What Does it Cost to Win in the Market Today?

In recent months retail investors have learned that the cost of winning is higher than it has ever been. The battle between hedge funds and retail investors has taken a toll on both sides costing billions and leaving many exhausted. By the end of the week each group was left distraught.

The fervor around GameStop offers many lessons. The most important of these lessons is this: things are not what they seem. Savvy investors who discovered this once undervalued stock have learned that there are far more forces at work in the market than previously realized. That is, the hedge funds have more weapons in their arsenal and more allies by their side than ever before. As a result, the latest chapter of the GameStop saga has the retail investors on unsure footing and the hedge funds battling catastrophic losses.  

This story underscores the fact that the equities market is more complex than many ordinary investors realize. Fundamentals, once the key criteria for successful stock selection, have fallen out of favor as more investors seek momentum plays or opportunities to ride a wave of broad based investor optimism. Investing is a game that has only become more complex as the cast of characters grows to include social media, pundits, mainstream media, short sellers, and opportunistic hedge funds.

This tangle might explain why seasoned investors so often seek the relative stability of precious metals. Gold and silver offer a grounding force in a portfolio because they are often free from the kind of manipulation seen in equities and bonds.

Consider the example of counterparty risk. This is the risk that a person involved in a transaction may fail to deliver on their end of the agreement. Counterparty risk becomes a problem for bond investors when an issuer defaults and is unable to meet their obligations. Equity investors can also suffer from counterparty risk when the managers of the company fail to act in the best interest of the investors.

Gold is free from counterparty risk because it is an asset that does not require a group of people or board of directors to satisfy debt payments or to generate profits. The threat of counterparty risk to investors seems to be escalating today because managers of public companies face the distractions of dealing with competing groups of investors seeking ways to force share prices down or drive share prices up.

All of these new voices have become a roaring crowd that makes it more difficult for investors to single out the information needed to make a smart long-term decision. In contrast the value of precious metals are not tied to the ethos of a flashy CEO. They are not tied to the esoteric and sometimes underhanded strategies of monolithic hedge funds. As a universal asset recognized throughout the globe gold and silver have a value that is measured and understood by all nations rather than the whims of a marketplace characterized by a battle between retail investors and professional traders.

Simple solutions are best.   

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