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The Last Days of the Long Investor?

by: Trader Mark August 14, 2008 | about stocks: DIA / QQQQ / SPY    
Trader Mark

Trader Mark

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A reader sent me a link to this site and I'm starting to read this more and more around the internet. Especially from people with gray beards (literally?) i.e. even the Doug Kass' s of the world. Sometimes I feel like I am incessantly whining about the lack of logic in this market - frankly the market has always had a lack of logic in the near term but you could take advantage of that (i.e. profit). Now, I am not so sure with the programmed trading if one can take advantage of it because if you are wrong by even a 5 day duration, you lose 30% of your capital. There is no coming back from that - if you lose 30% you need to make 40% just to break even. That is not a set up for success over the long run.

These are times like I've never seen before - I continue to wonder if this is a permanent change as the macro quant funds dominate more and more of the trading [Cramer - Quants and their Machines] , or if this is just a transitory period. I am hoping the latter as hedge funds had their worst 1st half performance in 20 years, so as they stumble over each other trying to out trade one another, all they are doing is losing money for us all. But all you need to do in hedge funds is have one huge period of gains (levered up 20:1 or 30:1 preferably) and you have what I call "generational wealth" - the type that takes cares of your grandchildren's grandchildren.

Remember a few hedge fund managers made over a billion dollars ... in 1 year. [Hedge Fund Manager - Good Work if you can Get It] So why not take outsized risks, with huge leverage - if you are correct you can effectively take care of generations of your family. If you are wrong - you blow up. You close your fund, hang out for 6-12 months, then get the word out that you are starting a new fund and people start sending you money (because your "pedigree" is enough to convince them that the last blow up was a "Black Swan" event) and you play the game over again. It's the biggest craps table in the world.

Here are some words from another "old timer" - maybe we are all just whiners; those of us who have been around markets for a while. Or maybe this is truly a very different market. My conclusion is if this is the new era - where nothing works off of logic for long periods of time - the retail money will give up. Many have already been (in their minds) fleeced from the early part of the decade when they chased into technology stocks (hand raised, I was one of those guys) and now again in the past year - many people I read anecdotally on message boards are incensed when a company like Flowserve (FLS) raises guidance by $1.25 and then loses $20 of stock value within days. That whole sector of money will simply hang it up.

Remember, it's been a "Lost Decade" for investors - anyone buying "the market" has made nothing; and adjusted for inflation they have lost money.  No easy answers here and I don't know if one can truly "adapt" to this market where everything is random and bipolar. For me, the advantage of the market over a gambling hall is "research" can give you better "odds" than going to Vegas - that's the selling point. But increasingly the odds are no different than Vegas. And we know in the end the house wins there.

Commodities -- like nickel and zinc -- have also fallen heavily as a result of thinking that a global economic slowdown and the continuing credit squeeze will hurt demand.

The reason that these price moves are so dramatic and occur within such a short period of time is that they're basically speculator driven. Hedge funds now speculate on anything and everything. And they do it from minute to minute, from day to day. Add "everything and anything" to the trading desks at Wall Street's investment bankers and you have a desperation willing to throw billions at "bets. -- many of which pay off spectacularly, if you can read the tea leaves and sharply limit your losses if the market moves against you and watch it hawklike. This is a game that most of us simply don't have the time, patience or stomach for. But we're the victims of it, as we see our long-term "logical' ideas get crushed.

I doubt that this situation will change. I suspect that with limited investment banking fees and rich clients soured on their brokerage houses (because of the auction rate securities freeze-up), the big Wall Street houses will spend more of their time gambling (also called trading). And markets will become even more volatile.

Look at the charts. No one can time when markets change direction. But you could. When it's going up, stay long. The minute you get a one or two percent pullback, sell and go short. Stay short until the market moves against you. Meantime, make sure you get on CNBC and argue "logically" that Gold or Silver or Oil is dead (or alive) for the following reasons. You can always find reasons. And you can always find lazy CNBC reporters who need someone with a shtick and a point of view on how to make their viewers their next bundle. CNBC is only interested in the next bundle. That's why viewers watch and hence, advertisers buy ads.

It's getting super hard to be a long term investor. In the old days, you could pick some "logical" positions, stay with them and eye your monthly brokerage statements with satisfaction. No more.

I don't have a simple solution this morning. My wife's "solution" looks increasingly enticing, "If we have it, let's spend it. That way we get something for our money."

Note: I've received emails from people in "regular" (i.e. we actually pick stocks) hedge funds who also are extremely frustrated by the quant hedge funds, and they are suffering along with the rest. So perhaps we are just all a bunch of whiners and need to recognize it is best just to hand our money over to HAL 9000 since he is going to dominate us in the end. I hope not.

A reader sent me this audio link. Here is a hedge fund manager who is giving up and returning money to investors, because he says there is too much volatility to meet monthly results. Note - he is a human being, not a computer.

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This article has 11 comments:

  •  
    Aug 14 12:28 PM
    Eventually, small investors are going to wake up a recognize that "owning" stocks which do not pay solid dividends is a waste of time and money.

    Right now, I am in CANROYS (PWE, PGH, etc.) and dry-bulk shippers (DSX,EGLE, etc.). Solid companies that pay solid dividends.

    Also, there are some nice ETFs out there: DGT, DVY, etc.

