Opinion: To beat this rigged stock market, stop what you’re doing – MarketWatch 07-16-15

Salient to Investors:

Jeff Reeves of InvestorPlace.com writes:

  • Manipulating the markets with high-frequency trading is extremely complicated, hard to track, and even harder to determine violations of laws or regulations.
  • Half of all trading volume in US equity markets supposedly involves high-frequency trading (HFT), which is now a global concern. HFT represented 39% of the total European stock market according to 2012 data. The destabilizing force of HFT will only increase as the technology evolves.
  • The Congressional Research Service says HFT provides “phantom liquidity”. Michael Lewis says HFT divides the market into predator and prey. Help for small investors is not on the way any time soon. Even when caught, HFT bad actors just pay a relatively small fine and continue.
  • Retail investors are disadvantaged with unfair prices or fees, and are at risk should a HFT robot crash the market. Small markups take a serious toll on small-time investors. E.g. $100,000 invested in the market earning a 7% annual return grows to $543,000 after 25 years, but only $518,000 if incurring only 0.2% annually in extra fees or expenses.

Read the full article at http://www.marketwatch.com/story/to-beat-this-rigged-stock-market-stop-what-youre-doing-2015-06-18?page=1

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‘The market is rigged’ – Michael Lewis – BBC News 04-10-15

Salient to Investors:

Michael Lewis said:

  • Charles Munger says high-frequency trading is the functional equivalent of letting a lot of rats into a granary.
  • Electronic trading has rigged the market against ordinary investors, particularly in America, by allowing high-frequency traders to front run institutional investors and skim billions of dollars from the market.
  • Screwed up behavior is normal, even praised because it increases profits, while new regulation is uncertain because of the revolving door between Wall Street banks and HFTs and the regulators.
  • Perverse incentives means that culture change in financial services is glacial at best.
  • The IEX seeks to eliminate predatory opportunities created by speed and counts its biggest source of orders is from Goldman Sachs.

Rebecca Healey at Tabb Group said many market participants have already adapted trading strategies to deal with HFT constructively and automation delivers choice and fosters lower commissions for investors.

High-frequency trading accounts for 30% of business on the UK equity market.

Read the full article at http://www.bbc.com/news/business-32246655

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Dark Pools Here to Stay, Says Broker Conflict Researcher – Bloomberg 06-29-14

Salient to Investors:

Robert Battalio at Notre Dame said:

  • Dark pools have existed forever: shut them down and new forms will arise elsewhere because money managers are too fond of them.
  • Order flow will always have multiple venues to execute on because one size does not fit all.
  • Brokers favor their own needs over customers’, often sending stock orders to exchanges that pay the most.

Dark pools et al account for almost 40 percent of US equity volume.

BlackRock said dark pools are an invaluable execution tool for large orders and stocks that may be more difficult to trade because of wide spreads or low liquidity.

Niamh Alexander at Keefe, Bruyette & Woods said clients have become much more cautious and careful about where their order flow is going.

Read the full article at http://www.bloomberg.com/news/2014-06-30/dark-pools-here-to-stay-says-broker-conflict-researcher.html

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Six Investment Errors You Are Making Right Now – Bloomberg 12-13-13

Salient to Investors:

Barry Ritholtz cites his trading mistakes early in his career:

  • Optimism Bias. After the costs incurred, expenses, taxes paid, time and labor invested, most of the time, it is not worth the effort to beat the market. Most traders won’t go on to become Paul Tudor Jones or Jim Simons.
  • Confirmation Bias. When we are long, we tend to read bullish research and commentary. When we are in cash or short, we seek out bearish writings. Smart Money seeks out research and commentary that challenges its existing beliefs.
  • Recency Effect. People tend to focus on what just occurred, often to the detriment of the bigger picture or the longer-term trend. Post-Crash Stress Disorder is why many investors have been carrying so much cash during a 150 percent rally – they are waiting for the next crash, having missed the last one.
  • Politicians of either side get their perceptions and predictions wrong, so ignore them.
  • Cherished Myths unsupported by evidence. For example the Death Cross, Sell in May, Buying single-digit P/E stocks.
  • Blind Faith. Research anything you read, and study the long-term track record, the methodology involved, and the overall approach.  The National Retail Federation Black Friday survey is nonsense and has been wildly wrong for the 10th consecutive year.

