Author Topic: It’s Not Your Father’s Market Anymore…  (Read 1509 times)

Offline Reginald Hudlin

  • Landlord
  • Honorary Wakandan
  • *****
  • Posts: 9958
    • View Profile
It’s Not Your Father’s Market Anymore…
« on: September 03, 2010, 08:05:33 am »
from our friends at BEVERLY HIGHLAND CAPITAL:

September 3, 2010

It’s Not Your Father’s Market Anymore…

My father, thank God, will celebrate his 84th birthday in a couple months. He has lived through both The Great Depression and The Great Recession. Like many Depression era Americans, in need of larger than life heroes, my Dad became a fan of boxing at an early age; originally listening to fights on the radio then in later years, watching them on TV.

As a boy, he got to hear great heavyweight title fights between James J. Braddock and Max Schmeling and was able to cheer Joe Lewis as he reigned from 1937 – 1949. In the 1950’s Joe Walcott, Rocky Marciano, and Floyd Patterson gave my Dad a decade worth of great fights. He got to watch Sonny Liston turn the crown over to Cassius Clay, who as Muhammad Ali, would hold the title of Heavyweight Champion for most of the next 15 years - allowing for a brief stint in jail and the time the crown was held by Joe Frazier and George Foreman (before George’s grilling days).

With a lifetime of experience listening to and watching the greatest boxers of all time, it is understandable that my father has a deep appreciation for the courage, skill, and gamesmanship of these athletic warriors.

In recent years, fighting as a sport has evolved (some would argue devolved) into mixed martial arts competitions where boxing is only one component of a much more diverse array of skills that combatants use against their opponents.

Last week, while having dinner with my parents, my Dad and I got around to the subject of a fight schedule between James Toney (former heavyweight boxing champ) and Randy Couture (a 47 year old former mixed martial arts champ). My Dad was optimistic that the younger boxer, “the purist” would win the fight, while I believed the boxer would not stand a chance as he had only one weapon in a competition that now requires many.

The fight happened last Saturday night. Toney, the boxer, never landed a punch before being defeated by a skill-set much deeper than his own.

I think my Dad knew the boxer had the deck stacked against him, but nostalgia acquired with a life-long love of boxing kept my Dad from embracing the idea that the game had changed; boxers, the purists, have been left behind.

Buy and hold no longer works

Just like the evolution of fighting, from boxing into mixed martial arts, so to, the stock market has evolved.

In the past, before computers and the internet, successful investors spent countless hours pouring over thousands of printed pages sifting through the financials of stock offerings, in hopes of determining which stocks offered the best combination of fundamentals and value. After a carefully weighed decision was made, an investor would pay a very large commission to buy shares in a company, then sit, often for years, waiting for the price to rise as the market adjusted for the undervalue that the investor had uncovered during his research.

Technological efficiencies have changed the stock market game. A thorough fundamental analysis can now be done in a fraction of the time required just a few years ago, trades can be made in milliseconds for almost no cost, and investors have become traders.

Sound fundamentals alone are no longer enough. In the way that boxing has become a component (albeit an indispensible one) of a more complicated skill-set that makes up mixed martial arts, fundamental analysis is still critical, but no longer enough, to compete in the market.

Successful traders today need fundamental analysis, technical analysis, and precise timing of buying and selling decisions.

Large numbers of individual investors are frustrated by the stock market that has replaced the one they knew. The importance of fundamentals has been overshadowed by high frequency algorithms designed to ferret out inefficiencies that can be exploited by increasing speed and volume to repeatedly capture miniscule gains.

Picture an enormous school of little fish that can almost instantly and randomly change direction; such are the movements of high frequency traders. High frequency traders can reverse direction just as easily and often as a school of small fish. By doing so, high frequency traders cause spikes and dips in stock prices, ala the “flash crash” that occurred earlier this year, on May 6th.

For many investors (and would be investors) it feels like the market is rigged, but it is not. It is just that the market has changed and success now requires tactical asset allocation, market timing, and the nimbleness to exploit short term trends.

It is no longer adequate to just be right about an investment decision, investors’ timing is also critical.

If this all sounds difficult, that’s because it is. But then again, making money in stocks is not supposed to be easy. It was not easy when my father’s generation of investors had to spend their nights and weekends at libraries digging through reams of paper to analyze a company’s fundamentals, it isn’t easy now, and it won’t be easy when my children are adults.

What has remained constant is – success in the markets depends on how well we trade the market we have. Accurately seeing and accepting the market as it is, instead of how we would like it to be, is the first and most important step along the path to profits.

Be well and enjoy your holiday weekend.

This material contains the opinions of the author but not necessarily those of Beverly Highland Capital LLC and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.