Jason Zweig’s column Wall Street Journal column today suggests that wild market swings are the result of sentiment. Hahahahahahahahahaha.
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Mr. Zweig:
Sentiment is a human attribute. As the Journal frequently reports, about 66 percent of all trading is machine to machine, algorithms at work. Those algorithms are the proprietary weapons of choice of organizations that move huge amounts of capital, hedge funds and governments.
Algorithms feel no sentiment. There is no herd instinct in circuitry.
Human investors, the kind that are suggested by the illustration accompanying your work and are the topic of the study on which you report, do not have access to the same markets as the algorithms moving two-thirds of the world’s money volume on any give day. As an individual, I cannot engage in “after hours trading.” That’s not the case for computers that never sleep and are programmed to capitalize at the sight of a penny’s discrepancy on, say the Tokyo and Berlin exchanges. That trade triggers other algorithms; all those pennies add up. While I am asleep in my Eastern US time zone, and while the markets are closed to me, I may awaken to learn that the opening price of an issue or vehicle is significantly different from the previous day’s close.
Even if I were awake, it would not matter. While the bromide to individual investors for decades has been to diversify, and most individual investors, pension funds and smaller municipalities pay heavily for professional management via mutual funds, those investors are closed out of the markets while the markets are open. Sentiment–whether fear or enthusiasm–cannot move the markets when buy or sell orders may only be implemented at the close of business, after 4 pm. Indeed, what crash after crash of the past several years has shown is that while the big investors trade in liquid markets, smaller investors do not, and pensions or college savings may be ravished before any action by investors may be taken. As the Journal reports, “Despite its 2009 rebound, the Dow Jones Industrial Average today stands at just 10520.10, no higher than in 1999. And that is without counting consumer-price inflation. In 1999 dollars, the Dow is only at about 8200 and would have to rise another 28% or so to return to 1999 levels.” Our 401ks and IRAs are trapped, holding trillions of dollars that do not grow.
In terms of real wealth, the past decade has seen us grow more poor. Only volume has soared. Someone is making money, but it is not those of us schooled to buy-and-hold. We are stuck on the sidelines while fees and commissions bleed us white. Which someones? Oil emirates, the government of China, and the financial community that services those huge, capital machines by developing ever more obscure financial instruments that investors subject to sentiment cannot understand, much less trade. All we get to do is bail out corporations too big to fail.
It would be lovely if the Journal stopped perpetrating a myth of an open market democracy. The word “investors” should be reserved for individuals and organizations that actually invest, and by doing so create wealth by facilitating capital formation , not money-movers who buy and sell in minutes, create no new wealth, and hedge against the less mobile funds of us poor saps who foolishly continue to believe the markets are a level playing field.
Best wishes,
dollar$ 