Financial Freedom Is Merely Organized Common Sense
If so, it cannot happen too soon.
Measuring investments and portfolio managers is a statistically intense undertaking. Designing portfolios is an “interesting” pastime as well. Pity that both are important. Especially a pity that the existing measurement methods have underlying statistical factors that make it nigh impossible.
Perhaps the loss of the high frequency, high velocity trading firms will be a blessing.
The data generated in the stock market now is not the same as the date generated in the past, even though numbers are still numbers. We can estimate that the statistics that develop using high speed methods do not mean the same thing as the others.
How so?
Some time ago I wrote a piece called, “If things are different, they are not the same” In that I talked about Project Express, a new transatlantic fiber optic cable that would give high frequency traders a 5 millisecond trading advantage and with it the ability to quickly pay for its $300 million cost.
My concern then was that the “statistical meaning” of a trade where the hold period is measured in milliseconds is not the same thing as buy and hold in 1950 when the statistical underpinnings were first developed or even in 1980 and maybe not in 1993 when the hold period was still in years.
Buy and hold is a continuing process of assessing dividends, management, debt and other ratios, future prospects of the company and the industry, one’s own time frame and taxes.
High volume trading is more event than process. There are no factors that matter that are not reflected in the immediate price. When the numbers start to matter more than the business, then you have a different system. The entire transaction is over immediately. No introspection or thought. Execute a trade against a price anomaly.
Using statistics from one system to describe events in a different system is invalid.
High volume, short hold trading is a newish phenomenon although it was practiced in a rudimentary form back in the ’60’s. Back then the hold time was more than 60 seconds. An eternity by today’s standard.
Some interesting details from a BusinessWeek story. How the Robots Lost
We know that the price to volume correlation which used to be quite strong, has become random and I have to think that most other statistical measures are now close to meaningless.
Perhaps it is time to buy businesses and ignore the stock exchange. As Warren Buffet has said, “When we buy a business, we don’t care if the stock exchange closes for 10 years a day later.” That is how the business people think.
If the high frequency folks had the stock exchange close 1/10 of a second after they buy, they would be out of business.
As the OPP say, “Speed Kills” and it looks like that maxim applies to more than driving.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.
don@moneyfyi.com | Twitter @DonShaughnessy | Follow by email at moneyFYI
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