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Written by José D. Roncal
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Saturday, 15 January 2011 00:11 |
Remember the so-called Flash Crash back in May of 2010? The market had been humming along nicely for more than year, until the unexpected happened—the Dow Jones took a 10% nosedive in about 15 minutes. Everyone felt the effects, but those so-called “investors” who thought they had make safe bets with big names like Proctor and Gamble took a 30% hit. Why? What happened? How could blue chips suddenly turn into gambling chips?
Of course, the reality is that there is no such thing as an “investment.” As we point out in our book,The Big Gamble: Are You Investing or Speculating? it’s all speculation, or, as in the case of the rude May awakening, shareholders discovered it was all just a big gamble.
Yes, the market got back on a relatively even keel, and yes, the May Flash Crash was a strange anomaly, but it’s a puzzle that the SEC is still trying to solve. We all know that the increasingly high-speed trading technology has caused markets to get very complex, which makes pinpointing the cause of the crash next to impossible. Was it a mix of human error and high-frequency traders working on high-speed computers in a myriad of electronic trading systems? Was it because the exchanges lacked the ability to put the trading brakes on in time to slow things down? No one knows.
But the bigger and more troubling question now is, could it happen again?
Circuit breakers have been put in place that hopefully will help prevent a repeat performance, but since no one knows for sure what caused the problem, no one knows if they will actually work.
Back in a more rarified time, human interaction was a key factor in building trust in the markets. If you were lucky, you had a broker you had confidence in, someone that handled your account, understood your risk tolerance, and advised you on your portfolio.
Today, algorithms are replacing the human factor. Consider the latest technology, Lexicon—a service that delivers real-time financial news. Sounds useful, but the problem starts when it’s no longer humans reading and analyzing the news in order to advise their clients. This news is packaged in an algorithmic format readable by other algorithms that then parse the hard data. The end result is that the machines are no longer just crunching numbers; they are actually making decisions—a practice that has become prevalent system wide.
Algorithmic trading on Wall Street has become so pervasive it’s now responsible for up to 70% of all activity. The swings in the market used to be a result of traders trying to out wit other traders for the best prices. Now it’s bits and bytes of electronic code scanning at the speed of light for anything that signals potential profit. Algorithms have become such an integral part of our financial system the markets can no longer operate without them.
It’s not that computers can no longer benefit those individuals that play the markets—computers help match up prospective buyers and sellers without the middleman taking their commission. But when those high-frequency flash traders use the system on a massive scale to buy and sell thousands of shares every second, and when the price fluctuates just a few cents, fortunes get lost in the blink of an eye.
This is the Wall Street system that consumers are up against today. What used to be called investing, is now simply a matter of trying to beat the odds without the benefit of knowing the odds. It’s playing in an electronic game they know absolutely nothing about; yet most still cling to the idea that they are making investments.
History can only leave records of catastrophes that have already occurred. But when the markets are controlled by run away technology that nobody fully understands, technology that changes more rapidly than anyone will ever have time to understand, what are the odds that we can know in time how to prevent the next flash crash?
Think about that, and then think about this:Are You Investing or Speculating? Or are you simply taking a Big Gamble? |
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Written by José D. Roncal
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Saturday, 01 January 2011 18:08 |
We’re entering a new year and a new decade. It’s time to pause and take a quick review of where we’ve been. And more importantly, it’s time to consider your options as you move forward.
Where will you be placing your money? Will you be investing or speculating? What does that mean? The answer can be found in our book,The Big Gamble: Are You Investing or Speculating? Make certain that you know the difference before you make any financial decisions. Many learned the hard way that what they believed to be an investment was nothing more than speculation, most of which didn’t pay off.
The last decade was the worst Wall Street has experienced since the Great Depression. But it began with the belief that the sky was the limit. Money was pouring into tech stocks at an astounding rate. The Nasdaq composite index reached an all-time high of 5,048 on March 1, 2000. But for those who had believed they were making sound investments, everything ended when the dot com bubble burst.
Did you “invest” in the market? Did you think you were making a wise “investment” in a home? Are you better off today than you were at the start of 2000?
In the last half of the last decade, with low interest rates, and even lower lending standards, so many unqualified consumers where buying homes, housing prices went through the roof. Then came the highly toxic sub-prime mortgage products followed by record numbers of defaults causing the housing market to rise and fall so dramatically, the effects were felt around the globe
Low interest rates resulted in credit becoming the currency of the decade. Market research revealed that nearly 8.2 million credit card offers were sent out during 2002. Even though wage levels were stagnant, consumers went on a credit-card shopping spree until the level of debt finally peaked in summer of ’08 at a whopping $2.57 trillion. Businesses were also over-borrowing during an active period a mergers and expansions.
It was as if the whole world was over-leveraged and it was just a matter of time before it all came crashing down. All those toxic mortgages led to the failure of investment bankers, beginning with Bear Stearns and Lehman Brothers. The ripple effects across banking and other industries sparked a global recession that led to widespread job losses and drastic cutbacks in consumer spending.
In 2008 we witnessed massive bank failures. First IndyMac Bank went under at an estimated cost of $10.7 billion to the Federal Deposit Insurance Corp. By the end of the year a total of 25 banks had failed. Another 133 were closed down in 2009, and in 2010 there were an additional 157 closures.
In March 2009, major stock market indicators hit 12-year lows, with the Dow Jones industrial average sinking to 6,547, down from the all time high in October 2007 of 14,164.53. Stocks have recovered a portion of their losses, but the 2000s will still appear on most balance sheets as a lost decade – the first 10-year period that saw a negative total return.
But as we know, all business is cyclical. There will be a recovery, although with the mounting debt, both nationally and at a consumer level, and with geo-political tensions ever present, no one is making any predictions about how or when that recovery might happen, or what it will look like when it does. One thing is certain—change. We can never go back to way things were.
It’s time to look for new opportunities, or to make our own. There will always be those who speculate wisely. You could be one of them. Just understand the difference between investment and speculation. Be as informed as possible. Learn the lessons from our book,The Big Gamble: Are You Investing or Speculating? With the right knowledge and a little luck, you can prosper in the new decade! |
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