Ignore the Hype. Brian Perry
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practice. After all, high-frequency trading firms exist to make money for themselves, and their profits come directly from the pockets of other investors. As such, high-frequency traders are the financial market equivalent of toll collectors.
So, what's an individual to do? My advice is to not even try to compete. Investing and trading are inherently different activities. Traders are at risk of losing out, with a share of their profits being sucked away by the high-frequency firms.
Investors, with their longer-term time horizons, should find their holding period returns relatively unaffected by the high-frequency traders exacting their pound of flesh from each and every transaction, which is yet another argument in favor of adopting an investing, as opposed to a trading, approach.
The 24-Hour News Cycle
The Change: Now, I'd like you to remember back to a different time. I'm talking here about ancient times, long, long ago. Someday, people may refer to this as the last, great Dark Age.
It was a time of hopelessness and despair.
A lonely time.
A boring time.
I'm referring of course to the 1980s.
You remember the 1980s (and if you don't, just try to imagine a world where you can't check Facebook every 90 seconds!). That distant decade, which my six-year-old son refers to, as “You know, the 1980s, when really old people were alive.”
Well, the 1980s certainly were a transition point, because that decade represented both the first decade with 24-hour cable news channels focused upon the financial markets, as well as the last decade before the widespread adoption of the Internet. To be fair, the Internet was actually invented in the early 1980s, but its current user-friendly form that we all know as the World Wide Web only came into existence in 1990, and widespread usage really only began in the second half of that decade.
Why does that matter in the context of a finance book? Because, prior to the 1980s, the nonprofessional investor only knew what was going on in the stock market when they looked up stock prices in the Wall Street Journal or similar, specialized publications. And even these relatively well-informed individuals were analyzing market movements with a significant time delay. Less committed investors might only notice the gyrations of the financial markets when they were sufficiently notable to merit front-page coverage in mainstream newspapers.
Then, the 1980s ushered in the era of the 24-hour news cycle on cable TV and dedicated financial news networks. These outlets allowed committed market watchers to track the gyrations of individual securities and the broader market indexes on a more or less real-time basis. The individual, sitting at home, could now access market updates nearly as quickly as a professional sitting in a brokerage office.
The rise of cable news channels in general and financial news channels in particular changed forever the way people consume information. During the newspaper era people received their news via the morning or evening paper, or perhaps from the broadcast network's evening news. The advent of cable news ushered in an era of around-the-clock coverage. As outlets have proliferated, the fight to attract eyeballs has intensified, leading many to resort to increasingly breathless reporting with an eye toward the sensational.
Financial news channels such as CNBC further exacerbated this trend for investors, and individuals who previously might have had no idea what markets were doing on a daily basis were now bombarded with breathless headlines from TVs hanging in restaurants, barber shops, and bars, not to mention their local brokerage firm. Importantly, many of the “expert” reporters telling you when to buy and sell have relatively lean or even nonexistent financial backgrounds. Rather, many of these individuals were chosen for their journalism backgrounds, on-air personality, or looks. There's nothing wrong with that, this is TV journalism after all. But it pays in finance, as in life, to consider the source you're taking information from.
During the TV era, people's information flow was subject to the editorial decisions of the cable news provider. If, for instance, you wanted to track IBM stock but the news outlet wasn't covering or discussing IBM that day, you may still have been left in the dark.
This shortcoming was rectified when the 1980s transitioned into the 1990s and the World Wide Web gradually became ubiquitous. At that point, the cost of producing and disseminating content on the financial markets declined sharply, resulting in a significant increase in the number of information outlets providing real-time updates, news, and analysis on the financial markets and individual securities. Furthermore, individuals then effectively became their own editor, able to find information on nearly any security or investment idea that tickled their fancy.
The Internet exacerbated the movement toward nonstop news coverage, and greatly expanded the number of media outlets that need stories to draw eyeballs. Furthermore, there are lower barriers to entry online than over the airwaves, bringing into further question the journalistic and financial credibility of many outlets. And, particularly in the realm of blogs and online chat rooms, the motivation of commentators is an open question. Though it is illegal to promote false news in an effort to manipulate financial markets or stock prices, it does occur.
Social media has provided the final push in the battle for around-the-clock news, providing consumers with a never-ending bombardment of opinions and news stories. Many people check their social media feeds first thing in the morning and repeatedly throughout the day, providing them with not only important updates on what their best friend from the sixth grade had for lunch that day but also breaking news events and their social network's take on those events. Additionally, we live in an era where you need to filter information flow in order to determine if you are viewing “real” or “fake” news. This can be difficult to do in the financial realm, particularly if you don't have extensive expertise.
The bottom line is that whereas three or four decades ago the average person may not have been aware of market movements until they opened their annual brokerage statement, in today's day and age, notable and even inconsequential news headlines are conveyed almost instantaneously to investors big and small.
The Impact: As with lower transaction costs, the more democratic distribution of information is an inherently good thing. Used properly, instantaneous access to information can improve decision-making. And wider dispersion of information helps prevent pricing abuses that could be present if information was concentrated in the hands of a select few. At the end of the day, any business in which information is tightly guarded lends itself to potentially abusive behavior, and the dispersion of information shifts the balance of power to the consumer (in this case the individual investor).
However, as with lower transaction costs, there are downsides to the more widespread availability of information that we now enjoy. First of all, as the number of information sources has multiplied exponentially, the veracity of some of those sources has declined. As such, not only do you need to decide how to incorporate new information into your investment thesis, but you also need to determine whether the information you are considering is accurate and unbiased.
Furthermore, whereas there was a time when you might not know for days, weeks, or even a year that the market had fallen, you can now access that information more or less immediately. Sometimes you get that information even when you're not looking for it. Heck, the elevators in my building even have scrolling news updates and stock tickers!
Want a vision of hell on earth? Just imagine being on that broken-down elevator when stocks are crashing. Then you can spend a couple hours in a small metal box, watching your net worth plummet while hoping the elevator doesn't emulate the market's collapse!
The bottom line is that, depending on your mentality, instantaneous information updates can cause you to do things that aren't in your best interest. At the most basic level, it's a lot easier to panic and sell during a market crash when you know there's a market crash.
So this information availability, which again is a net positive, also exacerbates those basic human emotions of fear and greed and makes it a lot harder to stay on track toward financial success.