Michael Lewis, the author of "Flash Boys," went on 60 Minutes to talk about how the stock market is rigged.
Well, I’m sure he’s going to sell a boat load of books over the TV appearance, so it was great marketing for him. However, for the true investor, the stock market isn’t rigged.
Yes, there are high frequency traders. And in the absence of most specialists on the floor of an exchange and with the advent of more electronic trading, some HFTs with algorithms have taken their place.
Now, among HFTs, there are some who have spent millions of dollars to slightly outrun others' orders to give themselves an advantage of a penny per share or less. When you’re trading billions of dollars it’s worth spending that kind of money for a penny per share.
But for the person who manages a small amount of money, it wouldn’t be worth it.
It’s true that some of those guys, while staying within the confines of present regulation, are still not likely making good moral judgments when it comes to their trading. So for now, some are allowed to legally front-run some orders electronically. Do I think that should be changed? Sure!
But does it worry me as an investor? Of course not! Why?
When you buy and sell a stock, there are a couple of costs you have. 1) the spread between the bid and ask price. This is the difference between the price at which you could buy the stock and the price at which you could sell the stock, and 2) commission costs from your broker on the buy and sell trade.
Back when I first started investing, the difference between the buy and sell quote might be anywhere from 10 cents to 25 cents apart for many stocks. These days, the difference between the buy and sell quote might be a penny. So the spread has narrowed significantly for all investors, large and small, which means the costs that I have to overcome to become profitable on an investment is less and I can become profitable quicker on that investment.
Secondly, when I first started working for Charles Schwab back in the late 1990s, the commission was $29.95 to buy and $29.95 to sell. So it cost me about $60 round turn to buy and sell. So this was another cost I had to overcome. (And by the way, they were one of the cheapest in the industry at those commissions at the time).
These days, I pay $9.99 on each side of my trade and generally a spread of 1 cent. So the costs are so negligible that I don’t even think of them very often these days, like I did in the past when the costs were so much larger.
So if my costs have shrunk that much but someone might cause my stock quote to be marked up by maybe a penny, I’m not too worried about it as an investor. Why? Overall, my costs have still shrunk considerably through the years.
Secondly, do you think that if I assess a company’s fundamentals and deem it to be a good investment that I’m going to NOT buy that stock because someone may have gotten that stock for a penny less than what I paid for it?
No, what I do as an investor isn’t gauged in pennies and my investments don’t last seconds or minutes. I’m looking to gain many dollars per share over time (months to even a year or more).
So is the stock market “rigged” against me? No. That’s ludicrous!
If I judge that a stock is fundamentally sound and yet undervalued and I buy it…and then later on assess that the company has now gotten overvalued and I sell it for a profit…do I care if someone made a penny, even on both sides of my trade? No!
Now, if I were a hyper day trader, it would be a different story. But the true, modern-day day trader has much more to worry about than these HFTs. They’re fighting the toughest game out there. Why? Investments need time to go up/appreciate. And time is what these guys don’t give investments.
Also, their costs are significantly higher than mine because they are generating commissionable trades right and left many, many times per day whereas I’m only paying commissions a time or two every 30 days or so. So my costs to overcome (as an investor) are far less than that of the day trader.
So day traders have always fought an uphill battle and they always will. It’s one of the toughest ways to try to make money there is…and yet people want to try it all the time.
But go look on the Forbes 400 list and tell me how many day traders you see on there. Then look on that same list and see who got their wealth from stocks invested over time. I think you’ll find many in the latter scenario and likely none in the former scenario.
You see, almost all of the focus and competition is on the short end of the market. In other words, everyone wants to compete on speed and who can get their order filled in a microsecond, etc. But there’s a reason why Warren Buffett is way over in Omaha without a high-speed line and super computer and yet makes more than them all.
Stick to being an investor and not a hyper trader. Keep your focus on the company you’re buying and its financial health and if it’s at a good, low fundamental valuation. Focusing on other stuff, like HFTs is taking your eye off the ball.
Therefore, don’t lose a wink sleep if you’re a true investor like me or one of my 131,000 Ultimate Wealth Report subscribers. Only be concerned if you’ve been unwise enough to be a hyper day trader. You don’t stand much of a chance with your home Internet connection and your E*TRADE account against HFTs. They’ll eat you up and spit you out.
But if you’re a true investor, you’re not competing with HFTs nor do you care to. And whether you’re successful or not won’t depend upon any action of an HFT, it will depend on whether you picked a good, solid company that was undervalued and then had the patience to hold on while it appreciated in value over time.
So I hope this helped many of you to relax and remember what’s truly important in investing: the fundamental condition of the company and the price at which it was bought.
About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.
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