“INVESTMENT” DEFINITIONS AND TIME Firstly, there was the “business introducer” asking what commissions he could expect for a USD 6 million deposit which the prospective client would need back in 6 months’ time; plus there was the barber who was convinced his client base would be worth a lot to me if I could double their money over the next month. All in one week…. a door opener into an inaccurately perceived but not real world of investment advice. Secondly, I also had a cracker of a month in terms of the amount of money my “esteemed” and sometimes “respected” position attracted from various collapsed governments, wives of politically famous people; high ranking military personal…all with millions they need help with, and in which little old me was part of the solution. These days, we have less difficulty dismissing the scams and fraud-attempts of the second set of illusions (although the head gets scratched at the sustained amount of attempts); yet, the first set of illusions remain an issue for the investor-layman. This article seeks to underline the importance of time as a factor in risk and investment. A crucial, crucial role.
The Nano-Second….Computer Trading.
The “dark pools “of money.
Highly specialised computer driven trading beyond the speed capabilities of the human mind.
Characterised by High Frequency Trading(HFT).
For an insight… read The Poisonous Pen article of October 2013… what can be achieved in a nano-second?… click here for more.
Between 2008 and 2012 the volume of HFT by number of shares traded stood between 51% and 61% of all shares traded on US stocks (New York Times)…From Poisonous Pen October 2013.
The Trader
The trader lives in the world of very short time frames.
Stan Lock at TJ Markets often talks about “not falling in love with a share and not going to sleep with it”… ideally you close the book at the end of the day and don’t carry positions from day-to-day… sort of, but then we are talking about human judgement with some help from
computer interpretation and mathematical models. The latter tools have a high profile in the world of the Trader, hence he will look for “candlesticks” and all sorts of other pattern based inputs.
For the layman, suffice to know that “the trend is your friend”…the good news for the trader is that trends can be either up or down. The investor generally needs prices to go up (buy low, sell high); the trader can make his buck on a falling market and is often blamed for extending a falling market.
The Trader often uses little capital (unlike the investor), he/she can borrow shares/leverage with options and dance around the market with a number of instruments designed to get more from next to nothing.
Cash Management
Herein lies the root of many a misconception…..our “business introducer” was surprised that the best our investment team could offer for his USD 6 million, six month deposit was a slightly better interest rate and that every other potential decision carried a significant level of risk. Worse still… there was zero commission. His jaw dropped… how could USD 6 mill of someone else’s money be worth nothing to him?
“Do what you will your capital is at risk” (Justice Putnam- The Prudent Man Rule)…. Guarantees are only worth the paper they are written on. The real world offers no certainty of safety on any investment anywhere. Over one day to (say) three year (and for safety, five year) periods there is no better advice than LEAVE IT IN THE BANK…. Unless…unless you have a tolerance for losses.
This brings time into play…..time allows for a degree of ‘recovery time’ from: o
Market Corrections/collapses.
o
Poor timing.
o
Poor asset selection.
o
Allows asset inflation to remedy short term hurt.
Investment.
So there you have it… the real world “investment adviser”, whilst glued to short term news, might now be seen as a more boring than the barber first imagined. The world of a “good” investment adviser is over periods of five years plus… some might say “rolling three year periods…but a note: the time is above a couple of years and way above the six months required by our “business introducer”.
Five years provides enough time for assets to inflate above the rate of inflation and therefore provide improvements in purchasing power WHICH IS WHAT WEALTH CREATION IS REALLY ABOUT.
Five years provides time for an economic cycle to revolve its way around, …should you have entered at the wrong time.
Five years provides time for “educated” analyses of quantitative and qualitative processes to work its wonders. After all, short term, a research team can be unlucky over a year or so…. But bad luck becomes bad judgement after say, 5 years!!
