Feedback on the Issues of Our Day September 12, 2000January 27, 2017 INVESTMENT CLUBS Joe Devney: “I started an investment club with my brothers and sisters a couple of years ago. Investing was an alien concept in our working-class community, so when we reached adulthood none of us knew anything about the stock market or other investment vehicles, and left our retirement decisions in the hands of our employers or our unions. “I’ve educated myself over the last several years, and decided to bring my brothers and sisters aboard with the club. I avoided some of the problems you mentioned in your column by keeping the monthly investment amount low ($10, but in practice everybody contributes more) and by giving the club a fixed lifespan of five years — we each get a modest windfall at the end, so there is little reason to bail early. And I keep emphasizing that the main purpose of the club is education: if we lose money, we are just paying for our lessons. What we learn about how investing works can be applied to our activities outside the club. “Because we are scattered across the country, we have our discussions via e-mail. And I publish a monthly newsletter for the members and a few other relatives. It includes a family news section that is unrelated to investing, partly to encourage people to read the newsletter — they may go on to the other articles after they read about who took a road trip or that a baby has started walking. “At the moment, our investments are worth less than we paid, mostly because one of our holdings (Inacom) went out of business. But the club is still doing its job of teaching us how investing works, and we may yet see a profit when we cash out in 2003.” DON’S CHALLENGE Don Hurter: “This is for any readers who think or claim that they can beat ‘the market.’ “On January 2, 2000, the first day with open markets of this millennium, I invested exactly $10,000 in a Total Stock Market index fund (the Wilshire 5000 index at Vanguard), to establish a performance baseline for all other investments, real or hypothetical. From this fund I can see, firsthand, how ‘the market’ is doing (minus, of course, Vanguard’s small operating expenses), and compare any other investment to that fund’s year-to-year results. (One can get these values without actually buying into a mutual fund, but I did it for honest-to-god investment reasons as well.) “Now, I put forth a challenge to anyone who thinks they can ‘beat the market’. I’ll let you invest more of my money if you are willing to back up your claims, with the following two conditions: 1. If you fail to beat the market (i.e. the Wilshire 5000), then you pay me the difference so that my investment still equals the market’s results. 2. If you DO beat the market, you get to keep half the surplus. “In a nutshell, folks who claim they can outperform the mean aggregated results of all the other investors should be willing to put their money where their mouths are. The penalty for failure is simply to pay up the difference, and accept the humility. The pay-off for success is virtually unbounded. So who out there with ‘a plan’ is willing to accept these rules and show me how good he is?” Hmmm. Something tells me that if this ever caught on, the “taker” of your challenge would not have to offer 50% of her added value to attract money. If someone with the resources to make good the guarantee offered “market performance plus 10% of any surplus,” every indexer in the world would clamber to move his money to that deal. But just because people aren’t certain they can beat the market, and are unwilling to give you 50% of the added gain if they do, doesn’t prove there aren’t folks who probably can. . . THE $20 MILLION DAY TRADER Name Withheld: “I recently joined a small day trading firm (was previously working in fixed income/cmbs at Daiwa Securities and I’m otherwise steeped in the No Free Lunch school of thought). Of the 15 co-workers in the firm, I’m one of two who have not turned a positive return consistently to date. To be more precise regarding consistency, at one extreme, there is a trader that has had just 5 losing days so far this year. At the other extreme, there are three of the most successful traders who made at the low end $5 million and the high end $20 million gross during 1999 trading Nasdaq stocks exclusively, and using their own capital. The more successful traders — as measured by total dollars — have a much lower win/lose daily ratios than Mr. Consistency referred to before. My Consistency makes about $2000 on a typical day. This amount seems to be uncorrelated with his total equity. It’s simply a reflection of his trading style. It is difficult to conclude that something other than abnormal returns are being achieved here. Perhaps my Ivy League MBA, and CFA credentials have something to do with being one of the losers (so far) in this group. My point is that market timing is probably possible, unless we are the millionth toss of the coin that turned up its millionth consecutive head.” My own preferred market beater is the person like Warren Buffett or Peter Lynch or Michael Price who is brilliant, focused, hard-working, bombarded with the best ideas, and intent on finding good value. Market-beating speculators make me nervous, because “this shouldn’t be possible.” It’s one thing to be one of the first to taste a Krispy Kreme donut and take a bet that this thing could become really big. Or to keep your head and buy Citicorp at $10, when all about you are losing theirs. It’s quite another to just approach the market like a video game and make money at it. But assuming Frank’s information is accurate, I’d offer these thoughts. 1. Envy. (Is that an emotion and not a thought? And an incomplete English sentence, in any event? OK, how about this: Envy, envy, envy, envy, envy — give me $20 million. Me! Me!) 2. Skepticism. There are risks here. a.) In a different kind of market, Mr. Consistency might find himself losing $2,000 a day. Would he quickly quit? Or keep losing, certain his edge would return, until he had given much of it back? b.) Might any of these guys be using leverage? If so, what would one of those freak days in the market — down 23% in a single day in October, 1987 — do to their capital? Or how about freak events with a specific stock (Emulex, which was down 60% in hours on a hoax)? Of course, if they were short, those events would have just made them fabulously more rich. 3. Grudging admiration. Listen, to some extent this really may be like video games. I remember 20-odd years ago, when Touch-Tone phones were new, visiting a friend who was an institutional salesman. His job was to service the fund managers and the like with ideas and information (and jokes), so that they would direct business his way. “Oh, come on,” I needled him. “How do you know whether a stock’s going up or down.” “Haven’t got a clue!” he shoot back, “but I have the fastest fingers on the street.” Without looking away from me, he sent his right hand lunging for the phone keypad behind him and dialed a number in less time than it would take most of us even to think of the number, if we remembered it at all. When there was news, or a new research, my friend’s clients often heard it from him first — because he could remember all their phone numbers and dial faster than anyone else. They knew he had no clue whether stocks were going up or down; they didn’t have much of a clue, either. But he was first; they liked him; and they were happy to send commissions his way. Day trading is different, but here, too, being really fast helps. So does having an intuitive “feel” for the market. The first one to spot an anomaly in the market may be able to grab off that tiny pricing inefficiency — and it’s gone. When news comes out, being first to nail 5,000 shares of some stock that slower-witted or -fingered folks might take 15 seconds to realize might be tangentially affected . . . and then being smart enough to get out with a quick $5,000 profit a minute or two later once the stock has bumped up a point . . . well, I’m not saying some people can’t do this. Even without news, some people may be able to “read” the ebbs and flows of the market nimbly enough to dance in and out with a profit. 4. Not me. Realistically, this has nothing to do with investing. And even if it did, obviously, most people playing this game do not do well. If anything, the rare winners that Frank sits among all day are most day traders’ competition. Yes, you could quit your job — a job that is almost surely more productive for the world than day trading — and try your hand at this. (You could also learn to count cards and become a full-time black jack player.) But the chances are very good that, even devoting your whole life to it, you would not do very well — even with an Ivy League brain and an MBA and a CFA (Chartered Financial Analyst) certificate hanging on your wall. The real question: are any of Frank’s associates Democrats? Would they like to help me out with a big check?