Trading pros may not think things are different. However, the public is reacting to suggestions that Wall Streets may be rigged against them.
In this cartoon, Darkow draws the Carnival Midway Game of Wall Street, "Spill the Milk" … which disguises the super-fast high-frequency stock trading center for insiders only.
The Carny beckons to the 'Little Guy': "Step right up, friend… It's a game of skill. Trust Me!".
This kind of public sentiment often triggers regulatory scrutiny … which, in turn, triggers new games of 'skill'.
Here are some of the posts that caught my eye. Hope you find something interesting.
Even during a week like this one, there is always something working … if you look in the right places.
The chart shows the top-and-bottom performing markets, ranked by weekly performance.
The data is color coded based on sector. The first column shows last week's performance, followed by six columns of the most recent weekly market performances.
Did you see the 60 Minutes report on Michael Lewis' new book, "Flash Boys," that reveals some of the ways that high speed traders work the stock market to their advantage.
Here is an excerpt from the intro.
Steve Kroft: What’s the headline here?
Michael Lewis: The Stock Market is rigged. The United States stock market, the most iconic market in global capitalism is rigged.
Steve Kroft: By whom?
Michael Lewis: By a combination of these stock exchanges, the big Wall Street banks and high-frequency traders.
Steve Kroft: Who are the victims?
Michael Lewis: Everybody who has an investment in the stock market.
The 60 Minutes piece has a interesting explanation of what is happening.
Let me know if you want to talk about high frequency trading or what is likely to happen as a result of press coverage like this and the ensuing regulatory scrutiny.
Few investors are good at swing trading — meaning, they're not good at predicting short-term swings in the market.
Recently, BusinessInsider observed that more often than not, investors find themselves buying high and selling low. And when the market starts selling off sharply, investors will panic, sell their own shares, and sit on the sidelines.
For instance, if an investor stayed fully invested in the S&P 500 from 1993 to 2013, they would've had a 9.2% annualized return.
However, if trading resulted in them missing just the ten best days during that same period, then those annualized returns would collapse to 5.4%.
In this trading methodology, missing 'big win' days does so much damage because those missed gains aren't able to compound during the rest of the investment holding period.
The Economist's Big Mac index seeks to make exchange-rate theory more digestible. They say, tongue-in-cheek, that it is arguably the world's most accurate financial indicator to be based on a fast-food item.
The Big Mac index is based on the theory of purchasing-power parity (PPP), according to which exchange rates should adjust to equalize the price of a basket of goods and services around the world. For them, the basket is a burger … a McDonald’s Big Mac.
According to this measure, the most undervalued currency is India's Rupee at about 67% below its PPP rate. In India, a McDonald’s Big Mac costs just 95 Rupees on average, the equivalent of $1.54 at market exchange rates. In America, the same burger averages $4.62.
The interactive graphic, below, shows by how much, in Big Mac PPP terms, selected currencies were over- or undervalued.
The index is supposed to give a guide to the direction in which currencies should, in theory, head in the long run. It is only a rough guide, because its price reflects non-tradable elements such as rent and labor. For that reason, it is probably least rough when comparing countries at roughly the same stage of development. The Economist has added an adjustment option to account for this in the interactive version of the data.
Were you surprised how quickly Markets digested the risk of Russia and the Ukraine?
It’s not the news … it’s what markets do after the news hits. In Bear Markets, markets are looking for excuses to pull-back and take risk off the table. In Bull Markets, things can advance, even with uncertainty.
The New York Stock Exchange publishes end-of-month data for margin debt. Historically, surging peaks of margin debt often happen before big market pull-backs.
The chart, below, shows the relationship between margin debt and the market (using the S&P 500 as the proxy for the market). Even adjusted for inflation, the latest data puts margin debt as at an all-time high.
Why should you care? Well, his fund posted a record profit, last year, of $19.5 billion. It owns meaningful parts of American Express, Goldman Sachs, Wells Fargo, IBM, Exxon, Phillips 66, Walmart, Coca Cola … and the list goes on.
Buffett's annual letter is always an interesting read … even if you don’t agree with everything he says. There is a reason he is called “the Oracle of Omaha.”
Here are a few of the ideas that I noted.
Own Low-Cost S&P 500 Index Funds:
Mr. Buffett advocates going long "the economic future of the United States."
That sentiment was nothing new for him: "We’ve been making similar wagers ever since Buffett Partnership Ltd. acquired control of Berkshire in 1965. For good reason, too. Charlie and I have always considered a 'bet' on ever-rising U.S. prosperity to be very close to a sure thing."
Historically, Mr. Buffett has cautioned against trying to pick winning stocks. Instead “own a cross section of businesses that, in aggregate, are bound to do well.” A low-cost S&P 500 index fund helps any investor do this well.
Mr. Buffett has emphasized this point throughout his investing career.
“In the 20th century, the Dow Jones industrial average advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st century will witness further gains, almost certain to be substantial.”
Mr. Buffett writes that when he passes away, he has left instructions for his trustee to invest the cash designated for his wife in two ways — 10% in short-term government bonds and 90% in a very low-cost S&P index fund. He suggests Vanguard’s index fund.
“I believe the trust’s long-term results from this policy will be superior to those attained by most investors who employ high-fee managers.”
Swing Both Ways When It Comes To Investing:
Buffett said Berkshire likes to buy businesses outright, but also will invest large sums in stock or partial ownership of a company, to increase its profit opportunities.
"Woody Allen stated the general idea when he said: 'The advantage of being bisexual is that it doubles your chances for a date on Saturday night.' Similarly, our appetite for either operating businesses or passive investments doubles our chances of finding sensible uses for our endless gusher of cash."
A Hint Towards the Future:
Three things struck me here.
First, in describing the large purchase and financing of ketchup maker (H.J. Heinz), Mr. Buffett called it a 'template' that Berkshire Hathaway could use in future acquisitions.
Second, near the end of this year's letter, Mr. Buffett notes that most Americans don’t understand the math behind pensions … and cautions about the 'accelerating' dangers of local and state financial problems. Pensions, he says, have become a "gigantic financial tapeworm" because "public entities promised pensions they couldn’t afford." Mr. Buffett predicts: "During the next decade, you will read a lot of news — bad news– about public pension plans."
Third, he said: "Next year’s letter will review our 50 years at Berkshire and speculate a bit about the next 50." Interesting …
Mr. Buffett has often said: "At Berkshire, our time horizon is forever." That perspective makes it a lot easier for the game not to end until you've won.
It reminds me of a lesson from an earlier Annual Letter:
Nothing stopped so many innovators and entrepreneurs more than the fear of failure. If you allow yourself to be constantly scared into thinking that the world is doomed you will never take that risk which might result in great reward. And perhaps worse, if you never fail you will never learn to get up, brush yourself off, move on and succeed in the future. This does not mean you should wander through this world with great complacency and blind optimism, but if you deny yourself the ability to maximize your full potential, you will always come up short.
Two Other Things:
Quicken Loans announced on Tuesday a $1 billion prize paid out over 40 years—insured by Warren Buffett's Berkshire Hathaway—to anyone who pulls off the ultimate forecasting feat in sports: predicting every tournament game's winner.The winner also gets investment advice from Mr. Buffett. (WSJ)
Buffett bulleted five fundamentals of investing (BusinessInsider)
Are the Olympics over yet? No? Here are some worthwile momements, in case you missed them.
For example, here, a woman tried to snap a picture of the hockey game between Russia and Slovenia — but instead she got an eyeful. Call it a new form of 'Selfie'.
