G'day, Fools!
Imagine this scene:
Dave: "Open the pod bay doors, HAL"
HAL: "I'm sorry, Dave. I'm afraid I can't do that. I'm busy placing high speed trades on the ASX"
If the 1968 movie classic 2001: A Space Odyssey was being written today, that might just be the way the screenplay would be written… at least if the explosive claims in a new book are true. The market is rigged in favour of the computers, if claims in a new book are to be believed. Going by the names high-speed, high-frequency or algorithmic trading, supercomputers are taking advantage of extraordinarily fast internet connections to take advantage of small inefficiencies in the market.
If it sounds a little fanciful, I don't blame you. But get this: high frequency trading now makes up over half of all trades placed on the New York Stock Exchange… and you can be sure there are plenty of Australians hoping to replicate that situation here…
The author of the book, Flash Boys, isn't some previously unknown panic merchant, but award winning journalist Michael Lewis, who wrote Moneyball and The Big Short. These traders are the ultimate retailers – making tiny margins on extraordinary volumes, which add up to many, many millions of dollars in profit.
Indeed, Australian super funds estimate it might be costing Australian investors up to $2 billion, according to a recent Fairfax report, which noted a concern that: "… high frequency traders can see another trader's buy orders and then buy the shares themselves, forcing up the price for the other investor and then quickly selling and pocketing the profit." So much for individual investors getting a fair go!
While there is a view that the ASX's 'simpler' market structure makes HFT less of a problem and therefore less profitable here in Australia, you have to wonder why it's allowed at all. Over to you, ASIC! Can you imagine competition regulators allowing systemic advantages by one section of the market at the expense of another? Hardly… that's exactly what the phrase 'abuse of market power' was coined to describe… and it's illegal.
While not a competition issue, per se, there's precious little reason for supercomputers to be allowed preferential access to the market, compared to what you and I can achieve! It might seem archaic – almost naïve, even – in this day and age, but the sharemarket is supposed to be a market for the exchange of capital to fund the innovation and growth of our economy. The prevalence of day traders, technical analysts and now high-frequency traders makes it very hard to escape the view that the ASX can be described as gambling for respectable men in suits, and nerds with computers. Who needs the pokies?
The market is unfairly tilted in favour of those with the biggest computers. It's patently unfair and it MUST be changed!
But…. Don't lose hope, Fools!
Some people might have an unfair advantage by dint of processing power and hyper-fast data, but individual investors – Foolish investors at that – have a completely fair but under appreciated advantage… It's an advantage that is right in front of every investor on the planet, but very few take it up. You need no software, and there's no algebra in sight. No charts, no caffeine-powered day trading or speculation on foreign exchange. It's a tried and tested model that we call, simply, Investing Foolishly. Yes, with a capital 'F'! We don't package it in an expensive software package, or sell the secret for thousands of dollars. We're going to give it away, here, for free.
It has two simple parts:
1. We focus on businesses
Yes, really. It's less common that you'd imagine. We don't talk about three-letter ASX codes, we don't use charts to help us find 'double tops with pike' (I think that's an ice cream) and we don't try to guess what the share price might be by the end of the month.
2. We invest for the long term
We all know the story. A company misses analysts' half-year earnings estimate by a few cents per share and the shares tank. Or the share price declines over days or weeks and investors rush for the exits. It's as if the long term future of BHP Billiton (ASX: BHP), Wesfarmers (ASX: WES) or Cochlear (ASX: COH) have been irreparably harmed (or irrefutably burnished) by that six-month period. Yes, such thinking really is as crazy as it seems!
Isn't investing supposed to be complex? Difficult? Only successfully undertaken by guys in flash suits and flashier cars? That's what some people would have you believe.
The Motley Fool believes the best person to take control of your wealth is you. That investing well doesn't require high-speed computers or Nobel laureates. (Don't believe me? Just ask the boffins that ran Long Term Capital Management!) Or, as Warren Buffett says: "Beware of geeks bearing formulas"!
