Tuesday, May 11, 2010

The Little Guy Has Nothing to Complain About

I see a lot of comments about how the "little guy" feels like the system is stacked against him. Who are we talking about here?   The small investor?  Au Contraire:   There has never been a better time in history to be a small investor in the United States.  Note - there is a difference between investors and traders, which I'll get to in a minute.

-We've had a veritable FLOOD of new ETFs created, which allow investors to easily and with granularity select exactly what kind of exposures they want.   Small retail investors can now get customized exposure to almost every sector and industry, as well as fixed income strategies, developed markets, emerging markets, international indices, commodities and even currencies.

- Technology has allowed brokerage firms to provide speedier access and cheaper commissions.  One can now trade for $9.99 or less, and customize executions to decide which exchange to send orders to, as well as use advanced tools for research, charting, and rapid market access via front ends (I use Etrade's Power Etrade, personally, and it's decent).

- Bid/ask spreads have decreased from quarters 10 years ago to pennies today.  That's a good thing - no matter how you slice it.

- Individuals can easily get access to after hours trading sessions, should they so desire.

 - Access to information:  the individual investor has ample access to an insane amount of information:  SEC filings, news, research reports, rumors.  When I first got interested in stocks as a mere pup of about 15 years old (and this is less than twenty years ago), I would read the earnings reports in IBD looking for companies with increasing earnings.  Then, I'd call my broker, speak to an actual person, and get the phone numbers for the companies I was interested.  THEN, I'd call the companies themselves and ask them to send me their latest annual reports, 10k, 10q, and if I was lucky, I could begin doing some analysis a week later!

In my opinion, the most important items for an investor are selection of products, availability of information,  ease of access, and costs of trading.   I don't know how anyone could argue that we're at unprecedented "bests" in all four of those categories.

Now, how about the small "trader?"  Well - that's a different story, and it should be.  Our markets aren't  constructed (nor should they be) so that any monkey sitting at home can turn on a computer and print money by easily navigating our capital markets.  If you want to trade with the big boys, who are faster than you, smarter than you, more experienced than you, and have more technology than you, you're going to lose.  The important thing is that this "big boys" club isn't an exclusive club - anyone with the resources can develop their own trading systems and gain equal access to the same "privileges."

So if you're a small trader and you're disillusioned with the markets and are throwing in the towel - good for you!  That's your prerogative - no one said trading was easy - but I don't think anyone needs to weep for you.   No one has the right to demand to be able to make profits trading their personal account! Take a longer term view, do some real research, and invest in companies at prices which you like.  If you're right, you'll make money in the long run.  THAT is the important feature of our markets. (If you want to talk about how markets are rigged, I think they are actually rigged in one way: against the prudent short positions.  Markets are rigged to go higher.  We need them to - our society's spending habits depend on it, because we have come to think  of the value of our portfolios as synonymous with our wealth.  If you're positioning yourself from the short side, you may also eventually be proven right, but you frequently have to endure a lot more pain in the process)

The most important point, though, is that all of this fancy trading stuff doesn't hurt the little average Joe Investor!  It doesn't hurt you when someone or some electronic thing crushes your beloved ACN down to a penny and then it rebounds in a matter of seconds.  Other people's mistakes are YOUR opportunities.  If you're really the investor you claim to be, you don't care about short term price movements, and need not lose faith in markets because of the short term aberrations.  Of course, I already wrote a whole post about this:  don't lose faith in markets, lose faith in market orders.

Everyone, investors and traders alike, should certainly understand one important thing, though: The Market doesn't owe you any price for your stock.  If you use a market order, you are saying "I want to be filled, regardless of the price, even if the price on my sell order is 1c."  Now, I'm guessing that people don't really mean that.  Ever.  I've said it before, and I"ll say it again:  in my opinion, you should NEVER use a market order.

Liquidity is not a right, and should not be assumed.  Expecting it to be there is a mistake.  Liquidity gaps have happened throughout the history of trading markets, and they will continue to happen.

