The Huge Advantage You
Have Over Institutional Investors
By Charles Mizrahi
Editor, Hidden Values Alert
High frequency trading (HFT) by institutional investors has dramatically increased turnover, and lowered the holding period of securities on all global markets.
According to Grant’s Interest Rate Observer:
“At the end of World War II, the average American investor held the average American equity for four long years. By 2000, those four years had dwindled to eight months. By 2008, eight months had shrunk to just two months.”
Holding periods for stocks are no longer measured by days or even hours but by micro-seconds – millionths of a second. Very soon it might be measured in nano-seconds – billionths of a second.
A recent speech by an official of the Bank of England stated that, in 2005, HFT accounted for less than 20% of stock volume in the US equity markets.
Today, it accounts for as much as 75% of stock market volume!
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For short-term traders, HFT has increased price volatility making it very difficult to trade the stock market.
But for long-term investors…HFT has created great opportunities.
The Structure Causes Great Companies
to Sell at Deep Discounts!
You have to feel bad for many of these financial institutions because the system works against them, forcing them to make foolish decisions. Today, institutions are under tremendous pressure to play the performance game.
Not only do they have to put up good numbers over short periods of time, they also have to have good “relative performance,” which means how well they have performed against an index and their peers.
A fund that produced a 10 percent return in a quarter does not look very good if the index they are measured against returned 12 percent. The fund will be labeled an “underperformer” and the manager will start taking a lot of heat.
At this point it becomes extremely difficult for the manager to buy stocks that do not track the index for fear of drifting too far from it. There is no way that the manager will fight the crowd and buy stocks that are not very popular at the moment.
Like other lemmings jumping off the cliff, the manager now gets caught into buying and selling the same popular themes and ideas as everyone else.
And that is just one way great companies selling at discounted prices get overlooked on Wall Street.
Any time stock prices disconnect from the intrinsic value of the underlying business—the advantage goes to the investor that is able to value the business and has patience.
When the stock price is considerably lower than the value of the business, it pays to buy the stock. And when the stock price is considerably higher…that’s the time to sell. Unlike institutional investors, you don’t have to answer to a committee, or confine your stock selections to a particular industry or market cap.
Instead, you have the advantage to pick and choose great companies…wherever they may be, and buy them when they are selling at bargain prices.
What to Buy: How to Take Advantage
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