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Unfortunately, Wall Street is a place where a quick buck is often more highly valued than enduring long-term gains. And in the current liquidity driven market mania, these trends are becoming even more pronounced.
But even I, a 30-year market veteran, was astounded when I read that quantitative algorithmic trading (what you may know as “high-frequency trading,” or large, rapid-fire transactions done primarily by hedge funds) accounts for 60 percent of the current daily trading volume, with the average trade lasting just 11 seconds.
I knew there was a lot of computer-driven high-frequency trading going on out there. But 60 percent, really?
Even-more-shocking was the 11-second trade duration. Wall Street is known for having a quick trigger finger, but I found these figures hard to believe.
So I placed some calls to a couple of Wall Street’s most-experienced and longest-tenured investors. And to make sure I had all my bases covered, I also called a few of the new whiz-kid hedge-fund hotshots.
And sure enough, while no one could confirm the precise numbers, they all reported that 60 percent and 11 seconds seemed about right to them. Each time, I hung up the phone saying, “Wow, 60 percent and 11 seconds, really!”
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| The average high-frequency trade done by supercomputers lasts just 11 seconds. |
I know a lot of these short-term speculators. They come armed with their advanced degrees in quantitative mathematics, physics and computer science from some of the best universities around the world.
They are highly trained in multi-variable calculus and abstract math. They have the most-current financial information beamed to them instantaneously, and they possess the most-advanced computer technology available on the planet to act on it.
They work for places like Goldman Sachs, JPMorgan and Deutsche Bank. They are the modern-day version of America’s gunslinger from the Wild West era, just looking for a shoot-out on Main Street or at the local corral.
Trying to beat these fast-money traders at their game is a fool’s errand. You might get lucky once or twice. But, sooner or later, you will meet your demise because their information and technology advantages are too big. Simply put … you are out-gunned.
So how do you beat these highly skilled mercenaries and make a profit in the markets?
The key is to understand that these gunslingers’ strengths are also their weakness. Their short-term, myopic obsession creates market moves that are extreme.
In the financial markets, this is called volatility, and volatility creates opportunity for experienced investors to use it as a tool to selectively accumulate stocks and bonds when they are cheap and, if necessary, sell them when they are expensive.
Legend has it that Albert Einstein once said compounded savings was the greatest invention in human history. Regardless of whether Einstein actually made that observation, investment compounding (making money on money) is indeed powerful.
In fact, Charlie Munger, Warren Buffett’s longtime investment partner, has said on numerous occasions, “Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.”
In previous Money and Markets columns, I have discussed the importance of having a superior investment model and focusing on dividends as an important component of total return. As examples of both, I have often recommended the WisdomTree MidCap Dividend ETF (DON) for long-term investors looking to add a quality investment to their portfolios that will deliver compound returns over the long run.
In June, the high-frequency traders provided that opportunity when they pushed the markets down too far, too fast on the news that Federal Reserve Chairman Ben Bernanke would consider tapering its $85 billion per month bond buying program.
Opportunistic investors who used DON’s June 24 low as a buying opportunity have been rewarded with DON far out-pacing the S&P 500 since then. For the period beginning on June 24 through Monday August 5, DON has delivered a total return of approximately 11.5 percent compared to the S&P 500 which has returned just 8.7 percent.
Closing Thoughts
As an everyday investor, the day-to-day fluctuations that drive markets to the extreme can make you dizzy, especially in these uniquely-unusual times.
But keep in mind; many institutional investors have supercomputers doing all their heavy lifting. That’s why it’s hard to keep up when matched against the Wall Street pros who can move more quickly and have more capital in reserve than most of us on Main Street.
But there is a way for you to earn big profits too and turn Wall Street’s short-term hyperactivity into an advantage for you. If you’re patient and selective while using compounded savings to grow your nest egg, you can build enduring gains.
Don’t get distracted by all the short-term trading hype the popular media reports every day. That way, you can steer clear of the shootouts on Main Street when it comes to protecting your nest egg and, best of all, growing it.
Best wishes,
Bill
Bill Hall is the editor of the Safe Money Report. He is a Certified Public Accountant (CPA), Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP). Besides his editorial duties with Weiss Research, Bill is the managing director of Plimsoll Mark Capital, a firm that provides financial, tax and investment advice to wealthy families all over the world.