Hello fellow personal finance readers. I go by the pen name “Teacher Man” due to the fact that I recently graduated from university and am in my second year of teaching high school. About 9 months ago my partner and I started a website called My University Money. It is aimed at helping young people (with a specific focus on post-secondary students) and just talking about financial and student lifestyle issues in general. Young & Thrifty was one of the first bloggers to really reach out to us and give us a little recognition when we were just starting off. When I read that Y & T was hitting a busy patch in life I offered to do a little staff writing for her, and she graciously accepted. Many in the investing industry have been singing the praises of the explosion in discount brokerages over the past couple of decades. The fact is that online discount brokerages which cut fees to the bone (as little as $5 per trade) have completely changed the way the investing game is played. It wasn’t so long ago that someone wanting to invest had to ring up their full service stock broker (on a rotary phone) and ask them to place their trade for an exorbitant fee (often $50-$100). Unless you were one of the big fish, your order got put on the back burner until whenever your broker got around to it. These days investors have access to real-time quotes, and a bevy of current information that even corporate investors couldn’t have dreamed of 30 years ago. This is great news for the little guy right? Uh… the jury is still out on that one.
So You Think You Can Trade?
There is no doubt that the internet and the way it levelled the information playing field (kind of), as well as its pricing structure is to most peoples’ benefit IF they practice the same investment strategies as before. Therein lies the major problem. In the past, investors looked to make sizeable investments in companies they believed had a competitive advantage and would consequently do well over time. Paying these large fees to move in and out of investment positions was a major incentive to practice buy-and-hold investing. Today, you can turn on your TV to anyone of 3-5 channels that will be spinning some sort of voodoo about the latest earnings reports, or some new cookie-cutter shaped technical analysis theory, and that makes a lot of people believe that they could be the next Goldman Sachs hedge fund manager if they watch enough of the garbage. When you combine this with the sudden ability to trade whenever, and however you want, for a cheap fee, you can do a lot more harm than good.
Trading With The Stars
Investing is not trading. People often get this confused. When people watch Wall Street movies and get caught up in the adrenaline rush (admittedly, we testosterone-driven types are most susceptible to this) of getting rich quick, they get a ridiculous view of what investing should truly be about. It seems to me that a lot of people have forgotten that the whole point of the stock market is to allocate capital to the best companies. It is the natural extension of free market ideas that the companies that have proven they can do the best with what they have (and produce something valuable) should get more money to work with, and should see their value continue to grow. Online discount brokers have greatly aided this trend where we have moved away from that ideal, into this crazy casino world where people try to make money from nothing by attempting to predict the irrationality of the markets on a minute-by-minute basis. I want to yell at these people that Wall Street has mathematical geniuses working for them that have invented automatic algorithms that are powered by state-of-the-art technology and insider information. Do you really think you can beat these guys at their own game staring at charts? People on my site are probably sick of hearing about my worship of Warren Buffett and his patient, value investing ways, but I always think that this guy is the pinnacle of what true investing should be about – not day traders looking to cash in on some made-up “momentum swing.”
The Cheap Trade Factor
Is the invention of the $5 trade a bad thing? Not if you are realistic about the markets and your strategy within them. I’m by no means a stock guru, but pretty much every single investment study out there will back me up when I say that any sort of diversified, buy-and-hold strategy will work much better than trying to ride the latest trend. It doesn’t matter if you’re a dividend investing apostle, an ETF/Index investing convert, or a value investing Buffett-ite, you will be better off than the guy who trying match wits against the sharks on Wall Street. The $5 trade has saved smart investors a ton of money. It has also majorly cut into the slim profit margins that most investors have seen over the last few years. Go ahead and look for yourself at the studies done over the past 20 years comparing active traders to people who index is boring old index funds once every month. There is an old saying in poker that if you can’t pick out the sucker in the first hour, than you’re the sucker. How do you think these hedge fund guys can make such outrageous returns? Someone has to be at the other end of them, and I know it’s not the guy sticking his money in ETFs and Index funds.
Are You Smarter Than A Hedge Fund Manager?
For years economics professors out there loved to talk about how they had come up with a magical formula for the stock market called the efficient market theory. This approach basically claimed that since everyone now had access to such good information, supply-and-demand fundamentals guaranteed that every stock was appropriately priced at any given moment. This may have had some degree of validity when people carefully considered their investments since it cost $100 a pop to buy or sell any shares at all. I’m fairly certain that in today’s headline-driven markets it holds almost no short-term relevance at all. We are seeing more volatile markets now than ever before, and there is little doubt that this is influenced by the competition over who can produce the most extreme headline, and the ability of the do-it-yourself investor to rush to their computer and “join the heard” trying to follow whatever the latest “Mad Money” tip was . Humans have always been genetically hardwired to be bad at investing. Our risk-averse nature basically guarantees that most of us will want to buy high and sell low the majority of the time. With trades so cheap and access to accounts so easy these days, those millennia-old instincts have an instant outlet, and this is not good for many investors.
Be a Wall Street Survivor
Don’t be one of these investors that plays right into the hands of the investment industry. Even though fees are lower, investment brokerage employees are still driving yachts (albeit maybe slightly smaller ones now). When you use low-cost trading to justify a hyperactive, instinct-driven investing style, your just eating into your meagre returns (which now can’t compound over time) and buying some rich dude a new Mercedes (regardless of how you do on the actual trade). Instead, take advantage of this competitive new market and save yourself a ton of investing fees over your lifetime.