing in a game against itself as market makers, firms, and hedge funds all attempt to sway the direction of broader markets impacting mutual funds, ETFs, and individual stocks alike.

These forms of investment practices far too often leave a bad taste in retail investors’ mouths. Nonetheless, they are done every day without consequence from the Securities and Exchange Commission (SEC). While it is wrong for anyone to get inside information and benefit from it as a ‘tip’, it is not wrong for Wallstreet to influence markets while strategically positioning themselves to gain from it.

Many new, inexperienced, and sometimes experienced retail investors become casualties of Wallstreet’s game as most resources relied upon are directly under Wallstreet’s control. A great example is the price-to-earnings ratio, (P/E ratio). Many of these metrics are of no help independently for retail investors, but instead are tied to Wallstreet’s market influencing strategies. If Company A missed earnings per share (EPS) guidance by a penny, the stock price can be severely punished. This is aligned with Wallstreet’s short-term trading strategies.

This short-term focus places pressure on retail investors to succumb to these trading strategies when in fact Company A’s core metrics like revenue and cash flow growth could be performing well, leading to the Wallstreet-driven decline as a buying opportunity. Where a retail investor gets their information is an important part of their ability to succeed, and how they can recognize Wallstreet’s stances as to whether it is concerning or not is key.

Disconnecting from the Wallstreet Game is the first step that retail investors should take to ensure that they can truly focus on investment strategies that will benefit their goals and objectives, and also grow their sophistication and experience.

A fundamental component of this is to develop a clear understanding of how any company’s growth potential should be measured. It’s very similar to how any family household would measure their finances. Essentially recognizing salary (revenue) and discretionary money (cash flow) are the two most important metrics that must be soundly understood. There are many more details like macro-economic trends, peer competitors, management’s abilities, and other variables that need to be recognized. But when it comes to any company’s valuation, it will always be best assessed based on the rate of its revenue growth and cash flow relationship.

There are ample examples, Amazon (AMZN) being one of the most notable, where focusing on Wallstreet’s game did a massive disservice to retail investors, and institutional investors alike.

Breaking away from the Wallstreet Game, including free and paid information that drives its influence is the first and most critical step to unlocking any retail investors performance potential.