Yes, People. You Do Have the Power!

Over the past several days, our office has been abuzz about a recent development involving the issue of fairness in the administration of the U.S. securities laws by the federal Securities and Exchange Commission. It seems that a bunch of ordinary retail investors have been able to make some of the larger hedge funds “cry uncle.”

This development reminds me of an earlier article I wrote about an interview that Forbes had with that famous venture capitalist, Fred Wilson, of Union Square Ventures. At that time, Fred Wilson warned that venture capital was on the verge of cutting its own throat by having way too much money to invest with too few qualified deals to invest that money in. The interview was captured in an article by Forbes entitled, “Fred Wilson and the Death of Venture Capital”

Interestingly, during the interview Fred, in making his main point, briefly alluded to the power that the retail investor has, if only they were to choose to exercise it. In a particularly telling portion of the interview, Fred explains,

[T]here is simply too much money. Although $30 billion continues to flow unabated into venture-backed companies annually in the U.S., venture capital as an asset class hasn’t outperformed the market since the early 90’s, when only $10 billion was put to work …

then, in order to convince the interviewer of the magnitude of the problem confronting venture capital, he added:

“If U.S. families devoted just 1% of their assets to investing in startups via crowdfunding, that would unleash a torrent of $300 billion annually. ‘The problems with venture capital now are dwarfed by the potential problems down the line ..”

This new development, where the little guy investor bests the financial Goliaths of the world, is not something that need happen only once, a one-time aberration such as is on display with the Gamestop story, as much as Wall Street would like it to be. It can be done again and again, but only if retail investors, as a class (estimated at more than 50 million households in the United States), “wakes up” from the stupor in which Wall Street has kept them for these past 50 years.

As a side note here, one which is particularly concerning whenever someone is contemplating disturbing any of these complacent financial industry behemoths, is how much they and their “elite establishment” supporters (big name law firms and accounting firms) seek to quell any financial uprisings by enlisting the heavy hand of the law or the government to squash them in their incipiency. “Rules for thee, but not for me” is the hypocritical refrain of this old guard.

All of this points to an investing system which is fundamentally broken. If the little guy, whenever he or she is bold enough or smart enough or wise enough to outwit the large players, is called to task simply by being bold enough, smart enough or wise enough to do so, and they are held to account for their behavior, then there is no equity in that system and it deserves to be abolished.

Let’s see how the regulators and the lawyers react to this latest “crisis” (i.e., from the perspective of the hedge funds and their investors). It will tell you everything you need to know about the fairness of the system and whether you stand a chance as a retail investor in participating in such a system.

Wall Street’s betting on the hedge funds. In spite of everything, let’s hope this time they lose that bet.