John Hussman provided some great old quotes in his most recent piece

"Of all the mysteries of the stock exchange there is none so impenetrable as why there should be a buyer for everyone who seeks to sell. October 24, 1929 showed that what is mysterious is not inevitable. Often there were no buyers, and only after wide vertical declines could anyone be induced to bid ... Repeatedly and in many issues there was a plethora of selling orders and no buyers at all. The stock of White Sewing Machine Company, which had reached a high of 48 in the months preceding, had closed at 11 on the night before. During the day someone had the happy idea of entering a bid for a block of stock at a dollar a share. In the absence of any other bid he got it."

John Kenneth Galbraith, 1955, The Great Crash

Hussman, in his own words:
"If you spend a good portion of your time studying price-volume behavior, "air pockets" of the type we observed last week become familiar parts of the landscape (though they are typically not so distilled into a single intra-day move). Robust demand is the only thing that holds prices from falling vertically in the face of eager selling. Overvalued, overbought, overbullish markets are often already spent of that demand. As investors suddenly became aware of that reality on Thursday, all I could think was "welcome to my world.""

I've grown fond of another expression I coined, which I think accurately describes the market action of last Thursday, May 6th: Markets aren't efficient, but they are efficient enough!  Was is crazy that ACN and other stocks traded down to 1c?  Of course it was, and we will probably modify our market structure to try to prevent it from happening again - but note this: the aberration was quickly corrected by The Market, and the lasting damage for the small individual INVESTOR was nil.  In fact, it was an opportunity to pick up some stock at fire sale prices!

There's no need to weep for the Joe SixPack American Retail Investor.  There has never been a better or more rewarding time for individual investors who do their homework to be able to quickly, cheaply and easily invest in the companies they choose to.



Anonymous said...

Problem is, they've revealed that the game is rigged. You're not investing in a company, you're investing in a sort of bet on what Goldman etal are going to do in their market playground.

Anonymous said...

What about the pensioner or 401K laborer who's told to invest in mutual funds with an "expert." Those "experts" then have guidelines and rules on percentage of assets which need to be invested. Do you see them in the same light? Is that just competitive advantage, or is it theft? Is the market not just a funnel of their money to the big boys?

Anonymous said...

> What about the pensioner or 401K
> laborer who's told to invest in
> mutual funds with an "expert."

There will always be salesmen selling snake-oil. Mutual funds should be avoided by everyone.

Buying a mutual fund one knows nothing about, run by a manager one knows nothing about is not investing... and no ratings from Morningstar will ever change that.

KD's point was that while there are many folks screaming about market structure issues and HFT, that for an investor looking to do their own research and buy shares of a company or derivative product like an ETF - there has never been a better time in history to do so.

> You're not investing in a
> company, you're investing in a
> sort of bet on what Goldman etal
> are going to do in their market
> playground.

Investors unlike speculators look at projected cash flow and discount it for risk to determine a fair price for an asset. If you do your homework and are right about the cash flow, it doesn't matter what the folks at GS are doing to the shares. If they are bidding them up too high, then sell at a profit. If they are selling them too cheaply, then buy and take your dividend payments.

If you are an investor, you should like it when share prices deviate from your view of fair value, since it produces ample buying and selling opportunities that Benjamin Graham would have approved of.

If you're on the losing side of frequent trades where you were not thinking about the assets purchased throwing off cash either to the balance sheet or paying a dividend, then you are nothing but a speculator miffed at the existence of more sophisticated speculators than yourself.


adam said...

You are easily becoming one of the most rational voices of those who comment on financial issues (not just hf).

KD: "Our markets aren't constructed (nor should they be) so that any monkey sitting at home can turn on a computer and print money by easily navigating our capital markets. If you want to trade with the big boys, who are faster than you, smarter than you, more experienced than you, and have more technology than you, you're going to lose."

I like how this is directly in opposition to one of the themis trading papers:

"Exchanges will argue that this information is public and available to all investors. Technically, this may be true, however, realistically, not many retail or institutional investors have the capital to invest in the type of computer systems needed to access this information and most are not even aware that it exists at all."

