I have been saying for many years now that the stock market is like a casino and that the house has an advantage over the players. I am surprised that after a modest amount of looking that I could not find anyone else saying that the house has an advantage in all markets.
If I am the first to identify this aspect of markets, then I am calling this the Biderman Market Theory. If someone else has beat me to this, let me know and I will humbly apologize. Meanwhile, the Biderman Market Theory says the house in all markets has an advantage over the players, and if that advantage disappears, so would the market.
In a casino, the players give the house their money. The house sets the rules that mathematically guarantee most players will lose and then tells the players to go have fun. In the stock market, the house are the public companies. The public companies have an advantage over the players. They have to know lots more about their own enterprises than investors, no matter how seasoned. In commodities markets, the producers are the house and have a huge advantage over the players. In the foreign exchange market, the house is the central bankers. Obviously the central bankers know more about changes in currency activity than the players.
The efficient market types such as Princeton professor Burt Malkiel says players cannot beat the market. I agree. However, if you follow what the house does, you can have an edge. In each market the house either is buying or selling the underlying asset. Obviously following what they do can give a player an edge over the other players.
How do you follow what the house is doing? All there is in any market is the asset being traded, the stock market that is shares of the stock. Then there is the money available to trade that asset. How to track the flow of cash is also simple, but not necessarily easy. In the US stock market, 80% of all shares are owned by institutions, therefore tracking flows of money in and out of institutions will uncover where the money is going.
Almost all investors firmly believe that today’s stock market valuation is related to the present value of all future earnings. I say nonsense to that. Today’s stock market valuation has to do with the supply and demand of shares of stock and the money to buy those shares. There is no earnings in the stock market, there is no interest rates and there is no valuation model.
All there is, is shares of stock and money. Knowing if the change in trading float and money to buy those shares is lots more important to knowing the overall direction of stocks, then knowing future earnings.
Charles Biderman
President & CEO TrimTabs Investment Research
Portfolio Manager TrimTabs Float Shrink ETF (TTFS)
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Charles Biderman is the Chief Executive Officer of
But if one of the buyers is the company itself and its’ buying power is predicated on earnings to reduce float surely that matters?
Also the dividends that are collectively thrown out that are predicated on those same earnings that draw on the supply of money through the corporate earning power also creates an incentive to recycle capital by reinvestment into those that provide the most?
Of course intermediaries matter those TIAA-creffs and the like for pension fund assets they invest with expectations of pie in the sky rates of return to satisfy effervescently growing obligations that are mathematically impossible to cover.
Of course the flow of funds matters but again we get into a few paradoxes. If you own a business and it is throwing off cashflow/earnings but the market says it is worth zero? do you sell it? The stupidity of limits becomes preposterous if the expectations are for infinite change within finite constraints you begin to get zero as answer and start to believe it.
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Assuming a small investor wants to invest using the logic you present, is buying TTFS the only feasible way?