Are You a Stock Market Sucker?

by kungfugirl on November 15, 2012

There's a sucker born every minute...don't let it be you

If so, fear not….you are certainly not alone!

I was, too, (and still am in some ways!)

When you first signed up for Kung Fu Finance, I promised you I would do my very best to show you what I’ve learned along my investing journey and show you how the “smart money” thinks and invests (because believe me, I was the “dumb money” for many years!).

But little did I know how much of this journey would be dedicated to exposing the seedy underbelly of the world of finance.

You probably already know that my opinion of the U.S. stock market is not exactly stellar. The deck is stacked against “the little guy” (that would be you and me…) from day one, as most of us are not taught how to invest in school nor at home.

And most of us individual investors are not professional investors or traders — many of us were thrust into stock investing due to a company’s compensation plan or retirement plan…(or because the current zero-interest-rate environment forced us to take on greater risk in a frenetic search for “yield”!)

Many individual investors do not have the slightest idea how to read a company’s financial statements, how to properly value stock, how to understand “what’s happening in the market” on a given day or week based on trading volume or other factors, how to determine what “investor sentiment” is and whether or not it is important, or how to determine a stock’s 200-day moving average (and whether or not they should bother).

In fact, most of us were taught that we didn’t need to learn those things…our company and/or those wonderful bankers on Wall Street would take care of all of all of that for us…we just needed to “buy and hold for the long term”.

Right.

(We know how well that’s worked out!)

In fact, the Wall Street Journal recently ran an article entitled, Tackling Investor Ignorance, which covered the findings of a recent SEC report on financial literacy in America. As you can probably guess from the title, the results were not very complimentary.

In the words of the Wall Street Journal, “as a whole, it’s pretty darn pathetic”!

Ouch.

From an educational perspective, most of us are stock market suckers…we simply do not know very much about investing or money management at all, and thanks to Wall Street, we really don’t know much about investing in the stock market.

(So that is Reason #1 why we are all stock market suckers…lack of financial education!)

But that’s just the tip of the iceberg…why else do I ask if you are a stock market sucker?

A recent article I read shocked me.

Yes, I have heard all about “HFT” (High Frequency Trading) and yes, I know it has a pretty big impact on the stock market (some say “good”, many more say “evil”), but I didn’t realize just how big

What do you suppose the average hold time is for a stock bought in the U.S.?

Well, most financial advisors advise you to “invest for the long term” and “buy and hold”, and most of us understand that from a tax perspective long-term capital gains are much more attractive than short-term capital gains (at least for the moment—who knows what the future may bring).

So one could reasonably assume (perhaps) that the average holding period for an equity might be several years, or months, or maybe days if you believe there are an abundance of day traders plunging in and out of the market.

Reasonable assumption? Yes.

But you would be wrong (like I was…)

Oh so wrong!

Because the average hold time for a stock in the U.S. is…

Wait for it…   :-)

22 seconds.

(You have no idea how badly I want to make a bad sexual innuendo here, but I will resist…)   :)

But seriously, 22 seconds???

Less than a minute.

Now, I may be indecisive at times (I am female after all…), but even I have never placed a trade and then changed my mind in the next 22 seconds!

But of course, it obviously isn’t humans making these trades and skewing the results…it’s the high frequency traders—the computers and algorithms running “behind the scenes” of the most powerful financial companies in the world.

These high frequency traders are so powerful and so vast that they skew the average hold time down from years, months, or even days…to seconds.

And according to Michael Hudson, a former Wall Street economist at Chase Manhattan Bank, this computerized high frequency trading makes up 70% of all trades.

(Reason #2 why you just might be a stock market sucker…no matter how fast you are when clicking that “buy” button, the HFT algo is much faster!)

So that’s reason #2…

Which of course got me to wondering…if large institutional investors of the sort who can conduct in this HFT make up 70% of all trades in the stock market, then just how much equity do we tiny little individual “retail” investors even own?

?

Not surprisingly, but sadly, the answer is “not much”.

