Strange Advice From the Motley Fool

This week I came across an article on-line published by the folks at the Motley Fool.  For those of you who do not know, this company gives a lot of good sounding investment advice, but in reality they are similar to every other “traditional” financial advice provider out there.  At the end of the day you are paying them for advice on what companies to buy, and which to sell.  In other words, they believe in stock picking.  But according to this article, not a lot.  I’ll explain.

The first point they raise in the article is that you should not buy high and sell low; but that is what everyone does.  The author even confesses their guilt in purchasing a rather famous, now defunct, stock at a very high price.  You might as well lifted this part of the article from one of our classes.  Their point:  don’t let emotions get in your way.  Stay disciplined.  That is good advice.

But then the advice gets… murky.  They say don’t “day trade”.  I’d agree.  The research shows that the more people trade, the worse they do.  They give an example of someone doing 10,000 trades a year and raking up $100,000 in trading costs.  Hard to overcome.  But that is a ridiculous example.  Trading once a day would only be 730 trades a year by comparison.  So that begs the question, what is day trading?  If “day trading” is bad, then is just trading “once and a while” ok?  The fact that the article hides is that whether you trade once, or hundreds of times, the research shows your likelihood of beating the market is not good.  You can’t both believe the market is beatable, and yet be against day trading.  Here is why.

Assume that the M.F is right.  Let’s say you (or they) can pick stocks with the probability of 70% being correct, at a gain of $100 per time (and when I mean gain, I mean gain as in better than what the market as a whole did).  Out of the rest lets say 20% of the time you break even (or match the market), and 10% of the time you loose $100 (or do $100 worse than the market).  If I do 730 trades, one a day, I will realize a gain of $36,500 assuming I pay $10 per trade in commission.  I think we could all agree that that would be day trading, right?  And if these are trades of $10,000 a piece, I don’t need a big price movement to get ahead $100.

Now let’s shrink this down to 10 trades.  Hardly day trading.  Well, in that case I would make $500 based on those same costs and odds.  In both cases, since the market is “beatable”, it pays to trade.  In fact trading more doesn’t hurt you (unless you perhaps take it to the absurd extreme like the article does)!  It can actually help you to a point.

Now, let’s flip it.  Let’s look at real life probabilities.  Lets assume that 30% of your picks work and profit $100, 40% break even, and 30% lose $100.  If you did 730 trades, you would lose $7300.  If you did 10 trades at these odds, you’d be out $100.  Your winners cancel your losers, and you’re out the costs of playing the game.  In the real world, you would have been better off just owning “the market” and not trading.

Does anyone get the irony of this article?  The Motley Fool sells you on the idea of letting them help you pick a few winning stocks by paying for their advice.  Just trading a “little bit”.  Inherent in this proposition is the belief that the M.F CAN pick winning stocks.  But I just showed you above, that if the M.F CAN pick stocks, they should give you TONS of picks so you can make TONS of money.  They SHOULD give you a trade a day.  Here is why they don’t.  If they did, they’d rack up huge loses for their investors through trading costs.  They know they can’t pick winners consistently. By keeping trading to a minimum, they hope to hit just a few more winners than losers, just enough to keep you along for the ride for another quarter.

 

 

 

 

 

Election Hysteria

The Labor Day Holiday has now concluded, and summer has reached its official end by most measures.  It’s now the final stretch for the 2016 election season.  Or at least that is what I am seeing over and over again on my internet browser headlines.  2016 seems to be a particularly charged election with alleged “drastic consequences” with the election of either presidential candidate.  I have heard on more than one occasion that investors have decided to “wait and see” before they take any action, based on what the election outcomes will be.

Out of all of the possible events to effect the market, I can tell you that political elections on the whole are vastly overblown.  Now, I am sure the market will have a temporary, one or two day reaction; but it isn’t likely to change it’s trajectory.  The media is very good at playing on peoples’ fears and emotions, making dire predictions about things to come should [fill in the blank] be elected.  The very thing that could effect economics, i.e. economic policy, is not set by the president.  The Federal Reserve will continue to set interest rates, while it takes the cooperation of congress to pass fiscal policy.

Here are some interesting things to note.  By many sources our two greatest presidents were Lincoln and FDR.  Were these people admired by all?  Were they destined for greatness from day one?  No.  One was a Republican, the other a Democrat.  Neither were without their detractors.  In fact Lincoln’s path to the presidency is rather interesting.  He was certainly not the clear frontrunner for his party’s nomination.  In fact, part of his plan for nomination entailed printing counterfeit convention tickets for his supporters at the 1860 convention. http://www.greatamericanhistory.net/nomination.htm.  That doesn’t sound very distinguished to me.  And FDR had plenty of detractors in his time.  Although fondly remembered, he took a lot of criticism from Republicans, but also from other liberals on the left, many of them against the Civilian Conservation Corps’.  He also broke with tradition by running for an unprecedented 3rd term.  The bottom is you can never tell how any one presidency will actually turn out once they get into office.

But furthermore, there is not clear evidence that the market does any better under a democratic or republican house/senate/or presidency.  There are not enough data points to make a determination.  And, the market has done very well under both– as business goes on regardless of who is in power.  So if you are losing sleep over this November, my advice to you is to relax, trust the process our predecessors put in place for us, and focus on the long-term.  The country will likely be around long after this next president leaves office.