The following is a recap of a dream I had a few months ago. I think it might be instructive.
A Martian (let's call him Floyd) lands his spacecraft on the outskirts of Omaha, Nebraska and one of the first thing he does after hiding his ride is to saunter into the nearest Charles Schwab storefront office to gather information about what these pesky earthlings are up to. He has been specifically tasked by the Galactic Authority to find out what this thing called the stock market is, and why so many earthlings seem to be fascinated by it.
Close encounters of the first kind
After waiting patiently for 45 minutes, Floyd is directed to the "broker of the day" Dash Riprock.
Dash: How can I help you today, Floyd?
Floyd: What is the stock market?
Dash: The stock market is a place where people meet to buy and sell stocks.
Floyd: Can you show me this place?
Dash: No, I can't. It's not actually a place, it's in The Cloud.
Floyd: Why do people buy and sell stocks?
Dash: To make money.
Floyd: How does that work, exactly?
Dash: If you buy a stock and it goes up, you can sell it and make a profit.
Floyd: How do you know which stocks are going to go up?
Dash: You hire a broker like me, and my research team tells me which stocks are going to go up.
Floyd: So, you only buy stocks that are going to go up?
Dash: That's right.
Floyd: What happens if a stock goes down?
Dash: We don't buy it. We only buy stocks that go up.
Floyd: I'm confused. If you only buy stocks that go up, who buys the ones that go down?
Dash: The Suckers.
Floyd: Who are the Suckers?
Dash: Those are the people who don't hire us.
Floyd: Why don't they hire you? If you know which stocks are going to go up, shouldn't they hire you?
Dash: They should, but they don't. That's why they're Suckers.
Floyd: I'm so confused.
Dash Riprock to the rescue
Don't be confused, Floyd. Just open an account with me and I will explain how the stock market works. I will answer all your questions, and you will no longer be part of the Sucker crowd. How's that sound?
After filling out the necessary forms, Floyd becomes a client of Charles Schwab and Dash Riprock is his broker.
Floyd: The first question I have is what makes stock prices go up and down?
Dash: That's where our research team comes in. We have the best research team in the world, and they know which stocks will go up and which ones will go down.
Floyd: But how do they know?
Dash: They know because they went to expensive business schools and they know how to use Microsoft Excel. You see, Floyd, it's all in the numbers. Our team has the best numbers of anyone in the business. They put all these great numbers into a spreadsheet and then they crunch them until the cows come home.
After the crunching part is finished, they write up these slick research reports and send them to me and the other brokers at Charles Schwab. Then we call our clients and tell them which stocks to buy. It's that simple.
Floyd: I think I'm starting to get it. But what happens if a stock that you recommend to a client goes down instead of up? What happens then?
Dash: That's an easy one. When one of our analysts recommends a stock that goes down, we fire him. We only keep the ones who pick winners. Very simple. If they don't pick winners, we don't hire them.
Floyd: That sounds good. Will I be able to see this list of only winning stocks and no losing stocks?
Dash: We publish a recommended buy list every month, so all you need to do is pick a few stocks from that list and you're good to go. It's that simple. Any other questions?
Floyd: Yes. What happens if my stocks go down instead of up? Will you give me a refund after you fire the analyst who recommended them?
Dash: That's not how it works, Floyd. If your stocks go down, we send you a letter that says "past performance is no guarantee of future results." You are responsible for 100% of any losses you suffer. We are guaranteed a 1% annual fee that's based on the size of your account. We don't really care whether your account goes up or down because we get paid either way. Sound good?
Floyd: Not really, no. It sounds like you have the game rigged in your favor so that you can't lose.
Dash: Welcome to Wall Street, Floyd.
Next time on the Man From Mars series
Floyd checks in with his handlers and the call doesn't go well.