Survey Says: This Stock Market Is Rigged

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Do you plan to put any money in the market this year? If so, you're in the minority.

Most people think of Prudential (NYSE: PRU  ) as an insurance company. But like fellow "insurers" AIG (NYSE: AIG  ) and MetLife (NYSE: MET  ) , Prudential also does big business in asset management, selling annuities and other retirement products. Thus, it has an interest in knowing how optimistic people are about the stock market. Prudential recently polled 1,000 Americans to learn whether they had any plans to put money in the market any time soon:

The results don't bode well for any of these asset managers -- or for small investors like you and me, who stand to lose money as our fellow Americans lose confidence in stocks. As you can see in the chart above, investors say they plan to avoid the stock market for at least the next year, by a 3-to-1 margin. Nearly half those polled say they will "never" invest in stocks again.

Does the house always win?
Commenting on the news, brokerage service Schwab (Nasdaq: SCHW  ) warned that the scandals of the past few years have left investors "scarred" and scared. According to one Schwab spokesman, "There's a view that the market is rigged and last year's Flash Crash did not help alleviate those concerns."

I think these fears are overblown, or more accurately, misplaced. The problem with the stock market isn't "the market" itself -- it's how investors go about investing in it. Too many people think of the market as a casino. And as everybody knows, a casino manager always "rigs" the game a little, to build in a guaranteed profit margin for itself. So yes, if you play by the house's rules -- spinning the wheel on momentum stocks, jumping in and out of investments in companies, when you have no idea what they do, or how they're doing, chances are you will lose money on stocks.

A better way to play
So how do you beat the system? You have to view investing in "stocks" as buying part-ownership in a business.

Suppose your buddy Joe comes up to you one day and says: "My dad built this great business, and I've just inherited it. Here's my plan: I want you to give me $10,000 to partner with me. What we'll do is coast on our past success for a while, build crap product for a few decades, and ruin our reputation for quality. At the same time, we'll pay our employees two or three times what my competition pays its workforce -- and then pay half of them to quit. Oh, and I'm going to take out a whole bunch of loans and go deep into debt. So whaddya say? You want in?"

Would you partner up with Joe? No? Yet tens of thousands of Americans bought shares of General Motors (NYSE: GM  ) .

Or say your girlfriend Sally comes to you with this bright idea: "I've got this great idea for investing in turnips. I know this guy who's been buying turnips, and he wants to pay me to cover his losses if the price of turnips ever drops. So here's what I'm thinking: Who doesn't love a nice, juicy turnip? Nobody! Turnips will always go up in price; they'll never lose value. I can insure his turnips for cheap -- heck, I can sell cheap insurance to everybody who buys turnips. And it's all pure profit for me, cause ... what's a better investment than a turnip?"

Another silly business plan, you say? Yet people still invested in AIG without necessarily realizing that this was essentially how its financial products division worked.

Foolish takeaway: Don't be a turnip trader
The moral of this story boils down to three simple points.

First, don't invest in dumb ideas.

Second, once you've found an idea that does sound good, learn to read a cash flow statement. (Here's how.) Confirm for yourself that this good idea is also a money-maker.

Third, if the idea sounds good, and the company is collecting more cash than it spends to stay in business, you might want to buy that stock. If it isn't, don't. While it's true that some good investments go through cash-poor periods, you've got 10,000 stocks to choose from. There's no reason to gamble on a "maybe." And once you realize there are good investments out there, there's no reason to "never" invest.

Fool contributor Rich Smith holds no position in any company mentioned. Click here to see his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Charles Schwab and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (6)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 06, 2011, at 1:45 PM, gib3 wrote:

    As long as Congress and Congressional employees are free to legally trade using insider information the markets are rigged. If the market allows the leaders of the country to play by different rules than regular investors it's an easy trip to believing that all of Wall Street is just one big insider trade.

  • Report this Comment On June 07, 2011, at 11:05 AM, patternjuggler wrote:

    I was taught to find out what everybody else is doing and then do the exact opposite.

  • Report this Comment On June 07, 2011, at 11:42 AM, smartmuffin wrote:

    Whether or not the average person invests doesn't really affect the earnings of the companies or their underlying values. If anything, this would present a good opportunity, as stocks will be undervalued.

    Eventually (who knows how long), confidence will return and when the small investors come back in the market, those who got the good values will be richly rewarded.

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