Oh, how times have changed. During the early 1990s placing security orders required a call to the broker (for us that was and still is Charles Schwab & Company), paper applications and checks had to be submitted manually and we did a daily financial market recap on the radio. Today, we place security orders, submit applications, other documents and checks online. And Investors can check their portfolios via an app on their phone, tablet, laptop or desktop.
The rapid development in technology over the past three decades has given even the novice investor the ability to execute trades in seconds as compared to the minutes and sometimes hours it took in the past (if your advisor was not available).
Professional investors have the added benefit of computer driven algorithms. According to Bloomberg, these actually accounted for more than 55% of all trades and 60% of all volume executed in 2019. By identifying trading advantages, the widespread usage of algorithms (along with other computer generated trading) has all but has old Wall Street strategies such as the January Effect (where historically small caps outperform) and “Sell In May And Go Away” (where most market gains are realized during November through April).
The old school way of a person doing his/her own research — spotting trends in specific industries or securities — was deemed over. That’s because these algorithms could spot meaningful trends and patterns long before the average investor. In fact, a growing percentage of industry followers believe that we could be witnessing the end of human traders and the beginning of total computerized investing. Evidence of this can be found in the statistic recently announced by Goldman Sachs. Over the past two decades, because of automated trading programs, the firm has replaced 600 traders with computer engineers. It seemed like the end of an era was upon us — with the Warren Buffetts and Benjamin Grahams of the world being replaced with computers that could calculate millions of trades per minute.
Not so fast! In the midst of this investing “revolution” investors forgot why and for what they were actually investing.
Yes, high frequency trading has replaced many day traders who just could not keep up with the daily patterns of stock movements. However, it has done little for the long-term investor. High frequency trading did indeed provide an advantage to the very few geniuses who could actually create algorithms to see these daily patterns. But these patterns do not provide lasting or meaning information. Investors still need to concern themselves with the performance of the fundamentals of their holdings and how those fundamentals hold up through various market cycles. This remains of the utmost importance.
Perhaps there are some trading advantages gained through the use of technical analysis by individual investors. However, it’s been our experience that once the secret is out the advantage is gone.
Every advance in technology is not groundbreaking. Computers are flawed. They do not take into consideration the human condition/behavior. This is where we continue to and always will have the advantage.
The strategy of being fearful when investors are greedy and greedy when investors are fearful has worked in the past, works now and in our opinion will continue to work. And it trumps all algorithms.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call (518) 279-1044.