What? Investment is required to make money in a competitive business? You have to actually research be aware of things? Who would have guessed.

The sad part of arguments like this is that the barriers to entry (in terms of gaining access to some of these datafeeds) are incredibly low (as in an individual could afford it) - but this entire debate has been skewed by extremely exaggerated arguments about exclusivity of deals and incredibly high costs (neither of which are very true).

Anonymous said...

Investors unlike speculators look at projected cash flow and discount it for risk to determine a fair price for an asset. If you do your homework and are right about the cash flow, it doesn't matter what the folks at GS are doing to the shares. If they are bidding them up too high, then sell at a profit. If they are selling them too cheaply, then buy and take your dividend payments.

I already have a full time job. I just need a way to save for retirement.

Sam said...

New sh*t has come to light on the "flash crash", man.

Looks like some aggressive selling in ES and a series of stops around 1070 caused the damage, which makes more sense than any other explanation.

Wonder if they'll ever reveal who the 9% player was. Guess not, bad for CME business and the SEC/CTFC won't push it. They've clarified it's a "hedger", so all swept under the rug, we're done here folks.

Anonymous said...

> I already have a full time job.
> I just need a way to save for
> retirement.

Well, negative real interest rates are not helping matters for you then, and I would suggest that your angst should be directed towards those who decide monetary policy and have been punishing savers for years... rather than other stock market participants.

If you really can't find time to do your own research, find some highly liquid ETFs and create a portfolio of ETF bond funds and ETF stock funds that are low cost (i.e. low management fees from the ETF provider).

Most stock mutual funds underperform SPY, so that might be a good place to start.

All that being said, I think everyone trying to secure their own financial future can find the time. Pick your least favorite TV show, take it off of your list, and replace it with investment research and management. Your financial future is too important to have determined by the average mutual fund manager.

And if you haven't read it yet, pick up a copy of Benjamin Graham's classic "Intelligent Investor".

I don't think anyone should really deploy their own capital until they've read that book at least once.


Anonymous said...

I'd like to hear a comment from

Kid Dynamite said...

i tried to reply twice already, but google ate my lengthy comment each time...

anon @ midnight: see PeterPeter's response... if the crash taught us anything it's that experts aren't experts (see: ACA, IKB)... no - i don't think the market is just a funnel of their money to the big boys. if you TRADE constantly, and you don't know what you're doing, then YES - you'll funnel your money to the better traders - but if you INVEST, you only have to pay that "vig" once! (or at least, very infrequently - and the Vig is smaller than ever!)

peterpeter - thanks for the continued level headed, eloquent and accurate responses

adam - i saw that themis piece and focused on the exact passage you did. it easily refutes their entire piece... unless of course you have an entitled communist philosophy.

sam - the futures seller explanation doesn't explain the bizarre prints in individual stocks though - nor etfs.. i wrote about that in my first post on the subject

anon who wants to save for retirement: 8% annual returns are not a human birthright! you can easily construct a diversified portfolio of assets using the liquid, cheap products that have been invented. if you want riskless returns, talk to the Fed/Treasury about monetary policy - as Peter mentioned.

But What do I Know? said...

Amen on the trader thing, KD. If it were easy to make money trading at home, then everyone would do it, and who would do the actual important work. . .

But I have some sympathy for Anonymous trying to save for retirement. What do you do with your 401K when stocks are (in general) overvalued and bonds and Money markets don't pay shit? I don't have any problems with big price drops--a big price drop would be the best thing that could happen for those saving for retirement twenty years down the road because then they could get much better prices on their investment purchases.

But I think what Anonymous is concerned about is the market action reveals that the rug can be pulled out from under his/her 401K at any time--and it will probably be when he/she is ready to retire. . .

Kid Dynamite said...

