In a previous article, I wrote the following about the joy of avoiding the competition to generate short term returns, and the opportunity it provides for long term investors:
The guy sitting at home managing his $100,000 IRA should be ecstatic. Without any clients to report to, you can sit back and laugh off the volatility, and continue loading up on beaten-down and unloved names without having to explain your rationale to unhappy clients. If you don’t capitalize upon this opportunity, or even worse, turn it into a headwind, you are passing up on one of the single largest advantages that you have as an individual investor.
Some people continue to think that they can win over time fighting with the traders – and if it was a fair game, maybe they could; these excerpts from an article in The Economist show that’s not the reality of the game:
“The New York Stock Exchange’s parent, NYSE Euronext, this month settled allocations by the Securities and Exchange Commission (SEC) that it had fed market data to certain customers fractionally before sending it to everyone else. Such favoritism breaches a market-fairness rule known as Regulation NMS. The exchange will pay a mere $5m…”
And an equally astounding anecdote from later on in the piece:
In stark contrast, dissemination of a twice-monthly consumer-sentiment index compiled by the University of Michigan is staggered by design. Under of the terms of its contract with Thompson Reuters, its distribution partner, the index is released in three stages: to subscribers of Thompson’s “ultra-low latency” feed two seconds before 9:55am; to the firm’s desktop clients at 9:55am precisely; and to the public at 10am. The more who sign up for the costlier low-latency service, the better for both Thompson and the university. The contract for 2010, seen by The Economist, stated that Thompson was to pay the university an annual fee for co-branding and distribution rights, plus a “contingent fee” equal to 25% of any “qualifying” revenue generated by the service above that level. It is not known if the terms have since changed.
Now that’s what you call a competitive advantage! I’m sure there are plenty of ways that the regulators try to make these subscribers play by the rules, and I would also bet that the incentive for bending the rules to some individuals is well worth the risk (prison time is not a huge deterrent for some people, as the financial industry has repeatedly shown).
If you’re jumping in and out of stocks, this is who you’re competing with – a slew of high-frequency traders, who now account for the majority of all market trades, according to a recent USA Today article. If you read something like this and still conclude that you can be successful over a sustained period of time at day trading, more power to you. I personally prefer Vegas, but I guess it’s cheaper to gamble in the comfort of your own home.
About the author:
I think Charlie Munger has the right idea: "Patience followed by pretty aggressive conduct."
I run a fairly concentrated portfolio, with 2-5 positions accounting for the majority of my equity portfolio. From the perspective of a businessman, I believe this is sufficient diversification.