Alicia Davis Evans, Assistant Professor at the University of Michigan Law School (Go Blue!), J.D. Yale University, MBA Harvard (in other words, no slouch) writes in her 2009 book, A Requiem for the Retail Investor,

“The American retail investor is dying. In 1950, retail investors owned over 90% of the stock of U.S. corporations. Today, retail investors own less than 30% and represent a very small percentage of U.S. trading volume.

Data on the overall level of retail trading in U.S. equity markets are not available. But recent New York Stock Exchange (“NYSE”) data reveal that trades by individual investors represent, on average, less than 2% of NYSE trading volume for NYSE-listed firms. There is no question that U.S. securities markets are now dominated by institutional investors.” (emphasis mine)

Ouch.

We, the (little) people, have gone from owning over 90% of the stock of U.S. corporations to owning less than 30%.

And just a few weekends ago, Barry Ritholz (yes, I am his new biggest fan after the Agora Financial conference, and yes, I still owe you my write-up on his 10 Mistakes Investors Make talk…coming very soon…) published an article in the Washington Post titled, “Where Has the Mom & Pop Retail Investor Gone?” where he lists the top 10 reasons he believes individual investors have left the stock market. Like all of Barry’s articles, it’s a great read, and I encourage you to take a look at his list if you have time.

So that is reason #3 why you just might be a stock market sucker…like me! We truly are “the little guy”.

I could go on and on…

Between HFT, mass corruption (can you believe John Corzine, MF Global thief supreme, is not only not going to jail, but wants to start a hedge fund???), and two tremendous plunges (NASDAQ 2000 and the “Great Recession” of 2008-2009 that wiped out trillions in wealth)…it’s no wonder individual investors have pulled money out of equities, and no wonder so many of us feel like stock market suckers! (We are!)

But what can you do? Should you just give up, throw in the towel, and run off to some other investment class?

Maybe.

I am extremely cautious with the stock market these days. Only about 15-20% of my portfolio is allocated to stocks (other than mining stocks). And I regularly use trailing stops and options to add to my gains and protect myself in the market. If you do not understand how to use those yet, I would advise you to first get educated (yes, I am working on a cool program to help you do that!) and then participate in the market.

This is the first in a series of Orange Belt articles…a survey of investment options, or, “there is more to investing life than the stock market”!   :)

Don’t get me wrong…the stock market has its place, and if you are a business-lover and understand how to properly value stocks and buy them at good prices, you can still do well, despite the fact that the deck is rather stacked against you.

But you do need to educate yourself first! Don’t be a sucker…do your best to learn about secular bull and bear markets and which strategies work best in each, learn how to read financial statements, learn the basics of fundamental and technical analysis, and learn some basic shorting and options strategies.

If that doesn’t sound exciting to you, and if you’d rather explore some other investing asset classes, then stay tuned! In the next several weeks I will cover gold, silver, commodities, currencies, bonds, real estate, businesses, and more….there are so many alternatives to stock investing, and they can be MORE lucrative and MUCH more fun!

And speaking of gold and silver, tomorrow and Saturday I am attending the San Francisco Hard Assets Conference! Thankfully this involves zero traveling on my part as it is right in my backyard, and I can’t wait to report on it for you!

(And I apologize for the crazy posting schedule this week…usually it’s two or three times a week, Tuesday/Wednesday/Friday or Tuesday/Wednesday/Saturday, but this week is a little off due to a huge bout of the flu in the Kung Fu Family!)

Please let me know what you think about the stock market in the comments! Is it really rigged and just for suckers, or should it still have a place in your portfolio? And definitely let me know if you’d like me to check out any particular mining companies for you…most of them will be exhibiting at the conference tomorrow and Saturday.

To your financial success,

— Kung Fu Girl

 

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About the Author:

Susan Fujii, aka , is an SEC Accredited Investor who believes that anyone can learn to be financially independent.

Susan has authored 199 posts on Kung Fu Finance, and you can connect with her on .

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