BWDIK - who said INVESTING was easy? it's not easy either!

yeah - stocks are overvalued (in my opinion) and rates are zero - guess what - i'm screwed too! just like Johnny 401k!!! so what? what's the solution?

if you think it's overvalued, you can short it... that's your prerogative! you might lose money doing that too!

if you can't short it, or can't buy inverse ETFs in your 401k, then you keep it in conservative, zero yielding fixed income investments - FINE!

you touched on a point, though. if you're retiring right now, and you need the money - YOU ARE NOT AN INVESTOR ANYMORE - you're now a speculator!!! your money should not be in risky assets if you have a short term horizon.

it sucks that interest rates are low - but that's not the byproduct of our stock market structure. take it up with the policymakers!


Daniel said...

I live on the west coast and I don't know of anyone who has a pension plan for retirement. It's all 401 (K). I think this is mostly true. I'm willing to stand corrected. On the east coast I think there are still companies that offer pension plans for retirement. And in the midwest. Anyway, 401 K's allow for a selection of funds and a very limited selection at that. Companies use matching to encourage their employees to contribute to 401 K's. And who wants to turn down free money? So there you have the mutual fund industry. This business about doing your own research ala craymaerica is just so much nonsense. Buy and hold is dead, should be dead and never revived. You have to trade. You especially have to trade if you want to have a return better than an index. There is no way I can ever, EVER, approach the boots on the ground from a research standpoint that the "smart" money has. So I made the decision to become a professional options trader. Very few people can do this. The idea of spending a hour a day doing research is laughable. Trading, to be successful, takes a very unique set of skills. Most people have no chance. I don't have an answer. I really do not.

Anonymous said...

Hey Kid -

Always appreciate your insights. Please indulge me for a bit while I play devil's advocate here. How about the following two counter angles:

1) The real possibility that our economy (high debt-to-GDP, papered-over bad debt, etc) and potential demographic (long recessions aid in lowering birth rates of developed nations) goes the way of Japan, whose stock market has been in a 20 year bear.

2) The allowance of highly opaque (and sometimes dubiously valued) off-balance sheet "assets", which make evaulating companies for investment that much more problematic, as long term future cash flows are harder to predict.

Given these two, even a hard-working, diligent investor would have a significant real risk (even if only possible and not probable) of long term capital loss. Thus, with regards to information availablity and cost, I think you are right on with respect to the "little guy". With regards to long term value, I could easily say you should have nuanced your post a little more...

thedude said...

Part of the problem with 401(k)s is that the administrator usually gives you only 10-20 fund options, usually all big mediocre mutual funds, and usually only one fund in each asset class/category. That's why the Fidelity funds are so damn huge. No one talks about it, but the mutual fund industry is a huge swindle. These guys are asset gatherers who don't generate any alpha, and yet they control trillions in 401k funds.

That being said, even if 401k options were limitless, there aren't enough alpha generating managers to grow everyone's wealth at above market rates. This is a mathematical certainty. Stock market investors as a whole might still see their absolute wealth grow due to population/GDP growth, but the rate expectations for the majority of people should be low. If you're an average/passive investor, the best way to save for one's retirement is to actually live at or below your means and put more paycheck away rather than count on your mutual funds to deliver 15%+ annual returns.

Kieran McCarthy said...

If Goldman Sachs, JP Morgan, Citi, and BofA all go an entire quarter without trading losses on any day, they have to be making their money from somebody. They're taking it from nearly everyone else in the country. Meanwhile, few private companies have fixed pensions of any kinds. Private employment vacation time has been reduced 70% in the last generation. Put your money in cash? Treasury policy is explicitly aimed at inflation. Put it in stocks or real estate? Overvalued by traditional metrics such as Case-Schiller. Gold? All-time highs and historically difficult to manage in terms of volatility.

It's the great wealth suck. Peter Pan in reverse. It's a system where all efforts are made to siphon more money to those who need it least from those who need it most.

Maybe you think that these companies, all of whom receive loans at nearly 0% from the Federal Reserve, who operate with knowledge of the order flow of trades, deserve to make this money because of their superior skills and resources.

But I think it's sad, the way we've become so efficient at fleecing the less sophisticated. To use a poker analogy, I used to go to Mountain towns in Cripple Creek and Blackhawk to play poker. Relatively small stakes, but I enjoyed it nonetheless. But with the exception of a few ringers, the game was mostly old, sad codgers who played nearly every hand. You'd see them call every raise hoping desperately for gut-shot straights and other long shots. After a while, I stopped going. It just wasn't fun taking their money.

