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Rules to deal with downdrafts

70% of stock trades today are done by computers. It’s called algorithmic trading. The computers follow rules set by their human masters. They don’t deal with stuff you and I deal with — like what the company does, how successful it is, if its management is any good, where the company is going long-term, etc. Algo compuaters “watch”  ultra-short term. If prices are going down that moment, they sell. If they’re going up, they buy. Think of the algo computers as day traders on steroids. They get their information and act very fast — they’re big users of ultra-high speed fiber lines connected to the various exchanges. Remember the ones I wrote about a couple of days ago — fiber lines that are so fast they can download everything on Netflix in under a second.

I’ve heard stories that algos never have a bad day. I suspect that if I place an order to buy Apple, they hear about it before my online broker executes my order. I don’t know the extent of this. But I have my suspicions. How can all the online brokers charge nothing to buy my Apple, my Microsoft or my Netflix and yet they apparently make a profit.

The best days for algos are days like yesterday. Stock prices start to fall — there are a million reasons. You can hear them all on bubblevision. No one knows really why… And the algos, seeing the sell orders, pile in and this is what happens. All these charts show yesterday:

Does yesterday’s action (and probably today’s) mean anything for our holdings? Clearly, all our old lessons still prevail:

+ Don’t panic. Markets go up and down. You always lose money when you panic into selling because there’s a momentary blip.

+ Keep assessing your stocks. Do you own solid growing companies with a long-term future? If one or two look “iffy” it’s ok to sell them. Personally, I’m happy with the stocks in our portfolio.

+ It’s perfectly reasonable to have 5% of your portfolio in specs — like some of the vaccine, cannabis or gold mining stocks. Personally I have no idea what they might be.

This morning, as I was writing this blog, I received Joel Ross’s latest Ross Rant, which begins:

Almost every day I had heard my friends and talking heads on TV say the market is over-priced and over concentrated, and the end is near. And so the pullback happened. There was no question the prices of some stocks had gotten ahead of themselves, driven by the Robinhood day traders and the momentum players. So now the drop is possibly over after one day. As you know from my prior Rants, I now do not think long term those favored stocks have peaked. Yes the multiples are very high, but for the tech companies and retailers like Walmart and Home Depot, they are still not over valued based on what I believe is the future earning potential. I take a longer, multi-year view, not the next 6 months, or even next year. I have held some stocks like HD for ten years. I have made over 900% on my investment in HD. Since March of 2019 when I moved all of my accounts to Schwab and self-managed, I have earned a 26.4% annualized return following this strategy, as measured by Schwab for my account using a daily time weighted rate of return. They also rate my portfolio as high risk because it is 100% equity. To me the risk reward is easily worth it. In my view, long term gain is what investing is all about. Not a short term hit. Taking this long view has paid off for me extremely well. You just have to select the companies that have strong management, strong brands and products, and a solid balance sheet, and then sit back, and not panic every time there is a hiccup like in March, or this week. My strategy is not for many who fear the risk, which I consider not to be a risk if you have a long term view and know when to get out, as I did in May 2007 for two years. I will get out again if Biden wins and the Dems take the Senate, as I believe they will destroy the economy. Better to pay taxes and be liquid than lose 30% or 40% of principal, and still owe some taxes because your cost basis was low. And if the Dems get control, your cap gains taxes will be at ordinary rates. Many people I know sold in March to book losses and then reinvested. Too late now. If you have a wealth manager, insist on what you think is right if you have a view different than they do. Investing is like medicine. If you are not your own advocate, you can get into trouble. Some wealth managers do very well, but like in every profession, there are some who are not good. Reality is the Fed is still supporting the economy, there are still trillions on the side lines waiting to invest, and the economy is improving. The correction we just saw was simply due to values getting out of control and most traders believing the market would decline, so they and the algos sold once it started down. Keep in mind the algos are 70% of the market trading, and as soon as there is bad news, like from Fauci about vaccines, they instantly react, and then it cascades. Plus it is right before the long weekend.

I will not sell my stocks if Biden is elected. As I have written before, historically stockmarkets actually do better under Democratic regimes.

