Tuesday, November 15, 2011
Trading vs. Buy and Hold
Everyone is entitled to their opinion. I am posting this because I am of an almost entirely different opinion than a blog I recently read. I agree with many of the assertions made in that post, yet I came to an entirely opposing conclusion.
The first assertion is the discount brokerage business has changed the way the investing game is played. According to the author, the new lower commissions combined with the excessive amount of opinions on TV, leads people to think they could be the next Goldman Sachs hedge fund manager. Lower fees and more information, they say, is bad because it causes people to trade too much. I have heard a lot of theories, but I have yet to see any research that says the present market volatility is caused by lower brokerage fees! If anything, I would say the volume of trading, on average, has decreased since the Great Recession.
Next they imply that trading does not add capital to the best companies in the stock market, and that long term holds are good, therefore all short term trading is bad!?! Further, they assert we shouldn't even try to beat professional investors with their automated systems and state-of-the-art technology. This suggests we are in competition with the professional money managers, where nothing could be further from the truth. We do not have millions, or billions of dollars to invest. We do not have to be in the market 24/7. We do not even have to be fully invested. We do not need to meet weekly, quarterly, and annual investing targets. We do not need to appease fund holders and shareholders. We do not need to meet any forced redemptions. However, we do want to know what the big guys are doing. Doing so gives us an edge because we can do what they are doing, only faster.
Sources of Income
Also, according to the author, Buy-and-Hold always beats riding the latest trend. The implication is hedge fund managers make their "outrageous returns" from the "suckers" dumb enough to make trades in the market. Personally, I don't know who this person is invested with, but in taking a close look, we can see only a very small handful of professionals manage to outperform the index. These organizations do not make their outrageous returns from their investing ability, they make it from the fees they charge! Have you ever noticed they collect their fees even if you and I lose money? If I say, "Bank", what do you think of? I think of fees and service charges!
Next they assert the efficient market theory has been disproved. I agree. This theory supports the idea that assets cannot be mispriced since enough people always have enough information to accurately determine the correct price. Three things - nice theory, but it is not about what people think, but what they actually DO. Have you ever paid too much for something, knowing that is exactly what you were doing? (Ever just had to buy that present for your child, no matter what the cost?) Second, are we to believe that prices are never manipulated? Third, the "efficiency" of information has never been greater, but that applies to misinformation, as well. If the market is so efficient, then how did so many professionals get taken by Sino Forest? Largely because of that theory, one of the main arguments against trading has been that assets cannot be mispriced, so the odds of buying low and selling high would be zero. The fact the theory has been disproved supports the case for trading, rather than refutes it.
For What It Is Worth
If we want to just Buy-and-Hold this market, then I would purchase a couple of index ETF's. Not I, since I personally, have zero expectation the stock markets will be any higher a decade from now. Think deleveraging, and demographics. If we do want some sort of return, then I believe (based on my years of experience) a good trading strategy - one that uses low commission rates - is the only way to go.
As I said at the beginning, everybody is entitled to their opinion. What's yours?