Another job automated away

About 50 years ago, I had to call or visit a stock broker to buy or sell stocks. I would place the call.  A few hours later the broker would call me back with the results of the transaction.  The charge could be $50 or more.

About 30 years ago online trading began.  Place an order and some time later the order would be processed.  The charge was about $25 regardless of the size of the order.

About 20 years ago, the time lapse was shorter and the charge was $14.99.

About 15 years ago, many trades were “instantaneous”.  Place the order and it would be filled.  The charges also dropped down to $9.99.

Today, I was informed that the charge would be $6.99 next week.

Consider that many of these trades are untouched by human hands.  Instead of a local broker calling a New York broker who would pass the order to broker on the exchange floor, each buy-sell order goes to a set of computers which fill the orders within seconds, and with only fractions of cents difference in the offer and sale.

Now if we could only automate CEO jobs.  Think of the billions that could be saved across the economy by replacing these over-paid men and women.  The savings could be passed on to the people who do the real work.

EU Vote and markets: false linkage

Phil Anderson wrote an interesting article in the Duluth Reader about the linkage between the Brexit vote and the reactions of stock markets.  See
http://duluthreader.com/articles/2016/07/06/7525_speculating_on_the_eu_vote.

I’ve often wondered how the stock markets could turn on a dime based on some event or another.  It seems more that commentators need to justify their salaries rather than provide insight for investors.  Oops!  That should be traders!  Anderson describes investors those who are in for the long haul.  Traders now will sell stocks within seconds of buying them.

I remember crossing the old Broadway bridge over the Mississippi River in the late ‘70s when the market news was a new high on the New York Stock Exchange of 54 million shares.  Today, 2016-07-13, the NYSE volume was 836,762,854 shares; a week ago it was 1,050,701,150 (Wall St. Journal, http://www.wsj.com/mdc/public/page/2_3021-tradingdiary2.html).  That’s about 20 times what it was over 30 years ago.  Probably the big difference is online trading, then you had to call your broker who then placed the order on a teletype.

Still, I agree with Phil Anderson, how can so many people be in lockstep because of certain events?

The two most important pieces of stock advice

When selling at a loss, never look at how much you lost but at how much you could have lost.

When selling at a gain, never look at how much you could have gained but at how much you did gain.

Remember where you were when you heard…

Tonight we watched "Julia" with Jane Fonda and Vanessa Redgrave, a tight, engrossing movie about Lillian Hellman and her friend Julia.  I won't get into the veracity of the story, but I would like to mention my own personal incident concerning Lillian Hellman.  At the conclusion of the movie, I remembered where I was when I heard that she had died!

In the summer of 1984 I was driving on 42nd St. in Crystal, Minnesota when I heard a tribute to her on Minnesota Public Radio.  I was a block west of the Post Office.

I also remember where I was when I heard Jack Kennedy was shot, Walt Disney died, Marshall Dodge the Maine storyteller died, about 9/11, and 54 million shares were traded on the New York Stock Exchange the day before.

BTW, what is your name again?

A different idea for capital gains tax

Many don't want capital gains to be taxed any amount, even if a stock was bought and sold in seconds.  But how does such a short term profit make any real contribution to the economy compared to an hourly worker producing a tangible product such as vegetables or automobiles?

We really should tax capital gains on a sliding scale.  Securities held for less than a year should be taxed at the same rate as earnings.  Securities held for more than a year should be taxed at a progressively lower rate until securities held for, say, ten years should be taxed at zero percent.

Of course, we are still rewarding people for luck at throwing darts more than people who show up for work everyday.

I'm probably preaching to the choir on this.  I've been writing for some time on this and you can see how much it's caught on.

See "Let's do away with capital gains taxes, dividend taxes, and estate taxes by…" or do a search for "Irregular Blog" and "Capital Gains".

One business group that wants more regulation

In the name of efficiency, one business sector has become inefficient, and that sector would like government regulation to restore efficiency.

The business sector: stock trading.  The inefficiency: run-amok computer algorithms for high-frequency trading, HFT.  There have been several cases where HFT algorithms have caused problems with initial public offerings and set off price-spikes that some firms couldn't handle.  Firms may not put in sufficient checks on certain trades in order to gain speed.

"'Market participants at every level of the trade life cycle reported they are looking to regulators to establish best practices in risk management and to monitor compliance with those practices,' Carol Clark, senior policy specialist at the Chicago Fed, wrote in a summary of the survey's findings."

See "High Frequency Trading: Worse than You Thought", Jeff Cox, CNBC, 2012-09-20.

Next time a newspaper reports that "investors decided" ask yourself do they mean traders and do they mean trading computers.

Stock market – humans need not apply

Yesterday afternoon I sold shares in a stock through my online broker.  As soon as I clicked Submit, up popped a message that the order was filled!!!

In the past, this process has taken minutes or even hours, especially for odd lots like mine.  It's all done by computers owned by the really big guys who are taking advantage of the small ups and downs of the market.  The cents part of my price was .1902.  The stock closed about five cents higher.

And to think that many financial articles talk about investors doing this or that to the market.  Buying a stock and then selling it a few minutes later is not investing.  Recently I read that the majority of stock trades are done by computers, not people.

Quote of the day - Stock Market

"Why is it that when everything goes on sale at Sears everyone gets excited and rushing into the store, but when everything goes on sale in the stock market, everyone panics and runs out of the store?"

- Member TheLudicFallacy on a Motley Fool board

Quote of the day

"The stock market is as emotional as a hockey fan during a game-seven triple overtime of the Stanley Cup finals."
- Motley Fool Email update

Free markets and capitalism – their supporters don't want them!

