Since Michael Lewis’ book “Flash Boys” hit the street, the buzz has been loud and raucous. It started with the “60 Minutes” interview featuring Lewis and Brian Katsuyama, who helped parse out the high frequency trading issue. “Trust is a differentiator?” Brian Katsuyama said incredulously during the interview.
The fact that a significant portion of the public has lost faith and trust in Wall Street as an institution is supported by the percentage of people owning stocks vs ten years ago. Not to mention the flood of fines, penalties and investigations surrounding the largest banks and Wall Street institutions, reaching into the billions of dollars.
I cannot count my conversations with people who honestly believe they are smarter than the market—those who believe they can pick the best stocks and even more surprisingly believe they know when to buy and when to sell. While it is intellectually an interesting conversation, in reality it’s mired in complete self-deception.
The belief that sitting at your computer, watching numbers float across the screen provides you with any germane knowledge of whether the investment is a good one is delusional.
In Meir Statman’s book, “What Investors Really Want” he explains that trading stocks is not like hitting a tennis ball against the wall—it’s more like playing against Grand Slam pros. The individual cannot rationally hope to match these professionals with any degree of consistent success over the long run. It’s silly to even imagine—you’d be better off spending your time thinking about how you’re going to spend the Mega Millions from your lottery ticket.
The deck has always been stacked in favor of the professionals (think casinos tossing out card counters). But that doesn’t mean you can’t be a successful investor. Here are a few ideas to level the playing field:
1. Set reasonable expectations: the market is going to give you a certain return each year (positive or negative). History has shown that over time, market returns can be substantial if you are disciplined enough to weather the bad times and stick to a rational plan.
2. Understand your risk tolerance: we know that down years are normal; even recessions are normal. Understanding how much volatility you can absorb is really important. If you cannot stomach the ups and downs, then having a position in stocks may be tough to handle. Over the long run, stocks (as a class of investments) outperform bonds, but everything with the exception of Treasury bills has a degree of risk. If you have a long time horizon, purchasing power or inflation risk should be factored into your equation.
3. Have a plan and set your goals using your desired time horizons. For example, retirement, college planning and buying a home might all be goals, but each one has a different time horizon and investments should be tailored to each need appropriately. Remember, if you are invested in equities, volatility is normal. There is no way to predict if the market will be up, down or flat, so if you have a short term goal, your risk increases dramatically if you are counting on stocks to fund your goal.
4. Focus on YOUR goals, YOUR resources and YOUR values, not on whether HFT or other Wall Street forces are moving the market up, down or sideways. The fact is you cannot control the market and burying your hard earned money in the back yard won’t grow your wealth.
Yes, hearing that some institutions have an advantage is frustrating and maddening. But your anger and angst will not move the dial on your success. Instead, know the game is rigged, play to your strengths and tolerance and make your investments work for you.
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