The investing environment today promotes impatience and its concomitant shortfalls.
No time than the present has been easier for investors to analyze or invest in securities. No time than the present has offered investors more investment options: stocks, bonds, REITs, MLPs, commodities, and exchange-traded funds (ETFs) of every sort and size for the taking.
Spreads are razor thin; commissions, where they occur, are barely perceptible; trade executions are lightning quick. Everything is available, it’s available on the cheap. Thank you, Internet.
It was all so inefficient a few years ago in an era not so far removed
Entering the 1990s, do-it-yourself investing was an still effort and an expense. It was a lot of fingers stained with newspaper ink and eyes strained from reading small type. When you had a few bucks to invest, you knew you had work to do.
If you were like me, you began with the latest edition of The Wall Street Journal or Barron’s. You perused one or the other and jotted the prospects in a composition notebook or on a yellow-paper tablet.
A “screen” consisted of spreading the Journal’s or Barron’s stock tables across the kitchen table.The screen was limited to the variables offered in the tables: P/E ratio, 52-week prices (high or low), and dividend yield. Stocks that met your criteria or piqued your interest were added to the notebook or tablet.
This initial analysis alone could consume half a day. The work, though, had only begun.
You were off to the public library to see what Value Line Investment Survey or Standard & Poor’s had to say. Even with the wind at your back – all the publications were readily available and provided the desired analysis – you could easily kill the remainder of the day.
You weren’t done yet. You’d then call your broker (from a landline) and request that he forward the latest annual and quarterly reports for your prospects. You might even receive the reports that same week.
Once you had scoured the reports, performing additional analysis, you'd rank your prospects first-to-worst. Perhaps you had sufficient funds to buy a round lot of the top three. Whatever, you’d call your broker and place your trades.
If your broker were of the discount variety, you'd be charged $45, the best price at the time, for each trade. The price was usually quoted in sixteenths (1/16, 3/16, 5/16, etc.). If the stock was exceptionally liquid, say an Exxon or IBM, the price might be quoted in thirty-seconds. Less liquid stocks could be quoted in quarters or even halves. You preferred to buy and sell in round lots (increments of 100) because the broker commission and bid-ask spreads were higher for odd-lot transactions.
This all sounds terribly inefficient compared to the touch-and-trade process today, and it was. But there was an upside to this inefficiency: It cultivated patience and discipline. You bought only after you were convinced to buy. You did your best to measure twice and cut once. You stuck with what the stock you bought. You stuck with it because you had no egress came at a cost. Cost also served as a governor on your behavior.
You also stuck with what you bought because you could. You were isolated from an unending volley of noise and opinion. Headlines featuring “slashed,” “crushed,” “destroyed” or “decimated” were rare and never immediate (no cellphones or Internet in those days). You could go days, weeks, and even months without reading an opinion on your investment. Your nerves were barely stimulated, much less frazzled.
Today, all the information and opinion you could want is only a screen-tap away. Information is cheap and immediate, as is the ability to trade this cheap and immediate (and mostly useless) information.
Efficiency is a desirable thing if you are assured of paying a reasonable price. Unfortunately, the price paid is frequently unreasonable. Your investment returns pay the price. Efficiency encourages activity. When it’s cheaper to trade, investors trade more frequently and more to their detriment.
The correlation between trading frequency and stock returns is proven to be negative. The more you trade, the more you lose. An oft-cited academic paper published in the The Journal Finance found buy-and-hold investors outperformed their Tigger-like counterparts by six percentage points annually.
Embrace inefficiency, create obstacles. In your investing habits, set boundaries on when you will read market information and from whom you will read it. The less you are barraged and stimulated, the more likely you will generate higher investment returns – much higher returns.
No time than the present has been easier for investors to analyze or invest in securities. No time than the present has offered investors more investment options: stocks, bonds, REITs, MLPs, commodities, and exchange-traded funds (ETFs) of every sort and size for the taking.
Spreads are razor thin; commissions, where they occur, are barely perceptible; trade executions are lightning quick. Everything is available, it’s available on the cheap. Thank you, Internet.
It was all so inefficient a few years ago in an era not so far removed
Entering the 1990s, do-it-yourself investing was an still effort and an expense. It was a lot of fingers stained with newspaper ink and eyes strained from reading small type. When you had a few bucks to invest, you knew you had work to do.
If you were like me, you began with the latest edition of The Wall Street Journal or Barron’s. You perused one or the other and jotted the prospects in a composition notebook or on a yellow-paper tablet.
A “screen” consisted of spreading the Journal’s or Barron’s stock tables across the kitchen table.The screen was limited to the variables offered in the tables: P/E ratio, 52-week prices (high or low), and dividend yield. Stocks that met your criteria or piqued your interest were added to the notebook or tablet.
This initial analysis alone could consume half a day. The work, though, had only begun.
You were off to the public library to see what Value Line Investment Survey or Standard & Poor’s had to say. Even with the wind at your back – all the publications were readily available and provided the desired analysis – you could easily kill the remainder of the day.
You weren’t done yet. You’d then call your broker (from a landline) and request that he forward the latest annual and quarterly reports for your prospects. You might even receive the reports that same week.
Once you had scoured the reports, performing additional analysis, you'd rank your prospects first-to-worst. Perhaps you had sufficient funds to buy a round lot of the top three. Whatever, you’d call your broker and place your trades.
If your broker were of the discount variety, you'd be charged $45, the best price at the time, for each trade. The price was usually quoted in sixteenths (1/16, 3/16, 5/16, etc.). If the stock was exceptionally liquid, say an Exxon or IBM, the price might be quoted in thirty-seconds. Less liquid stocks could be quoted in quarters or even halves. You preferred to buy and sell in round lots (increments of 100) because the broker commission and bid-ask spreads were higher for odd-lot transactions.
This all sounds terribly inefficient compared to the touch-and-trade process today, and it was. But there was an upside to this inefficiency: It cultivated patience and discipline. You bought only after you were convinced to buy. You did your best to measure twice and cut once. You stuck with what the stock you bought. You stuck with it because you had no egress came at a cost. Cost also served as a governor on your behavior.
You also stuck with what you bought because you could. You were isolated from an unending volley of noise and opinion. Headlines featuring “slashed,” “crushed,” “destroyed” or “decimated” were rare and never immediate (no cellphones or Internet in those days). You could go days, weeks, and even months without reading an opinion on your investment. Your nerves were barely stimulated, much less frazzled.
Today, all the information and opinion you could want is only a screen-tap away. Information is cheap and immediate, as is the ability to trade this cheap and immediate (and mostly useless) information.
Efficiency is a desirable thing if you are assured of paying a reasonable price. Unfortunately, the price paid is frequently unreasonable. Your investment returns pay the price. Efficiency encourages activity. When it’s cheaper to trade, investors trade more frequently and more to their detriment.
The correlation between trading frequency and stock returns is proven to be negative. The more you trade, the more you lose. An oft-cited academic paper published in the The Journal Finance found buy-and-hold investors outperformed their Tigger-like counterparts by six percentage points annually.
Embrace inefficiency, create obstacles. In your investing habits, set boundaries on when you will read market information and from whom you will read it. The less you are barraged and stimulated, the more likely you will generate higher investment returns – much higher returns.
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