It's easier taking money from sad codgers you never see. And unlike the sad codger in the casino, the "little guy" has to make choices as to where to put his money. And perhaps you're more sophisticated than I am, but I don't see any easy or safe choices out there. Just lots of different places to lose money, in real or in nominal terms.

Daniel said...

Yeah to follow on Kieran, if I have one major gripe its the ability of these swing dicks, just because of who they are, to borrow money at 0%. Let me borrow at 0%. And not for a car or a tv or dishwasher. Let me borrow some real capital at 0% and I'll straighten you out let me tell you. Trading is NOT a zero sum game as somebody said it was. And I have no problem with the playing field. Pinning pays my mortgage.

Here is what my wifes ceo did: they took TARP. TARP limited comp. CEO didn't like that. Floated secondary, thus diluting all common shareholders (us), to raise capital to pay TARP so he could get bonus. Yeah, I know what a fat finger is. So eff GS, C, BAC JPM etc. That don't give a rats ass about me.

adam said...

Apologies if this is diverting from the conversation, but it felt relevant - just saw this (sec public comment from tradeworx) and I thought it was a great source of info on hf/stat arb in general - it contains some good information, debunking of claims where necessary, and contains some valid criticisms (ISO orders, tiered rebates):

Anonymous said...

I'll echo Mark Cuban's sentiments in this article:

Kid Dynamite said...

the Dude - well put. and Daniel - you and TheDude both mentioned beating market returns - you don't even NEED to beat market returns! one point here is that the plethora of products makes it extremely easy to generate market returns. 20 years ago you could invest in the SPX index fund. now you can invest in almost any index, easily and cheaply.

but my main point is that we should not be conditioned to EXPECT market returns to be 8%, 10% or 15% a year - as theDude says. if you want to save for retirement, don't live beyond your means - SAVE - start a business... don't expect free money in the market.

Kid Dynamite said...

anon @ 11:09am - i agree very much with that. i never said that now is a great time for investors to get rich easily. i never made any comment about long term value. of course a diligent investor can have long term losses. so what? what's wrong with that?


can the market go down over 30 years? sure. is that unfair? of course not! Americans need to be disabused of this notion that stocks always go up long term. the government will do its best to make sure that happens, like I said - i think the game is rigged in favor of the longs, but it's not our birthright to demand positive consistent equity returns.

Kid Dynamite said...

keiran - first of all - the majority of those bank profits you talk about don't come from equity markets, if that matters. they come from borrowing for nothing (from the Fed) and investing at positive rates. I looked through a few of the press releases to see if i could get breakdowns across product lines, but couldn't find the details.

know one thing though - this is EXACTLY as the Fed/Treasury designed it - and it's actually the ONLY way for the extend and pretend to work - they delay the writedowns for long enough for the banks to earn the equity back via "trading" - which isn't really trading at all.

Kid Dynamite said...

daniel - re: tarp: TARP sucks. i'm not going to argue against that, but the reason your wife's company had to sell new equity to payback TARP is because they NEEDED MORE EQUITY! if they hadn't got TARP in the first place, they would have still had to raise equity. If you don't think this is true, and they didn't need the money at all, then they could have just given the TARP money back.

Kid Dynamite said...

anon re Mark Cuban: sighhh... i just realized what my point was, because although Cuban makes some good points, he continues to miss the main point, confusing and confounding trading and investing.

here's my point: if you're an INVESTOR, you don't check your stock quotes 5 times a day. or 50 times a day. the short term gyrations DO NOT MATTER. it doesn't matter if some ETF trader, HFT algo, or mutual fund is selling your stock as part of a rebalance - none of that changes the underlying business fundamentals, which is the reason you are INVESTING.

