I am responsible for closing down the stock market 40 years ago! 

Here’s exactly how I did it:

When I was senior in high school we had a visiting Assistant Professor of Economics (I think he was from Northern Illinois University) teach a class.  During that class he wanted to show us how the stock market worked. 

He gave each one of us a fixed amount of play money and told us the rules:  When you buy a stock the price of that stock goes up.  When you sell a stock the price of that stock goes down.

He set up about 15 “stocks” — which were names he wrote on the blackboard — all at the same share price.  As my fellow students bought and sold these stocks the prices went up and down accordingly.

I didn’t jump right in — instead I watched for a couple of minutes and realized something:

You could force the price of a stock upward with a minimum purchase of one share.

So I began to force the price up by buying one share at a time.  As I began to do that other students seeing the stock go up also began to buy — but they didn’t buy just one share they bought several shares at a time.  Finally, I used up all of my play money with my one share at a time gambit and then sold all of my stocks at once…

The teacher was watching what I was doing and called a halt to the trading — he shut down the market.

I ended up with the most play money in my account. 

The teacher was upset that I took advantage of the system for my own gain… and made a point of chastising me for it in front of the class.

I remember thinking to myself: 

Wasn’t the purpose of the exercise to show us how to make money in the stock market?  Was it fair that I was singled out for understanding how the system worked and using it to my advantage? 

After all, he didn’t set up “trading rules” which would have prevented the artificial ramping up of the stock value. A simple technique I just happened to recognize early on –  that it took a very small amount of money relative to the overall size of the market — to force the price of the stock up or down.   I cashed out when the stock I was manipulating was near the top of its value — the point was to make money, right? 

That was forty years ago.

I’m  amazed that the manipulation I was able to accomplish as a teenager in a classroom is still possible in the real world forty years later. 

The fact that the stock market can gyrate up and down almost 1,000 points or more –  in a single day –  means the “irrational emotional element”  — which is part of the herd instinct –  has no checks and balances in the current system — not to mention the flat-out manipulation of share price — that always assures some will win but most will lose. 

Let’s face it:

What’s irrational is taking a company that might be worth 5 billion dollars —  if it was put up for sale — based on its’ assets and revenue — but having its stock valued at 25 billion dollars!  A valuation which is based upon an assumption of “faith”  that people will continue to purchase that piece of paper — a share of stock — for a price that has no valid connection to the true value of the company… Other than some arbitrary emotional belief that somebody’s going to pay that amount for the stock.

Here’s the fatal flaw…

If three or four percent of the total stock issued for a company is sold in a single day it can have a catastrophic effect on the share price.  It doesn’t simply go down three or four percent in value — You see in a perfect world there should always be enough people willing to buy the shares on a given day to offset any sales of that share.  One share is sold and one share is purchased — maintaining a sort of balance.

But you have a system now where it’s possible — if you understand how — to make money when the market goes up or when it goes down.

The share price of a stock can drop or explode in a single day based upon the well publicized opinion of one individual or organization — Something that shouldn’t happen.

It’s also time to eliminate altogether or rigidly regulate anyone’s ability to “profit” when the market goes down.  Common sense tells you that there shouldn’t be an incentive to collapse the wealth of many to line the pockets of a few.

The potential for real stability will now only come when the “exuberance”  is sifted out of the market and share price more accurately reflects  the true value and performance of the corporation.  

Unfortunately, it means lot of people will have been better off going to Las Vegas and gambling their retirement nest egg away. Most Casino’s will “comp” you a free meal and drinks if you loose everything — something you won’t get from those who managed  your 401K — into oblivion.   

-Bob Baran