Read the full article at http://www.bloomberg.com/news/2013-12-13/six-investment-errors-you-are-making-right-now.html

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Top Investor Myths – E*Trade

Salient to Investors:

Top investing myths:

  1. Buy and hold forever. Better to buy and protect as companies and economies change. Have an exit plan to guard against catastrophic loss.
  2. Only performance matters. Let you investment objectives guide your investment selection and diversity.
  3. Charts are for traders. Charts are important tools and help manage risk. Use both technical and fundamental analysis.
  4. Buy the bottom. You cannot predict the bottom. Rule #1 in trading is not to win big but to make sure you don’t lose big.

Watch the video at https://us.etrade.com/ctnt/investor-education-center/ArticlePage?aid=a95f3219-ea14-48ca-8cb7-193ac59ef8b8&&ch_id=D&s_id=OUTB&&c_id=EDUVID

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Sudden Stock Crashes Mostly Show Human Error, SEC’s Berman Says – Bloomberg 06-18-13

Salient to Investors:

Gregg Berman at the SEC’s Office of Analytics and Research said most mini-flash stock crashes are not the result of broken software but human errors like entering the wrong number of shares or some other typographical error, or incorrectly entering limit orders – these errors can be fixed by better risk management and oversight.

Sal Arnuk at Themis Trading said while crashes may be started by humans, the current market structure is set up to extract the most amount of pain from any mistake and more likely to snowball rapidly.

Credit Suisse on Jan. 17 found that few sudden swings are directly attributable to computer errors – between June 2010 through December 2012, 85 percent were caused by news, 9 percent by human error, and only 6 percent by a bad print – when a quote at an extreme price caused a halt, indicating a computer algorithm was responsible.

Read the full article at http://www.bloomberg.com/news/2013-06-18/sudden-stock-crashes-mostly-show-human-error-sec-s-berman-says.html

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Hedge Fund Market Wizards: How Winning Traders Win – Jack Schwager 05-29-12

Salient to Investors:

Jack Schwager writes:

As long as no one cares about it, there is no trend.

All markets look liquid during the bubble but illiquidity after the bubble ends matters more.

Markets tend to overdiscount the uncertainty related to identified risks and underdiscount risks not yet identified.

Low-quality names outperform early in the cycle, and high-quality names outperform late in the cycle.

Entry size is often more important than entry price because the larger the position, the greater the danger that trading decisions will be driven by fear rather than by judgment and experience.

When you hit a losing streak, you can’t turn the situation around by trying harder. Better liquidate positions and regain objectivity.

Watching every tick often leads to selling good positions prematurely and overtrading.

In strong uptrends, bad news counts for nothing. But a break in the trend reminds people of losing money in equities, and people start looking at the fundamentals.

Never buy low-beta stocks. If the market falls 40 percent for macro reasons, they will drop 20 percent and if the market goes up 50 percent, they will go up only 10 percent.

An extremely oversold stock is usually an acute phenomenon that lasts for only a few weeks, whereas stocks can remain overbought for a very long time.

If you are in a trade you don’t understand, you will only sell when the price action scares you. Most of the time price action scares you, it is a buying opportunity, not a selling indicator.

Let winners run and cut losers.

There is no high for a concept stock. It is always better to be long before they have already moved a lot than to try to guess where to go short.

In a bull market, prices open lower and then rise for the rest of the day. In a bear market, they open higher and go down for the rest of the day. At the end of a bull market, prices start opening up higher. In the first half hour, only the fools or people who are very smart trade.

Stocks suddenly no longer dropping on bad news is a positive sign.

To avoid value traps, stay away from companies that can’t grow their cash flow and increase intrinsic value.

Buffett says that time is the enemy of the poor business and the friend of the great business.

Over the short term, perhaps as long as 2 or 3 years, value investing may not always work. The fact that value investing sometimes doesn’t work over short periods,  is why it continues to work over the long term.

Institutionalization of the market has reduced the window of time managers have to outperform. They can’t wait 2 years for an investment to work because their institutional and individual clients won’t wait.

The best-performing mutual fund for the decade the market was flat was 18 percent a year, on average, yet the average investor in that fund lost 8 percent because every time the fund did well, investors piled in, and every time it underperformed, investors redeemed.