Kid Dynamite said...

i think a lot of people are missing the point of this post. the point of this post is NOT that it's an easy time to make money in the markets. on the contrary - i think it's INCREDIBLY hard right now - as valuations appear stretched, yet government appear intent on keeping them that way. I repeatedly use the term Ponzi scheme, which I think accurately describes our economy. Perhaps the US Gov't can keep this ponzi going. who knows. I absolutely understand that no one wants to be the last one left holding the bag when it collapses.

that has nothing to do with people complaining about MARKET STRUCTURE though - which is what I was trying to address here. simply: retail investors can now do things that only professionals could do 25 years ago - and that's a good thing for them.

Anonymous 11:09 AM said...

Hey Kid -

Thanks for your reply. I get your points, and they are certainly valid. I totally agree with you that no one is entitled to risk-free, or even low risk "above inflation" returns. However, I feel compelled to nitpick you a little since you used the title "The Little Guy has Nothing to Complain About".

I will stand by my 2) angle. Accuracy/integrity of information is just as important as availability, as that has to do with market integrity, which is the last important part of the structure. Look at what happens with the big guys game their capital ratios, which allows them to hyper-lever, which leads to various bailouts, debt crises, etc. If nothing else, I think the little guy has legitimate sour grapes here.

OK, so one can avoid financials and do their homework in other sectors. Fair enough. I would just say the title should be something more like "The Little Guy has a Tremendous Opportunity" given all to other valid points you make.

Allright, no more nitpicking. Just don't want one of our brighter beacons to devolve into one of those mindless CNBC market

Kid Dynamite said...

anon 11:09: as i mentioned in my previous comment, i'm certainly not saying that now is a good time to buy stocks, and i'm about as far from a CNBC cheerleader as you can get.

in general, i don't think there's any reason at all to think that we currently have a lower integrity of information than before. in fact, we're constantly trying to improve clarity and accountability (sarbanes Oxley, etc - even though there is potentially a great cost of compliance for companies)

if you've read my blog before, you'll know my response to your question: if you can't value something, DO NOT BUY IT. if the financial companies are fraudulently representing their balance sheets, they should be prosecuted.

now, i think that the health of the entire banking system is being misrepresented - but good luck prosecuting it, because it's by DESIGN - courtesy of the Fed/Treasury, mark to fantasy, etc...

Kid Dynamite said...

also, anon - we have regulations in place to deal with "gaming capital ratios" already - the problem isn't markets, structure, or regulation - we don't need more rules, we just need to enforce the rules we have!

Transor Z said...

All that being said, I think everyone trying to secure their own financial future can find the time. Pick your least favorite TV show, take it off of your list, and replace it with investment research and management. Your financial future is too important to have determined by the average mutual fund manager.

@peterpeter and kd:
First, IMO you've both written some really exceptional thing over the past week. This line of thought isn't one of them. :-)

Bankruptcy is one of our main practice areas. I see what we euphemistically refer to as a "cross-section of society." To the idea that most people can manage investing to come up with a large portion of their retirement needs, I'm just going to say, "No." And I'm afraid that if you disagree, we're going to have an exchange that looks like this:

No. This is why we need a properly funded Social Security/Medicare system. Guys, I completely support you in your effort to spread the gospel of risk and reasonable expectations around ROV (i.e., anti-Ponzi). But you're swimming upstream against 20+ years of institutionalized "buy and hold" "advice" disseminated to most Americans.

Just saying, please be careful not to fall into the solipsistic trap of thinking "inside every buy-and-hold 401(k) participant is a sophisticated investor struggling to emerge."

Transor Z said...

Sorry, ROI

Kid Dynamite said...

Transor -

"Just saying, please be careful not to fall into the solipsistic trap of thinking "inside every buy-and-hold 401(k) participant is a sophisticated investor struggling to emerge." "

whoa - i certainly agree with you on that - which is to say that the average monkey CANNOT beat the market and be a sophisticated investor.

however, the average monkey, thanks to our progress in market structure and access, can easily generate market returns, and even customize those returns (with tremendous granularity and accuracy, thanks to new products) if he wishes. that was my message.

you highlight a bigger problem, though, one that i'm not going to philosophize on any more here, and that's that these 401k holders you're talking about are not INVESTORS - they are people who think they are entitled to a return. as i've said throughout this thread, that is a horrible assumption, and one that no one should even expect to have. the stock market owes you nothing.

maybe, if the government wants people to be able to compound their wealth at 8% a year over a 30 year period, they should sell 30 year bonds... OH WAIT - they do !!! ;-) and the yield is about half of that 8%....

