(This column originally appeared in The Guardian)
A lot of people think investing in the stock market is rigged in favor of the big investors, the large financial firms and the people in the know. Small-fry individual investors have as much chance of success on Wall Street as they do at the Bellagio. Donald Trump’s recent windfall isn’t going to win any converts.
Trump merged his unprofitable and tiny Truth Social platform, which has reportedly lost tens of millions of dollars, into a shell company that was previously created and already had a value of billions. The shell company is called a Spac, which is an entity created to take a private business public without conducting an initial public offering (and therefore avoiding much of the regulatory scrutiny).
How did a shell company, which manufactured nothing and produced no services, rise to such a value? Because the price of its shares was bid up by Trump’s supporters through message boards and other social media platforms in a similar fashion to the share price run-up of meme stocks like GameStop and AMC Entertainment.
When Trump traded in Truth Social’s shares for shares of the shell company a value had to be placed on those shares and what other means could be used other than the Spac’s inflated, fake market price? None. So now Trump is the majority owner of a company that’s worth billions but runs a not very popular social media site.
“In the short term, if a lot of people say, ‘I don’t really care what it’s worth, I’m just gonna keep buying it, and I’m gonna keep propping it up,’ you can do that for a reasonable period of time,” Harry Kraemer, a professor specializing mergers and acquisitions at Northwestern University’s Kellogg School of Management told CBS News. “That almost defies economic logic, but there we are.”
There’s nothing illegal about this. People are allowed to buy and sell shares. A lot of individuals are making paper profits. But, like other meme stocks, the price of Trump’s company is likely to be volatile and could collapse and investors could take a beating. There are no guarantees. And it will be the individuals who pay the price. My bet is that by then, Trump and his large money backers will have taken what they need.
It’s kind of impressive in an ugly sort of way. But then again what else would you expect from a New York real estate tycoon dealing with New York financiers from New York’s Wall Street? Can’t you just see them all toasting each other at their Greenwich country clubs and laughing at how they reaped enormous fees by creating billions in value out of thin air? And all to scratch the back of a man who will surely scratch theirs once he’s re-elected?
Of course, this is all fake. But there you go. Trump isn’t doing anything particularly new here. The rich will always figure out some way to pull off these dubious transactions to make themselves richer while the rest of us are grateful for the 4% earned on our money market accounts.
What I’ve learned is that individual investors who are outside of the system or not in the know don’t have a chance. Sure, there are always a few outliers who get lucky and inspire Hollywood movies about them. But for the rest of us, our best bet is to pay the fees and let the fund managers play the game for us. These are the people that are in the know. They’re having lunch together right now. They’ll be playing squash with each other at the Harvard Club this evening.
Taking this approach certainly doesn’t guarantee your returns. But it does protect you much more than attempting to play this game on your own. That’s the real truth in all this.
