Time Is Money

I just returned from a weekend getaway today. An annual vacation, as it were, but I opted to drive instead of fly. I wanted to test out my "new" car (I bought it back in August of last year) over a long distance. My one thought was that, after reading a half-dozen articles about Nvidia ($NVDA) and Tesla ($TSLA) launching autonomous automobiles in the near-future, I lamented that I look forward to those days so I could read a book or two during the trip. Then I recalled the more current solution: audio books. I ran to the library and checked out a few (in case one was a bust), including Flash Boys by Michael Lewis, a book I attempted to read in my spare time last year, but eventually conceded that I didn't even have spare time.

The whole story was fascinating, but arguably designed to rile up the general public in an outrage that they do not fully understand. I soon figured out why it went from the best-seller list to being available in the public library so quickly. Like many other examples, just because a story is non-fiction doesn't make it true. A lot of the direct concerns in Flash Boys has been discredited by large.

According to this story, public enemy in the financial world is high-frequency trading (HFT). The details of the practice are less important to readers I would consider my target audience because it's virtually irrelevant for long-term planning. The disservice this novel does scare investors away from investing altogether without fully explaining the exact harm. Frequently, the story referenced the disservice that banks are doing to their investors, which applied in the context of the story. However, if readers are turned away from the stock markets, then this story would do more harm than HFT ever could.

Midway through the story, I started listening as a novice outsider (truthfully, the material was so far beyond my reach that I actually was). It was startling. It was alarming. It was outrageous and upsetting. But what "it" was got downplayed a bit too much, and all too often, "it" became all too easily confused with investing in general.

More vividly than the accounts being relayed within the novel, I pictured readers getting turned away from investing by thinking that the rigging (as it was described) was destructive to their personal investments. Unfortunately (or thankfully, actually), that is not true. If you are a long-term retirement investor, then HFT would have minimal impact on your portfolio.

In the end, I likened the story being told to a marathon race. If you were training for a marathon to improve your personal health, then would it matter to you if the winner of that marathon cheated the runner-up? Individual investors are planning for long-term goals, most often retirement. If your retirement were 10 years away, how important is each millisecond? This was the point that the story failed to address (albeit, its target audience was hopefully finance professionals and day-traders, and not retirement investors).

In both cases, time is money. Throughout Flash Boys, that became the universal message (and I wish the novel itself adopted this name). For HFT, each nanosecond counts because second-place isn't good enough. For long-term investors, these nanoseconds and fractions of a penny difference in stock prices are not going to matter in the big picture. As long as the money is invested, then it will grow exponentially through the compounding effects known as "time value of money." The disservice of HFT as described in the novel is that, if an individual were invested in an actively managed mutual fund, then the fund manager would be getting cheated out of fair market price of each trade -- but the unspoken bigger issue is that too much activity in these portfolios becomes counter-intuitive to the investors themselves.

If you buy individual stocks, then plan on holding every investment until short-term capital gains are irrelevant (by that point, microseconds and daily market fluctuations will have less impact on the overall investment). If you don't know how short-term capital gains impact stocks, then don't trade individual stocks until you do. I allowed a loophole for people day-trading in their retirement account, so I'll explicit fill that loophole and discourage that behaviour as well (those wins and losses are unlikely to reimburse the effort over the course of decades).

Time is money. In the HFT realm, it's all about nanoseconds (less time nets more money). In the world of retirement planning, it's all about decades (more time nets more money).

Seeing Is Believing

For all the pitfalls and missteps in investing, there can be a time and place to sit back and marvel at covered ground. I caught myself stopping to smell the roses earlier tonight, honestly trying to wrap my head around the recent returns that my portfolio was displaying for its 3- and 5-year returns especially. It's known that the stock market has not had an official correction in over three years now, which is alarming in many degrees but also reasonable based on the actual circumstances.

Psychologically, I have tricked myself into believing that my portfolio is at least 10% over-valued for its current balance, which made tonight's reflection all the more shocking. It was a nice moment to pat myself on the back for a "job well done," but it still feels as though I did nothing.

I have long held the belief that "you can work hard or you can let your money work hard for you," and there is a lot of truth to that cliché. I have been educating myself with individual stock investing for the past 8 months, but my success there has been a fraction of the simplicity of index investing. I have to laugh at the Money.CNN.com trolls who question leaving money on the table with inferior returns. So few have taken that next step of pretending it was "guaranteed failure" by under-performing the market by the expense ratio. (That argument hardly holds its own weight against its own inferred advice: why set yourself up for failure by investing in a fund with a high expense ratio?)

Mo Ansari frequently warns listeners that, regardless how much confidence they may have despite their age, younger investment professionals are learning as they go -- and they're learning with their clients' money. He often likens the situation to paying for strangers' education, conceding that it is fine with him as long as they understand that is what they're doing. For the most part, that comment made me realize I could be using (a fraction of) my own assets to gain a similar education on individual stock investing. Realistically, I never felt confident about investing until I made it through a complete market cycle (i.e. crash/recovery). By that point, I had accumulated a nice amount and all the philosophies Vanguard were preaching had proven true, so I continued down that route. I have held to those core principals for the majority of my portfolio, including my practice of rebalancing quarterly.

Effectively, it all comes down to testing theories, which is exactly what prompted my most recent stock purchase. I have heard that stocks often surge after a stock split, and last year I saw Apple ($AAPL) experience it from the sidelines, so I wanted to test the phenomenon on another stock experiencing a recent split, buying the equivalence of one share pre-split of Visa ($V). It is too early to determine success or failure on it, but the important thing is that I will get to see for myself (and since it's my money at stake, I am going to be more likely to remember the results personally). Trusting second-hand accounts is no longer a necessity. In sales, they teach "facts tell, stories sell," but building up my own book of stories, I will know firsthand how stocks react (and, having a direct emotional investment, I will *remember* how stocks reacted for years to come).

Regardless, I remain skeptical that any stock I've purchased will serve me better than my index mutual funds have treated me. But I would welcome any of them to prove me wrong!