    I recommend that people sit on the sidelines, wait for a nasty pullback, then buy. When there is a run up, sell some. If you don't want to sell- out fully, sell some covered calls.

    The most important rule to remember right now is NEVER, NEVER, NEVER buy any stocks on a day then the market is up more than 50 points. Your best bet is to buy ONLY when it's down more than 100 points.

    The hedge funds are driving the market volatility and if you buy into it, you care giving them your $$.

    I read the other day that one FIG (Fortress Investements) employee got a $400m (million!) stock grant recently.

    If you buy on a market up day - you are funding that program...
    Reply
  •  
    Aug 14 01:09 PM
    If you can lose 30% of your capital in 5 trading days, you are a speculator, not an investor.

    Maybe you should take less concentrated positions or not use leverage.

    For an investor, who sizes positions properly, the short term volatility provides opportunity to make money. When a well-thought-out position goes against you, you are not wiped out, you just put more money in. Eventually, when the position rebounds, you are handsomely rewarded.
    Reply
  •  
    Aug 14 01:56 PM
    I have been in the market for over 30 years, and it sure seems to me like it has changed. There is no such thing as investing, it seems. Short-term trading is the only game in town. On Fast Money a couple of days ago, it was proposed that over 50% of the daily activity in the market is done by programmed trading--computers doing it--no human action. I think EVERYTHING is stacked against the small investor. Buy and hold is dead. I am retired but working full time, and I am more and more going with short-term corporate bonds. Bonds have their drawbacks as well, but the stock market is totally crazy right now.
    Reply
  •  
    Aug 14 02:04 PM
    Quit whining, and start taking ADVANTAGE of others' short-termism. At the end of the day/year/several years, cash flow is cash flow and if you can buy companies that have (or will have) it at dirt-cheap prices because some quant fund is dumping them, that's a gift for which one should be thankful, not complaining.
    Reply
  •  
    Aug 14 02:16 PM
    Larry,

    Program trading I thought was about 63% 2 years back, now it is even more than that.
    Reply
  •  
    Aug 14 03:30 PM
    Why do you say everything is random? Why do you say nothing works off logic?

    The market is based in large part on emotion. Emotion is inherently illogical - and combined with a year where we have a record number of crises - leads to large swings and overreactions.

    But step back and look at the larger picture... Why do you think the general trend is wrong, given we are in a global deflationary/recession... environment after what can only be descrived as the *largest bubble of our lifetimes*?

    I'm having a great year - trading. (not "gambling," at least for me) But if it's consistent uptrends you are looking for, you might be in the wrong decade:

    100 Year Dow Jones Industrials Chart
    bigpicture.typepad.com...

    In other words, it may not be that your style is wrong, it's that the times and market right now are not suited to your style. Step back and take a look at where we are in a 100-year view, rather than the micro day-to-day or even month-to-month. But long-term buy-and-hold will come back one day, but it might not be for a number of years more, and until that point your choices are to be incredibly patient or wait and sit it out.


    Reply
  •  
    Aug 14 07:10 PM
    Pangaea, you completely missed the point.

    You said "The market is based in large part on emotion." The article states the complete OPPOSITE. If program trading becomes dominant, "emotion" has nothing to do with it, merely prices become a feedback loop as programs cause other programs to buy.

    I'm not entirely sure if it means more volatility- if every program is trend-based (and I'm sure many of them are) then that would translate into more volatility.

    It means technicals now mean more than anything else for the moment, as only technicals can be reliably be mapped to computer programs. Thus, news apparently have no effect on prices in the short-term.
    Reply
  •  
    Aug 14 10:25 PM
    Wow Mark. I guess we must be missing something as clearly many of these guys have got it all figured out! LOL.
    Reply
  •  
    Aug 15 08:43 AM
    seems like someone (probably already has) will figure out how to trigure these programs in a direction that person can then profit from, even if short term

    wonder if this makes the ppt's job (job, what a misnomer :-) easier or harder!
    Reply
  •  
    Aug 15 03:07 PM
    i have been saying for a number of years wall st. is now vegas.you lose slower & nobody brings you a drink.people are finally waking up.the house wins most of the time.
    Reply
  •  
    Aug 16 11:44 AM
    Mark, I share your frustration with today's market, but "logicalthought&q... has it right in his comment. I am heavily invested in the energy sector because I see so clearly (logically) the long-term bull-market case for this sector while also seeing so clearly the long-term headwinds faced by the retail and financial sectors, for example. So to see money flowing out of undervalued energy stocks into less undervalued sectors based solely on the rotational trading of hedge funds is extremely annoying. But fundamentals do eventually prevail, and the irrational behavior of others always creates opportunities for those guided by more rational thought. I traded the energy sector well when it was the overall market leader, frequently selling undervalued holdings on run-ups in the expectation of being able to buy them back on pullbacks. And although I've also done some selling of stocks that have broken key technical support levels, that selling hasn't been nearly aggressive enough to shield me from the pain of nonsensical over-reactions of others to those technical sell triggers. But I do at least have the satisfaction of being able to buy more of those appealing stocks at prices I'd never have thought possible. I had thought the bull case for energy stocks was so compelling that the sector would be able to ignore the bear market elsewhere. I was wrong.
    Reply
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