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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{ 17 comments… read them below or add one }

Honolulu Aunty November 15, 2012 at 6:00 pm

Aloha KFG,

You know, you couldn’t have written a more timely post for us. Our Investools subscription was about to expire and I had to decide whether or not to re-up for their low monthly fee in order to access their excellent charts, options pages, and Uncle’s red and green arrows (he likes those).

So my question to Uncle was – “During the last year, did you make money or lose money in the stock market?” Uncle said he was good and picked the stocks with the 3 green arrows and they were good stocks, etc., etc., but when I asked if he had more or less dollar value in the account than when he started, he had to admit that he had lost money.

So, we didn’t re-up our Investools subscription, and Aunty has almost sworn off guessing the market and throwing money away on options.

Almost.

22 seconds, KFG? That’s pretty indecent. That might be a strong enough reason for Uncle and Aunty to get out of the stock trade.

Mahalo for your lesson,

Aunty

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kungfugirl November 16, 2012 at 9:23 am

Aloha Aunty!

It’s so nice to hear from you, and I’m glad to know that you and Uncle are doing well! How is the Nerium business going? I hope *wonderfully*! And your Vegas real estate? I hope you are raking in the big bucks on both!

Yes, I couldn’t believe it either…I knew HFT was a HUGE part of the market, but 22 seconds?!?! Absolutely insane.

I am sad to say that unless you really, REALLY know what you are doing or have a fantastic options strategy OR just simply buy “world dominating dividend” stocks *when they are cheap*…that the stock market resembles a casino more than a free market of sound businesses to invest in these days. :(

So proud of you for knowing your strengths and focusing your efforts on the areas where you feel you can make the most money!!!

Thanks so much for your comment– it’s so nice to hear from you!

Mahalo plenty,
– KFG

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fbl November 15, 2012 at 6:15 pm

First let me say I’m sorry to hear about the flu bug in your house.

There are many ways to avoid flu and colds. I haven’t had either since ’85. Get your vitamin D level up to about 60 (probably need at least 5,000 iu of D3 a day for adults 2-3,000 for the kiddies), take 3-4 doses of vitamin C a day (1,000 mg each time for adults, 500 for the kiddies) all year round and at the first sign of any problem, be it sore throat, runny nose etc., start taking Grapefruit Seed Extract. Nutribiotic is a good brand and 250 mg 3-4X a day will stop almost anything in its tracks, 125 mg. for the little ones.

You are way ahead of me on the financial info so have nothing intelligent to add there.

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kungfugirl November 16, 2012 at 9:25 am

Hi fbl,

THANK YOU! :) I really appreciate it! Yes, my vitamin D is low…my doctor told me that at my annual checkup this year and I need to supplement (which I do, but lately I’ve been slacking…shame on me!). I will look into Grapefruit Seed Extract and buy some of that, too…thanks!

Thanks so much,
– KFG

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Kandiah Sivakumaran November 15, 2012 at 6:31 pm

I am a new member. I read the last two emails and honestly I am not sure what it is that you are trying to tell. Sounds more like just ramblings. Please do not think I am being critical, but this really is my feelings. thanks.

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kungfugirl November 16, 2012 at 9:39 am

Hi Kandiah!

First of all, welcome to Kung Fu Finance! I’m so glad you’re here. Yes, I am working on an autoresponder sequence (a series of welcome emails) to help catch new readers up to speed. I typically write articles two to three times per week, and the articles range from how to master your mind (the power of focus, importance of persistence, how to WIN, how to set goals, emotional investing, etc.) to macroeconomics (“what’s happening in the world”) to financial decoding and explanations (“what IS money?” “what is inflation?” “could we have hyperinflation?” “what is the 10-year bond yield and why is it important?”).

On Fridays (sometimes Saturdays) I typically do a “QnA” of questions from readers who have emailed me or commented on the blog that I think the entire community would benefit from.

My goal is to help YOU achieve a dramatically more successful financial future! But that looks different for everyone, so you will get out of this what you put into it, effort and timewise.

I recommend reading the articles under the “New Here? Start Here” section on the right hand side of this page, and also the Getting Started page has a wealth of information. And please feel free to ask me a question anytime!

Welcome to Kung Fu Finance….let’s kick some butt on your finances!!!
:)
KFG

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Marc P November 15, 2012 at 6:35 pm

Hi Susan!
I wish I could join you at the conference. I noticed that Tinka Resourses is exhibiting and would love to have your feedback on the company. I have lost money on the stock and was wondering if I should hold or re-deploy my funds elsewhere.
Many thanks!
Marc

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kungfugirl November 16, 2012 at 9:27 am

Hi Marc!

I will make sure to stop by the Tinka Resources booth and also attend any investor presentation they might have and let you know what I think…I’m on my way up to the City now (but I wanted to quickly reply to these comments first!). :)

More soon…
– KFG

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kungfugirl November 21, 2012 at 10:19 am

Hi Marc!

I stopped by the Tinka Resources booth and here is what I found out:

1. I only got to speak with their Investor Relations guy because their CEO was “busy” (strike one) :)

2. Their share structure is good– they have issued 70,422,899 shares and only have 3,550,000 options, so the percentage of options to shares is good (my investment banker source tells me anything under 10% is good).

3. They need about $5 million to get to production…the IR guy said he saw no problem raising that (but I’m not so sure…it’s a tough market out there right now for raising money!)

4. Their directors and management are Australians who serve as directors and executives on multiple companies…this is a bit concerning as they might be spread a little thin.

5. On a positive note, they have achieved the NI43-101 “inferred” category of silver resources of 32.7 million ounces and 29.6 million ounces.

