Is the Stock Market "Rigged"? 

 

You may have heard about the 60 Minutes interview with author Michael Lewis, a former Wall Street broker, author of "Liar's Poker" and "The Big Short," who has just come out with a new book entitled "Flash Boys." Lewis is an eloquent and astute critic of Wall Street's creative and predatory practices, and in his new book (and in the 60 Minutes interview) he offers evidence that the stock market is "rigged" by a cabal of high-frequency traders, abetted by stock exchanges and Wall Street firms. The charge is entirely true. And it is also completely irrelevant to you and anyone else who practices patient investing.

 

Consider three headlines:

1) The Stock Market is not Perfectly Fair to All Participants!

2) New Kind of Stock Exchange is More Fair than other Exchanges!

3) The Stock Market is Rigged!

 

If these three articles appeared in the Wall Street Journal or your local paper, would you read the first two? The first two are far more accurate, but if your job is to sell papers (or get viewers on TV) which headline would you choose? The basic message from Michael Lewis is that people who get information faster and can act faster have a financial advantage over those who get information slower and react slower. How is that a surprise? It has been true not only in financial markets, but in all markets, and it has been true since the beginning of time.

 

Why is this irrelevant to you? Many of those lost dollars are coming out of the pockets of day traders, ordinary people who mistakenly believe that they can outwit the markets by moving into and out of individual stocks several times a day, or professional traders at hedge funds who may not have access to the fastest server or a direct feed into the NASDAQ servers. There are tens of thousands of these investors, and many of them, watching the 60 Minutes report, discovered for the first time that they are getting routinely fleeced by Wall Street's money machine.

 

However, if you're invested for the long term, it really doesn't matter how many times the stocks you own inside of a mutual fund or ETF, or directly in your retirement account, change hands or at what price every few minutes. It doesn't even matter whether your stocks are up or down in any given month or year, as long as the underlying companies are building their value steadily over time. Your time frame is eons compared with the quick-twitch traders, who hope to be in and out of your stock in minutes rather than decades. Your mutual fund that buys when a stock seems cheap might, if it's careless or unsophisticated, give up fractions of a cent on its purchases, but that likely isn't going to have a measurable impact on your long-term investment returns. In fact, today’s markets are more efficient than they have ever been.

 

Somehow, this important fact was lost in the 60 Minutes interview. It is folly for an average investor to try to outsmart the markets with short-term trading activities. Having a long-term investment horizon means you measure returns over three-to-ten year time horizons; the milliseconds don't matter.

 

Bottom Line: This is another in the long list of headlines that you should spend none of your time and energy worrying over. We will keep thinking long-term and we will keep our focus on your goals.

April 2014

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