• Stock markets are not pension funds
  • The stock market’s corruption creates opportunities
  • Taking charge of your own money is the most important step

Now that you know how the rich are abusing the stock market to their advantage, and what it means for our economy, it’s time to figure out what we can do about it.

But first, I’d like to add one last way in which stock markets have been undermined…

The idea that stock markets are suitable savings vehicles is dangerously unhinged. And yet, that’s precisely how we treat them. Most people in the economy give as much thought to who they bank with as they do to which stocks they hold. They barely notice it and very rarely make a change.

I couldn’t find a poll on how many people know which stocks their pension fund actually invests in. But, given this statistic from a Hargreaves Lansdown survey, it can’t be many: “Two in three people don’t know their pension is invested in the stock market.” If only a third know they’re invested in stocks at all, how many of those know which stocks?

Many of us forget about past pension pots from past jobs. That implicitly reveals how much attention people pay to what their fund manager is up to with their money.

And yet, we plough a huge portion of our paycheque into opaque funds. They allocate our money without so much as a “by your leave”. And we rely on that capital later in life. It’s an extraordinary disconnect.

But let’s presume that our betters know better and we should leave them to it. Even after establishing what’s really going on with your pension pot, and what it means for the economy.

There’s a bigger problem to worry about, even for those who choose to stick their head in the sand.

Stock markets are not savings vehicles

Stocks weren’t supposed to be the sure bet they are presented as these days. They weren’t supposed to “go up in the long run,” nor be a place to store your capital. We’ve turned them into that function. Which has undermined their true purposes. And it will eventually lead to disappointment.

It’s a bit like building a house on poor foundations. Only it’s our retirements that are built on the stock market – a notorious place for losing money, not to mention other questionable machinations.

It all reminds me of the plot of Ocean’s Thirteen. A crew of casino robbers stage an earthquake as part of their heist. Only it triggers the real thing. I suspect that disconcerting moment is coming for the vast industry which has been built around opt-out pensions. More on that in a moment.

Because stocks are now a place to “save” money and forget about, rather than invest it scrupulously, stock markets don’t do their job anymore. They are no longer a dynamic capital allocation and fundraising mechanism.

These days, we care about stock market prices, not the crucial role the stock market plays in our economy. And those stock market prices are not reflecting the same information.

Have you noticed how stocks care more about government and central bank policy responses than actual economic data? That’s because, since stock markets were turned into savings vehicles, the authorities are required to keep them inflated.

A stock market crash is now a crisis for the whole society and economy, not a few speculators who falsely relied on irrational exuberance. This is a dangerous state of affairs.

Stock markets now rise not on the fortunes of the companies within them, but on fund flows. If a certain percent of each paycheque in the country is ploughed into stocks indiscriminately every fortnight, that becomes more important than the finance and valuation metrics which Benjamin Graham put together and Warren Buffett made so famous. Stocks go up in packs, not up and down on the performance of individual companies.

When it comes to share prices, the capital allocation decisions of fund managers matter more than the capital allocation decisions of the companies they invest in. And, if fund managers decide they have higher priorities than returns, strange things can begin to happen.

But what if stocks only go up in the long run while they are left to their own devices, instead of being shoehorned into a savings vehicle?

What if stocks only go up if badly run companies are allowed to fail?

What if the stock market can only boom if it is allowed to crash?

What if capitalism relies on Creative Destruction, as the economist Joseph Schumpeter described it?

What if stocks only rise if shareholders stick to Milton Friedman’s dictum that companies should seek to maximise shareholder value, not engage in social engineering?

What if turning the stock market into a pension pot will cause it to underperform?

That is the warning you should be hearing after reading this three-day series on the corruption of the stock market.

There is only one possible reason to try and convert the stock market into a savings vehicle

Fees. That’s what this is really all about.

Imagine an industry that your paycheque is automatically opted into paying to. It takes a chunk of your money and then charges you fees for it each year. Fees on the balance of funds.

The very audacity of it is breathtaking.

But if your head is in the sand, you are ripe for the… taking.

How to invest in a perverted stock market

Now that you’re aware of the strange world the stock market has become, we need to consider whether you should still invest in it.

The answer is unambiguously yes, if you do so bearing its corruption in mind. Indeed, you should optimise your investment strategies to take advantage of the idiosyncrasies that perverting the stock market has created.

Indiscriminate investing, as I call passive investing, creates opportunities. In fact, every finance fad does.

My old friend Eoin Treacy has by far the best way of profiting from it. He calculates precisely when funds and therefore stock markets are about to get hit by a flood of automated pension funding salary payments. And then trades the corresponding uptick in prices. But I can’t reveal more here.

You can also identify which companies are signalling they’re at risk of a disastrously misguided advertising campaign. Any virtue signalling that puts a brand at odds with its customer base is in for a hard time.

Transgender campaigns and beer just don’t suit each other. Parents don’t want their daughters to compete against biological males in the pool and won’t purchase swimwear from a brand that doesn’t understand this. I’m sure the list goes on, but does it need to here?

Of course there are brands that understand all this and know what makes their customers tick. These firms are likely to benefit from their competitors’ mistakes. Some energy conglomerates tried to go green by selling out of their coal businesses. Others pointedly did not. 2023’s stock market returns divided the two.

Another option is to invest in the stocks that are breaking the mould. Some good companies do still list on exchanges in order to finance expansion and growth, not just to reward their founders. They use the stock market for its true purpose.

Others know how to play the stock market’s games. You can look for several signs of this. They might seek to use their strong share price to fund the acquisition of companies with weak share prices, for example. The idea is to use their superior management abilities to improve the performance of a badly run business.

Conversely, companies that raise money when their share price is very weak tend to expose themselves as being run by poor management teams.

Southbank Investment Research’s very purpose

It’s worth noting that the company that publishes Fortune & Freedom is designed to help you achieve good returns from your investments despite everything that’s wrong with financial markets.

We publish a variety of newsletters that help readers make money in many of the ways just mentioned. And others that analyse just how bizarre the financial system really is.

But what all of these share is their presumption that you are willing to take control of your own finances in the first place. It’s all very well and good to understand and get annoyed about what’s happening to the institutions that made Britain prosperous.

But, as we looked into yesterday, how many people own stocks in the very companies they claim to hate without realising it? That’s the bizarre world the arm-length pension system has created.

If people took more control over their own finances and expressed their beliefs about the economy and financial system in this way, it wouldn’t be in the questionable state it is in today.

So, for the sake of the country, whether you read our newsletters or not, we hope this three-day series on the corruption of the stock market serves as the wakeup call you need to take more control over your own investment decisions.

Who knows what you might find lurking in your pension fund, if you take a look?

Let me know what you discover: [email protected].

Until next time,

Nick Hubble
Editor, Fortune & Freedom