Disclaimer: We own shares in some companies and mutual funds.  In our retirement we will depend more and more on dividends and interest.  However, we don't feel compelled to hide the warts in the system.

We read many complaints that the U.S. is becoming socialist and turning against free markets and capitalism.  Well, we are seeing many efforts to erode free markets and capitalism, but these efforts are being made most strongly by those who proclaim them.

The classical definition of a free market is one with many buyers and many sellers and with both buyer and seller having all the information they need to make a decision.  Oh, also, either the buyer or seller should be free to enter or leave the market.

We see many moves to reduce the number of sellers as companies gobble up their competitors.  We also see some moves to reduce the number of buyers - Wal-Mart has become the sole buyer for many suppliers.

Many large corporations fight efforts to give buyers important information to make a good decision.  The tobacco companies denying their products caused harm is one of the more egregious distortions of important information.  Agribusiness companies don't want foods labelled as genetically modified.  Many large dairy companies don't want competitors products labeled BGH-free (bovine growth hormone).  Telecommunication companies make it difficult to know the exact cost of their services before a customer makes a purchase.  How come the billing computers know exactly what a customer should pay but the sales computers supposedly don't have that information?

Freedom to enter and leave the market exists in varying degrees.  There are certainly many products we can choose to buy or not buy.  Suppliers with a single buyer can stop selling to that buyer, but they will have a lot of work to replace that buyer.

Capitalism - ah, a lovely concept when it started.  Some people got together and pooled their money to form a company, each getting shares proportional to their contribution.  Then markets developed to buy and sell those shares as owners wanted to reallocate their investments.  All well and good.  If Smith wanted to sell his shares in XYZ to buy a house and Jones was glad to buy XYZ shares because he missed out when they were issued, that's all above board.

I won't get into day-trading versus investing or all the derivatives that Wall Street thinks up.  This is almost all smoke and mirrors and a long, long way from capitalism.

As economies grew, so did the companies originally financed with stock.  But as they grew, the shareholders became more and more distant from the operation of the company.  They had to hire executives and board members to run the company.  All well and good.  But with all the buying and selling of shares, the shareholders had little interest in the company other than it grew and turned a profit.  Few had any interest in the day-to-day running of the company.

As time went on, the board members nominated themselves for successive terms, without any competition.  Shareholders could either accept them or withhold their votes; the boards made any mechanisms to offer a different slate extremely difficult.  To make matters worse, many of the shares were owned by mutual funds and other institutions; in general, the operators of these institutions exercised their "fiduciary responsibility" and voted with the board.

In many democratic countries, the boards lobbied their friends in governments to put up various hindrances to any shareholder control beyond the above yes or no votes.

These board members grant their appointed executives shares in the company for their "performance" and grant themselves the same.  In other words, they are giving themselves more and more of the company and more and more of the votes.  The board members often get over $100,000 per year for showing up for six meetings.  Nice work if you can get it.

Many define this whole process as capitalism and as a great good.  I call it capturism; the few have captured control of a company to run as they see fit.  At least, unlike many oligarchies, they don't throw dissidents in jail.

Quote of the day: On Flexibility

"Those who stay flexible and realize the world is dynamic are better judges than those who pretend it's built on certainties."
- Morgan Housel, The Motley Fool, "How to Know When a Talking Head is Full of Hot Air"

Although Housel is writing in the context of those making stock market predictions, it can apply to many other situations.  Just think of all those who think tax-cuts will solve all of our problems and of all those who think that more stimulus will solve all of our problems.  The real fix is probably some combination of the two applied in the proper areas and at the proper time.

He recommends "Expert Political Judgment: How Good Is It?  How Can We Know?" by Philip Tetlock.  Read Housel's article for a quick summary of Tetlock's reasoning.

Neither the Duluth Public Library nor the UMD Library have this book, but the UMD Library has three political psychology books of which Tetlock is a contributor or an editor.

Let's call a trade a trade

I've long been annoyed about stock market reporting that states "investors were" optimistic, pessimistic, pleased, irritated, delighted, or dismayed about some news and therefore the market went up or down accordingly. One of today's examples from finance.yahoo.com is

Investors retreated from Wall Street again, driven by worries about the nation's big banks and General Motors Corp.

But, investors don't react positively to news one day and negatively the next. Traders do. Investors are in it for the long term and will buy or sell according to trends lasting longer than a day. Traders are in for the short term whether it's minutes, hours, or days.

I had another insight into what investing thanks to Michael Gerson, "A Week of Revelation", Washington Post, 2009-03-04.

In it, he said that governments don't invest, they spend. Gosh darn it, governments do invest in education, roads, basic, and many support activities that people and businesses rely on in order to make money. We can see what happens in too many countries that don't invest. They don't have the human capital to build a strong economy when free schools are few and far between. Their businesses have higher transportation costs because of the poor quality or lack of roads. They have to rely on imports for medicines and technology because they have little basic research. And they don't have a civil society in which business can thrive because the police are ineffective or corrupt and bureaucracies are a tangle of competing interests.

It's easy to criticize government investing because no balance sheet shows the return on investment, a return that might not be seen for years or decades.

Are Gerson's investors really investing? Or are they merely providing liquidity for those who bought from investors who bought from investors ... who bought from the original investors who started an enterprise. We could consider any person who bought or sold shares a trader. They didn't start the companies they "invest in" or provide a dime of capital when the company started. As I wrote at the beginning of this paragraph, they do provide liquidity for the market. When any original investor wants to sell shares, there is a market for the shares. Of course, the persons who buy the shares want the same ability to sell the shares later. Without these markets less money might be invested in the first place.

Similarly, without government investment the stock market would be a shadow of itself. What would our country be like without the government investment in the transcontinental railroad, the interstate highway system, the Internet, and an educated citizenry.