Can’t Beat the Profits of Big-time Market Traders? Join Them
Wednesday, May 11th, 2011
By Michael Lombardi, MBA for Profit Confidential
As an individual investor, at a certain point, you really need to wonder whether the market is rigged, or, at the very least, if we stand a chance against the big players in the market.
Here are some startling examples…
The Goldman Sachs Group, Inc. (NYSE/GS) is the fifth largest U.S. bank measured by assets. Just like individual investors buy and sell stocks, options, currencies and other securities, Goldman has a trading division. In fact, Goldman makes half of its revenue from trading.
In the first quarter of 2011, Goldman traders lost money on only one day of trading. There were 62 trading days in the first quarter and Goldman lost money on only one of those days. You can say they had a 98% success rate at trading.
How can Goldman have such a success rate at trading? Well, they are not alone. Morgan Stanley (NYSE/MS) only lost money on three trading days in the first quarter of 2011. And the profits are staggering. Morgan Stanley made more than $100 million per day trading on 10 days in first quarter. Goldman generated $100 million on half of the 62 trading days in the first quarter of 2011.
Hence, when reading the SEC filings that reveal these mind-boggling numbers, a small investor like me can’t get away from the question: “How can we ever compete and win against the traders at these institutions?”
First, we need to understand that these traders are playing with big money; their risk is well over $100 million daily. They get in a position, they get out. As individual investors, we cannot move that quickly. We don’t make our livelihood from trading. Our goal is a respectable annual return on our investment portfolio. I’m personally happy with a 25% to 30% annual return on my investments, though I shoot for higher.
So, if we can’t beat them at trading, we can join them by taking long positions rather than short positions. Individual investors win in the long term by taking a position and sticking with it. I’m not talking about a buy-and-hold strategy (never believed in that). I’m talking about riding the prevailing trend.
Investors that joined the bear market rally in stocks at any time during the first half of 2009 have done exceptionally well. Their stock portfolios are up anywhere from 50% to 100% depending on when investors jumped into stocks in 2009.
Investors who got into the gold market early did very well, too. If you didn’t get in during 2002 at $300.00 an ounce, you could have gotten in during 2007 at $700.00 an ounce and still be up over 100% today.
Major market traders like Goldman Sachs and Morgan Stanley are making money by taking quick, daily in-and-out positions. Individual investors can’t beat them at that game. But we can win by taking long-term positions in clearly defined trends and simply holding them until that trend is over.
Michael’s Personal Notes:
As someone very entrenched in the media business, it was very interesting to see two “opposite” stories on the traditional media and online media hit the newswire yesterday.
Bad news for an aging industry…
The U.S. Postal Service said it would be insolvent by September unless the government delayed payments due to it from the postal service. The post office lost $8.5 billion last year. In the first quarter of 2011, it lost $2.6 billion. Use of first-class mail was down 7.6% in the first quarter.
The old media of magazines and other publications in printed format is dead. How would I fix the problem at the post office? The government obviously wants to keep the postal worker jobs, as it already has enough problems with the unemployment rate. My fix would be to slash postal rates.
It now costs about $0.50 for a company to send a publication to its subscribers via bulk mail. When I started in this business, it cost just $0.15. Lower the cost of the mail and businesses will go back to the mail system as a marketing tool. The post office needs to compete against e-mails, and they are sent for free.
Good news for a new industry…
On the other side of the spectrum, but still in media, yesterday Microsoft Corporation (NASDAQ/MSFT) said it was buying Skype for $8.5 billion.
Whenever I travel, I use Skype to see and talk to my family. I can use Skype to communicate with our people in India, Florida or any other place in the world…and it’s free.
Would I buy Microsoft stock because of the Skype deal? No. Microsoft still has to prove itself to me as a company that can execute on integration of an acquisition and make money from it.
With technology re-inventing itself every 24 months, unless the post office does something drastic, it will face the death of a thousand knives.
Below, a picture I recently took in Soho, New York, of a U.S. Post Office that was closed due to slow traffic. Apple Inc. took the space over. By noon each day, there is a line-up to get into the building. A classic case of old technology overtaken by young, new technology…
Where the Market Stands; Where it’s Headed:
As this bear market rally continues on (its halfway through month 27 of its advance), I’m starting to see Dow Jones 13,000 as a possibility.
No, I’m not changing my tune. I still believe this is a bear market trap, the goal of which is to lure as many investors as possible back into stocks before taking their money again.
The bear market rally that started in October 1934 lasted until August 1937—35 months—and took the Dow Jones Industrial Average from a level of 90 to 185, a gain of 106%. If we believe that history repeats itself, and we use that 106% factor, this bear market rally could end with the Dow Jones at 13,266.
But, as we all know, history never really repeats itself exactly. Long-term interest rates are rising, the government is in denial about rising inflationary pressures, there has been very little effort to curb the rising national debt (which I believe is unsustainable), and the printing presses are still running overtime.
A very tired bear market rally lives on.
What He Said:
“Even the most novice investor can now read the chart of the Dow Jones U.S. Home Construction Index and see that it is trading at its lowest level in five years. If, like me, you believe that stocks are an indication of what lies ahead, this important index is telling us that housing prices are headed to 2002 levels! What would that do to the economy? Such an event would devastate the U.S.” Michael Lombardi in PROFIT CONFIDENTIAL, December 4, 2007. That devastation started happening in the first quarter of 2008.