Buy the book at  http://www.amazon.com/Hedge-Fund-Market-Wizards-Winning/dp/1118273044/ref=sr_1_3?ie=UTF8&qid=1374162364&sr=8-3&keywords=jack+schwager

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Tudor’s Jones Apologizes for Remarks on Female Traders – Bloomberg 05-24-13

Salient to Investors:

Paul Tudor Jones at Tudor Investment apologized for saying that women cannot compete with men as macro traders after having children, that you will never see as many great women investors or traders as men, and women often turn their focus to raising children at a crucial time of life for learning about markets and trading. Jones said his comments were with regard to global macro traders, who are on-call 24/7, and life events, such as birth, divorce, death of a loved one and other emotional highs and lows are obstacles to success in this specific field of finance.

Rothstein Kass said the Women in Alternatives Hedge Index returned 9 percent in 2012 through September versus a 2.7 percent gain for the HFRX Global Hedge Fund Index.

Read the full article at http://www.bloomberg.com/news/2013-05-24/tudor-s-jones-apologizes-for-remarks-on-female-traders.html

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The Most Misleading Words In Investing: You Can’t Go Broke Taking A Profit – Seeking Alpha 05-17-13

Salient to Investors:

Tim McAleenan Jr. writes:

The Pareto Principle, also called the 80/20 Rule, states that 80% of the results come from 20% of the actors. Melanie Pinola at Lifehacker says 90% of Warren Buffett’s success at Berkshire Hathaway can be attributed to less than a dozen decisions.

This is one reason why it can be hazardous to follow the mindless rule “you can never go broke taking a profit”. You only have to have one successful investment “to make” it. Let your winners run.

The average Social Security check in this country is $1,200 per month. $10,000 in Altria (then Philip Morris) in 1990 would be averaging $1,568 in dividends per month today,  McDonald’s has grown its earnings by 12.5% and dividends by 26.5% this decade

All it takes is one Altria or McDonald’s in your portfolio for the long-term to make your investing career a success.

Read the full article at http://seekingalpha.com/article/1444861-the-most-misleading-words-in-investing-you-can-t-go-broke-taking-a-profit

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Hedge Funds Rush Into Debt Trading With $108 Billion – Bloomberg 05-07-13

Salient to Investors:

Hedge funds using debt-trading strategies are expanding at a record pace as they profit from risks big banks are no longer taking.

Roy Smith at NYU said regulators in the US and Europe want to transfer risk to the shadow-banking system and interferes capabilities of the large banks to function as market makers and arbitrage providers.  Smith said that if these hedge-funds fail, the real question is to what degree will the market suffer.

Credit hedge funds are minnows compared with Wall Street’s largest lenders.

Debt-focused hedge funds attracted $41.4 billion from pension plans, wealthy individuals and other investors in 2012, the most since 2007, and versus a combined $57.4 billion of net inflows in 2010 and 2011.

Warren Buffett and Gary Cohn are Goldman Sachs are predicting losses for fixed-income investors when interest rates rise.

Jason Rosiak at Pacific Asset Mgmt said there’s a continuous brain drain on Wall Street and hedge funds are playing in asset classes they previously hadn’t played.

Stefan Krause at Deutsche Bank said hedge funds will benefit the most post-crisis from the coming asset appreciation.

Constance Melrose at eFinancialCareers.com said average investment-banking salaries fell 14 percent in 2012 versus a 3 percent decline in salaries at alternative-asset managers, and business strategies are moving out of the banks and into the hedge funds.

Aetos Capital said fixed-income arbitrage strategies are benefiting from a relative lack of competition from large banks.

Fed Governor Daniel K. Tarullo said the move of fixed-income trading strategies to hedge funds could be pose a risk to the financial system.

Anne Casscells at Aetos Capital says  fixed-income arbitrage usually gets hurt during a big crisis such as LCTM in 1998 or the recession of 2008, and has very good returns afterwards – the difference now from 1998 is that banks are under regulatory pressure not to return to proprietary trading or even positioning.

Boston Consulting says the average ROE at Wall Street firms fell to 10 to 13 percent in 2012 from 15 to 20 percent before 2008.

Economists expect the global economy to grow 2.28 percent in 2013 versus the 2.32 percent annual average since 2005.

Read the full article at http://www.bloomberg.com/news/2013-05-07/hedge-funds-rush-to-debt-trading-where-wall-street-tread.html

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