top of page

Normalize Stock Market

   The intent and purpose of the stock market is to allow investors the ability to purchase stock in order to become a co-owner in a particular business while providing companies extra capital for their business. Stock ownership becomes mutually beneficial of where both sides may profit from the arrangement.

   However, many investors have misplaced or ignored their moral obligations as being co-owners of a business that resulted in the stock market being abused (and corrupted by greed). This behavior is unethical to say the least since ownership in a particular company through stock is legitimate and certain responsibilities and obligations are expected as being a co-owner of the business.
Unethical Behavior (Abuse)
   What constitutes as unethical or abusive behavior in the stock market?
   Day traders buy and sell stock without regard to the ownership of a particular business and as such, have no real interest in being a co-owner of the company. They likewise have no hesitation towards abandoning that business relationship on a moment's notice, and do so for any given reason.

   This conduct of buying/selling as a day trader constitutes as abusive in nature since there was no real intent of being a legitimate owner in the business that is associated with the purchase of stock. Because of this, day trading should be banned and those involved in such activity should be held liable for the unwarranted loss of value of one's shares.

   Another example of abusive behavior is high-speed computer trading since millions of trades are performed in under a second without considering the responsibilities associated with being a co-owner in the business. Sector rotation is another form of abuse since it occurs during a specific time of the year rather than due to being a responsible owner in the business.

   Momentum investing, panic selling, and the annual re-balancing of one's stock portfolio are other examples of abusive behavior since they all disregard the responsibilities of being a co-owner in the business.

   The key to understanding on whether a given practice is abusive or not is ownership. If an investor's behavior is uncharacteristic of being a co-owner in the specific business then such conduct constitutes as being abusive in nature and should be prohibited in the stock market.
Rule of Thumb

   Perhaps, a general rule of thumb for investors to follow when selling stock is if they would "quit their job" for the same reason. In other words, when selling stock, the investor is giving up their stake as a co-owner in the business and is essentially "quitting their job" with the company.

   In practice, investors should ask themselves this rule of thumb to help distinguish the legitimate sale of stock from an abusive one. For example, would you quit your job if your employer's stock dipped below its 200-day moving average? If not then it is not a valid reason to sell stock or you may be held liable for damages by the other shareholders.

   Perhaps, the simplest way to prevent most of the abusive behavior in the stock market would be to impose a 10-year restriction before a stock may be sold from its original purchase date.

   By having this restriction, the frivolous selling of stock that typically occurs within the first year of ownership would be prevented. Day trading, high-speed computer trading, momentum investing, sector rotation, annual re-balancing of portfolios, etc., all occur within the first year of ownership.

   The policy also provides a certain degree of protection against future market crashes since investors will need to consider buy-and-hold strategies in 10-year intervals, which will stabilize the market by a certain degree.

   A sell-off may result every 10 years though this downturn may be curtailed with a corresponding organized withdrawal policy that only permits the selling of 15% of holdings per year after the 10-year period (with hardship withdraws being exempt). That way, investors may sell a portion of their stock for the purposes of collecting profits, but not do so at the expense of causing a market crash every 10 years.
Other Considerations

   As an alternative to the 10-year restriction policy, since mutual funds consist of approximately 90% of the money in the stock market, perhaps a simpler solution is to set the maximum turnover ratio for funds to be less than 5%.

   Limiting the turnover ratio will also determine the maximum drawdown of the market in any given year since mutual funds pretty much dictate its direction. For example, placing a 2% turnover limit on mutual funds may result in the market experiencing a 2% loss for the entire year. Which is pretty stable without further measures in place. Liquidity for investors would be provided by having multiple versions of a given fund (e.g., a larger cash fund vs. a better-performing fund).

   By imposing a turnover ratio rule for mutual funds, we may be able to achieve a stable stock market
without the necessity of employing a 10-year restriction/organized withdrawal policy.
bottom of page