I do agree with Ross that taking a longer, multi-year view, not the next 6 months, or even next year, makes the most sense.

My friend Matt Wood, the best insurance broker in the world, has a wonderful job and a wonderful investment strategy: It’s called dollar cost averaging. He has assigned $x to invest each month in the market. And every month, rain, hail or shine, he dumps his money into half a dozen index funds. He’d be better off with individual stocks. But he also has a successful business to run. (He’s based in Chatham, NY in case you need  some insurance.) Tell your kids about dollar cost averaging.

A stunning book

I’m engrossed in this book.


Highly recommended. Excellent weekend reading. It’s #2 on Amazon. I won’t summarize it. But I can’t put it down. Read the book. Click here.

Nice, feel-good story about the Brazilian fisherman and the penguin

The weather up here

This morning, it’s cool and windless in Columbia County, NY. Perfect tennis weather for my 175th game this quarantine. With all this tennis, I should be getting better?

The US Open starts at noon EST on ESPN.

  • TomFromVa

    My thoughts on getting better while playing the same opponent:
    – Your technique will improve but if you stick with the same style you will not improve fundamentally
    – To really improve you have to try some things you are not comfortable with. In the short term this will probably make you lose even worse. But if you can add a new dimension to your game it will eventually pay off. For example, see if there is a type of serve that you can come in behind. Try a crosscourt forehand then come in behind a looping shot to his backhand. Try dropshots to both sides. Alternate topspin and underspin shots. And hit deep as much as possible – depth is key in singles.

    My $0.02

  • Glenn

    I’ve heard you mention these algo computers in a few blogs. Who actually owns or manages these computers that make 70% of stock trades. Are you talking hedge funds, big institutions or the actual online platforms like Robinhood, Fidelity etc. Also, you have any more info on the rules they follow – not sure what you mean that if prices are going down that moment, they sell. Sell if it’s down dollars or even pennies? Point being that it can go down but right back up the same hour so how do the computer detect this volatility…

    • harrynewton

      Algo rules are protected more than state secrets. Also they get changed, as new, better rules are created. The people who do the changing are far far brighter than I am. They have multiple Ph Ds. I have only three degrees, the highest being an MBA. Which is puny.

  • Carl A. Wright

    Ted,

    You may not be getting better at tennis because you play too much and too often for you to grow stronger and for the games play to get physically easier.

    It’s clear you enjoy it, so I suggest you set aside expectations of getting better and enjoy yourself.

    • harrynewton

      I am getting better. Just not as fast as I’d like. I also recognize that playing someone 25 years younger than me confers advantages on him and disadvantages on me.

  • Mike Nash

    Re Ross: you’ll only pay higher capital gains if Biden wins and Dems take the Senate (unlikely) AND if you earn more than $400,000 per year. If you are retired and keep a healthy portion of your investments in tax free instruments like muni bonds you can easily keep your income below 400k, unless you’re worth north of $20 million.

  • Mike Nash

    Trump is my God! I pray at the altar that is Trump. I even agree with him about U.S. servicemen who’ve died and been wounded. He just has the courage to say what others just think. Harry, please consider voting for Trump who is a total Alpha male and fit to be king!

    • harrynewton

      There are people who believe that American soldiers who die in battle fighting for the U.S. are suckers and losers?

      • Lowell Rapaport

        yes there are. they are called assholes.

        • harrynewton

          Amen. Amazing to think that giving your life for your country — our country — makes you a loser or a sucker or both.

          • Scooter

            You don’t really think Trump said that do you? Well, maybe you do.

          • Lowell Rapaport

            mr. nash believes trump said that and he is a big time trump supporter and agrees with that same sentiment.

            this is the paradox of trumpism. you either have to be in denial about who and what trump really is, or you have to agree with and participate in his douchebaggery, or something has to break and you have to go “fuck it, i can’t be part of this shit show anymore.”

            ultimately, even if you just can’t believe that trump is a douche, trumpism is about being a douche and you have to decide about being a part of it or not.

          • Dman

            Lowell……as you evil satanic democrat party circles the drain, I’d advise you to prepare to have trumpism shoved directly up your ass.

            Q is real, that means the democrat party is finished.