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Your Take: Faith in the Stock Market

Posted By Jim On 10/07/2011 @ 7:23 am In Your Take | 16 Comments

Here’s what every stock market expert will tell you – slow and steady wins the race. Keep your regular contributions going, lean on the benefits of time and compounding, and you will be financially set when you retire. Ignore the daily swings of the stock market, those are based on the whims of traders and market makers, just keep at it and you will be just fine. Statistics will be quoted, including the infamous “the stock market has returned XYZ since 19-whenever,” and those are supposed to buttress the argument that the stock market is just fine… as long as you ignore the daily gyrations.

Here’s the problem I have with that line of thinking – the market may have offered a reasonable rate of return since the Great Depression but a lot has changed since then. With the sheer number of electronic trading, including emotionless computer algorithms that follow their independently programmed instructions, and events such as the flash crash [3], it’s obvious we aren’t in the same era as before. High frequency trading accounts for almost 75% [4] of all buying and selling of equities, according to Bloomberg.

The first arrow that pierced the sanctity of the stock market was when I read Trading with the Enemy [5] by Nicholas Maier, which chronicled Maier working at Cramer’s hedge fund. In that book, Cramer finds out about a newspaper article before it gets published and trades based on that information. Is it insider information? Perhaps. Does this happen all the time? Very likely. Does this make you believe that us buy and holder suckers are really just buying into a Ponzi scheme [6]?

Do I believe the stock market is the easiest way for you to save for retirement? Yes. You really can’t beat getting into and out of a fairly liquid position for only a few dollars. When I buy shares of Apple, and I have, I’m not worried I can’t find a buyer in the next ten seconds. I might have to adjust my expectations, which should be in line with demand at the moment based on Bid/Asks, but I can find someone fairly quickly… much quicker than any other asset.

Is my faith somewhat affected by the hundred+ point swings in the market that seem to happen on a daily basis these days? Also yes.

How about you?

(Photo: psycho-pics [7])


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[2] Email: mailto:?subject=http://www.bargaineering.com/articles/faith-stock-market.html

[3] flash crash: http://en.wikipedia.org/wiki/2010_Flash_Crash

[4] 75%: http://www.bloomberg.com/news/2011-10-05/with-high-speed-trading-market-cannot-hold-commentary-by-mark-buchanan.html

[5] Trading with the Enemy: http://www.bargaineering.com/articles/trading-with-the-enemy-jim-cramers-wall-street.html

[6] Ponzi scheme: http://www.bargaineering.com/articles/save-retirement.html

[7] psycho-pics: http://www.flickr.com/photos/psycho-pics/2952050268/sizes/s/in/photostream/

Thank you for reading!