Kid Dynamite said...

also, Transor - the buy and hold guys kinda ARE my point - none of this crap matters to them! HFT doesn't matter. flash crashes and instant rebounds DO NOT MATTER...

but they need to be disabused of the notion that if they buy and hold for 50 years they will be able to confidently expect some rich annualized return...

Anonymous said...

KidDynamite, if I get time later I would like to post a response to this post. On your site, and with your original post on my site. May I please do so? Sal at themis

Kid Dynamite said...

hi sal -

let me know how to get in touch with you via email.

I won't pre-promise to post your response, but if it's intelligent (and your stuff is generally pretty well written), i'd be happy to.

if you are going to respond, please also address the specific point that Adam picked up on in your recent paper, which is "What? Investment is required to make money in a competitive business? You have to actually do research and be aware of things? Who would have guessed. "

Anonymous said...

One my favorite aspects of financial blogs is the dueling blogger debate threads. Its really what its all about. Lets see what the themis Guy has to say! Interesting thread and comments. -scharfy

Ken said...


While there is no denying you are right and traders today can do things and have access to information that did not exist 20 years ago, the market today is basically nothing more than a kleptocracy, in which banks, that are not really banks, are now able to borrow from the Fed for nothing and trade, trade, trade away.

Having a competetive advantage because you outwork me, out research me or employ superior technology is one thing, but having a competetive advantage that gives "select" firms unlimited access to taxpayer capital that can be invested and leveraged to the point where you can have an entire quarter where you made a profit trading every single day is a bit much.

All we need to hear at this point is that it turned out the fiasco that occurred last week was intentionally concocted by a group of trading Mensa's who figured out a way to to outsmart the computers and took full advantage of the calamity that ensued.

Kid Dynamite said...

but Ken -your post EPITOMIZES what I'm talking about here - the "victimization" of the little guy when it makes no sense. no offense, but your entire comment is irrelevant. I absolutely agree that the big banks have access to free money from the Fed, which sucks.. guess what - do you think that helps them invest? do you think CAPITAL gives them a competitive advantage over you? hah. if anything, it gives them a competitive DISADVANTAGE in terms of trying to get a good return on their capital (of course, that return is irrelevant if their cost is zero!)

they make money by borrowing for free (zero), and investing at greater than zero. it's IRRELEVANT to your profits as an individual investor, and if anything, can only help you once you figure out what they're doing and get on the train. Bill Gross said it last year: shake hands with the government!

this post has NOTHING to do with big bank profits, and the facts that big banks are making big profits, even every day, has nothing to do with this post.

QuantPlus said...

"If you want to trade with the big boys, who are faster than you, smarter than you, more experienced than you, and have more technology than you, you're going to lose."

This is analogous to table selection in poker. It's easy to find "inefficient markets" in both poker and trading. Simply focus on less liquid, arcane, or complex securities that do not scale up to the Big Players. But this absolutely central concept in poker... never seems to occur to "day traders" obsessed with the "sexiest", most liquid, and effectively rigged markets.

And no one has a right to 8%... but it's impossible to succeed with a trading business unless you can grind at least 20% long term (speaking as someone whose done it for 15 years).

Anonymous said...

There is a paper for that -

Jonathan said...

I have to respectfully disagree. Today is one of the worst times to invest in the United States or to be a "little guy."

$13 trillion national debt, $1.6 trillion national deficit and $107 trillion in unfunded liabilities and expenditures. Not to mention all the money that is being printed and will lead to serious inflation.

Government Keynesian policies, like the one in Europe, does not benefit the "little guy"!

Kid Dynamite said...

jonathan - we're talking about market structure - not Macro outlook