Depending on when you bought it, I can see that you have probably lost money (most juniors are down, particularly since 2010, and Tinka’s 12-month share price has been $0.75 – $0.28).

I don’t personally own shares in Tinka so don’t know a ton about it, but I can give you the list of questions from Rick Rule and Bryce Bradley on what to ask these juniors, and you can see if anything about Tinka has changed since you originally bought it….e.g. what was your original investment thesis and has anything about the company or its prospects changed since then, or is it just time? Like Rick Rule, you can either stick to your guns and average down, or you can sell and cut your losses if you think Tinka’s prospects have changed.

From an overall market perspective, both Rick Rule and Louis James feel that this is a terrific time to buy, because they see this as a cyclical decline in a secular bull market…but you will need to make your own judgement on that! :)

I hope this helps…I’ll try to get those questions out to everyone today, and if you have more specific questions on Tinka let me know– I did grab their presentation book and all of their docs.

Good luck with your decision!
– KFG

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Diane Aksten November 16, 2012 at 7:39 am

Dear Kung Fu Girl: I, too, have become disillusioned with the stock market and have chosen to invest my money in vehicles that most investment “gurus” would consider unconventional, like Cash Flow Banking (because it doesn’t make them a significant amount of $$)–at my advanced age :) I don’t have the luxury of waiting for the stock market to “bounce back”…

I like your contrarian approach to investing and look forward to your Orange Belt articles; any spare money I have will be going into silver, gold and perhaps platinum (still researching that option for myself).

Keep up the good work KFG and take lots of Vitamin C!!

Diane

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kungfugirl November 16, 2012 at 9:29 am

Thank you Diane!

I will do a writeup soon on Cash Flow Banking, too…and several other unique methods– I just met an amazing, wonderful ethical man who uses insurance as an investment vehicle…it’s very intriguing and I am researching it before presenting the idea to you all. There are *so many* ways to make money with your money….I’m glad you are focusing on the ones that work for YOU! :)

Thank you for your nice comment!
– KFG

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gilbert November 16, 2012 at 10:15 pm

Please check out Ethos (ECC) & Sandstorm gold (SAND). i know that SAND is led by Nolan Watson, a Casey Next Ten but i`m not so sure about ECC. I read that you bought Prophecy coal last year. is it still a gud buy (i know you`re not a CFP but i just like to know your thoughts). More power to you. I`d like you to know that i`m learning a lot from you & i just wish your site will remain to be free.

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kungfugirl November 21, 2012 at 10:26 am

Hi Gilbert!

It’s great to hear from you! I did check out Ethos, but unfortunately Sandtorm gold was not there. Ethos was interesting– I actually got a great feeling from their COO because *gasp* he appears to have a lot of integrity!

They were looking to find 3 million ounces, but unfortunately only found about 1/2 – 1 million ounces so they are cancelling the project.

They do, however, have $9 million in cash, and are looking to acquire someone else with proven resources.

The COO said that he could understand why you were questioning, since you had probably bought it at around $1.00 and now it is trading around $0.25 (I have no idea what you bought it at, but all juniors have had a rough 2 years).

The big question for you is whether or not you want to take a chance with them acquiring another company with their $9 million. They are in a good position to do so, because credit is hard to come by right now so they are in a great position with having cash…but they need to find the right deal.

I wish I could tell you what to do, but I just don’t know enough about Ethos…(I am not a shareholder).

Good luck with your decision, and let me know if I can help any more!
– KFG

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James Carr November 17, 2012 at 11:29 am

Avid reader. Have avoided the general market for years, holding majority of funds in CEF, the slow/steady wins the race thingy. On the other hand part of me is a crapshooter. So I “piddle” with precious metal stocks. Recently GORO took a huge hit which PM writers I read says were punishment the stock didn’t deserved due to accounting changes. Looking at GORO historically it has been a good stock; so my opportunity light flashed bright red and I invested a large (for me) sum, expecting a rebound. Sure enough, it didn’t exactly bounce, but with a few weeks had come back about 35%. I think, hang on there is more. NOT! A few days ago it was again hammered and I can’t find out why. Now I don’t know if I should cut my loss and get out or gut it out “like the tough guys?”

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matt November 17, 2012 at 11:35 pm

hi kfg-
thanks so much for your wonderful website, i’m a newbie and truly appreciate your efforts to help those of us seeking some financial education. regarding this article (stock market sucker), how exactly is HFT a negative thing for us as individual stock market investors? this seems to be the implication, but maybe i’m just missing something. please hold my hand here a bit, i’m trying my best to learn.
-matt

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DipintoDBlue November 18, 2012 at 11:04 am

Hola KFG,

Recognition that the stock market is driven by the institutional investors’ HFT shouldn’t dissuade the small-timers. You can ride the wake of the institutional tankers by following the money flow in and out of favored/unfavored sectors. If you can accept that you’re not gonna beat ‘em, it’s more profitable and less stressful to trade with ‘em.
The market is always smarter than you, get over it.

Many people make bad financial decisions because they’re made under the duress of “needing to do something” with their money. Especially if they’re earning less than 1% on their cash. Mr. Buffet is famously patient in waiting for the “right pitch” rather than swinging at a bad ball.

Cheers,
Nel Blu

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Don Klinkert November 22, 2012 at 12:03 pm

Hi Kungfugirl, You ask for our minning stock, well here are the onces I own. NUSMF, RIC, SLGLF, GBG, GORO, UEC. The only one in positive territory is RIC. I have own all for more then years.So let me know what you think? Thank you very much, Don

Reply

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