Last night on 60 Minutes, there was a segment focusing on Michael Lewis’s new book which evidently focuses on High Frequency Trading and the unfair aspects of machines front running human beings. In the interview, Mr. Lewis claims the stock market is “rigged”. First of all, the practice of determining order flow and trying to get in front of it is not new. In 30 years that we at CHJ have been involved in the investment business, professionals have been trying to get in front of other professional’s trades. Friends who worked on trading desks 20 to 30 years ago have told me how their best clients would check in before the beginning of trading to see who is lined up to buy what and in what size. Folks, this has been going on forever. The only difference is that today it is done electronically.
The important thing is how does this affect us as individual investors? For those of you who have followed our email updates over the years, you know that we have complained about unfairness in various marketplaces, and have always simply wanted a level playing field. We would love to see these advantages eliminated. But we aren’t going to hold our breath. Instead, we have always chosen to focus on what we can control, and that is staying invested and reaping the benefits of the powers of capitalism. If Warren Buffett had proclaimed back in 2008 that the market is rigged, instead of saying that he’s buying, those who follow the Oracle of Omaha would have kept their money in the bank and earned pennies and not enjoyed the rally that we’ve seen in stocks over the past several years.
Whether some machine is buying AT&T a penny cheaper than you is not a reason to give up on trying to grow your money. Rigged, is a term from a guy trying to sell a book. Mr. Lewis is a great writer, but “rigged” implies that investors are suckers and on the losing end. If you bought shares of Du Pont five years ago today, you paid around $20 per share. Today the shares trade at $67 per share. If you bought shares of Bristol Myers five years ago today, you would have paid less than $17 per share. Today they are worth more than $52 per share. Whether or not someone or something caused you to pay a penny or two more for those shares five years ago makes very little difference. What makes a lot of difference is the choice that someone made to buy shares instead of leaving money at zero percent in a bank or money market account. Some investments work out and some don’t, but whether you paid a penny more per share in the transaction is not the determining factor.
We need to remain focused and ignore the noise of carnival barkers selling books or spouting investment ideas on television, twitter and the internet. Once again, I am not defending things that are wrong. We want a level playing field as much as anyone. Off with their heads as far as we are concerned. But let’s stay focused on what is really important and what we can control.