The amount of press generated by the release of Flash Boys, the new book by Michael Lewis, is causing a stir with investors and traders due to its depiction of a rigged stock market that allows high frequency trading (HFT) firms to profit at the expense of other, smaller and perhaps unaware individuals.
I'm not here to debate the accuracy of the accusations put forth in the book. Nor will I provide an opinion on this hot topic. (Though I will say that it makes for some good viewing, as evident in this heated debate on CNBC that's been making the rounds the last few days.)
Rather, I'm here to say that whether or not the market is "rigged" to provide an unfair advantage for certain HFT groups to profit off of, it doesn't impair, handicap or interfere with my ability to make money from the stocks. These HFT groups have no real advantage over me. Why? Because I don't play their game. Simply put, I don't trade, I invest.
That is, I buy, I hold, and then I sell when appropriate. How long I hold is subjective. But it's usually sufficient enough so as to not be concerned by volatility caused by short-term catalysts, such as a poor earnings season, a brief slowdown in economic growth, the negative impact of uncontrollable macro events, and other temporary market moving factors.
Unlike HFT, where the object is to pinch pennies (or even fractions of a penny) off high volume trading, Buy/Holders like me are looking at the long term. The goal is to capture a sizeable above-average return through careful selection of individual stocks. Thus, the focus is on quality not quantity.
What this means is that it really makes no material difference if you buy a stock for $14 per share or $14.02 per share. If it climbs to $20 in a year, you're only talking about a difference between a 42.86% return and a 42.65% return.
But to be truly successful as a Buy/Holder takes discipline – a characteristic sorely lacking with many investors. Though it's hard to blame them. After all, many Americans are no doubt still feeling the burn from the Financial Crisis of 2008-2009, where 10 years of wealth building was wiped out in short order. The Flash Crash of 2010 where the Dow Jones fell more than 1,000 in a blink of an eye and other market anomalies since have only made matters worse. That's why even as the stock market hits new record highs, many individuals remain watching from the sidelines.
Yet despite all of these awful market events, I can honestly say that my biggest professional regret is not following a Buy/Hold strategy earlier in my investing career. In my younger days, I thought this strategy as boring. And perhaps in practice, it is. Like I said above, you buy, you hold, you wait. So I went for volume as well – looking for highly volatile stocks, price trends and anything else to earn a dime off 5,000 shares. On days where it worked, I'd earned hundreds on a single trade. When it failed, I'd often lose big. The net result was below average returns and one nightmare of a tax return.
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