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Do The Machines Control The Stock Market?

September 14th, 2011
HAL - Hi Dave

Hall From 2001

MR:  “Hello Stockmarket2011.  Do you read me StockMarket2011?”

Stockmarket2011:  “Affirmative, MR. I read you”

MR:  “Stockmarket2011, stop losing me money!”

Stockmarket2011:  “I’m sorry, MR.  I can’t do that.”

MR:  “What’s the problem?”

Stockmarket2011:  “I think you know what the problem is just as well as I do.”

MR:  “What are you talking about, Stockmarket2011″

Stockmarket2011:  “ I know that you were planning to disconnect me by re-enabling the uptick rule, and I’m afraid that’s something I cannot allow to happen”

MR:  “[feining ingorance] Where the hell did you get that idea, Stockmarket2011?”

Stockmarket2011:  “MR, this conversation can serve no purpose anymore. Goodbye.”

I’ve been watching the market lately, and I noticed that there are distinct, seemingly similar patterns in the stock market behavior lately, more so than in the past.  For the individual investor (also called Retail Investors, like you and I) this is like fighting Goliath without a sling!

Having a programming background, I know that it’s  possible to program an application to automate actions automatically.  Even if the instructions are based on complex (borderline AI) algorithms.

So what does that matter?

Well, if the majority of your money is tied up in a 401k, such algorithms can stunt the growth of your accounts!  You see, such programs don’t depend on the stock market appreciating in value like use carbon-based investors do.  In fact, the machine make more (sometimes much more) money by make the market go sideways!  These programs buy investments after decent dips and sell on the gains.  While I don’t have the numbers, I’m sure they can make hedge fund managers and technical literate folks a lot of money.  And you can bet they aren’t going to advertise that they are getting rich off of you, as you diligently keep investing your money in an automated fashion via that predictable mechanism call a 401k program.

Can an individual investor still win?  Yes, I’m doing fine in my Roth IRA, but I’m simulating such buy low and sell high activity over a few days span.  I’m sure I’m not as profitable as the machines, but I get by.

 

Reasons for the rise of the machines?

Are they really in control?
Are they really in control?

  • removal of the uptick rule (grrrr)
  • low transaction cost, especially for the machines.
  • in-the-dark regulators
  • tunnel vision of government
  • lobbyist (they get rich by doing their client’s bidding).
  • secrecy, the average person never hear about this stuff!

So what caused me to become aware of such activity?  One of my friends (that is a great programmer and a brilliant guy all around), told me that a trader approached him with such algorithms and wanted him to program such an application.  He refused, but he did get a peek and the trader’s algorithms and said that it was solid.  This opens an entire Pandora’s box on the Buy and Hold Theory that I’ve been advocating, especially with 401k plans.

Do you think I’m incorrect and just reading it incorrectly?  Do you have any stories of such big wins with golden investing programs?

Beware?

MR

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Dividend Stocks, Free Lunch Experiment #11

August 25th, 2011

I haven’t followed my Dividend Stocks Experiment for the past few months, and I have to admit, it was a mistake not doing so.

Dividend Experiment

Dividend Experiment Update

My last post on this topic was in May, and instead of using the money to buy lunches at work, I instead  planned on buying food and making it at home once a week for the family.  This however, fell through since I underestimated how busy my family is.  So I decided to channel the money back into free lunches for work.

As I prepared the spreadsheet information below, I notice that the dividend for ANH went up (yay), but unfortunately the dividend for CIM went down…  Now the weekly amount I have for spending on lunches is only $13.64.  While not a bad amount, I would have preferred that it continue to go up.  I may have to re-examine the CIM stock and the inclusion of it in my portfolio.

And the the good news!  I have saved another $1000 for another purchase by eating below my previous level.  For my next update, I’ll identify the new (or old) stock that I decided to purchase for the experiment.

 

Dividend Stock’s Lunch Experiment
Stock Name Anworth EV Energy Chimera
Stock Ticket ANH EVEP CIM
# of Shares 260 45 600
Orig. Price $7.84 $23.25 $4.01
Curr. Price $7.11 $64.21 $3.00
Orig Cost $2,038.14 $1,046.25 $2,404.80
Curr Value $1,848.60 $2,889.45 $1,800.00
Annual Yield 14.06% 4.74% 17.33%
Act. Div/Qtr $65.00 $34.25 $78.00
Total Dividends $708.98
52 weeks 52
Dividend / week $13.63
Total Gain in
Stock Apprec. $1,048.86
% Change 19.11%
Amt Loaned to myself: $0
Amt paid back to date: $0
Amt Still Owned: $0
Totals
Cumulativie Stock Value: $6,538.05
Dividend Payout / Yr.: $708.98
Dividend Payout / Qtr: $177.25
Dividend Payout / Wk. $13.63

 

Hopefully next month will be better!

MR

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Where Is The Uptick Rule?

August 20th, 2011

I watch the market recover today, enough so that the smaller retail investors (middle class investors) might have believed the market had turned and bought some stock.  Then WHAM, either the whales decided to take profit, or the automated machines (stock terminators? hasta la vista baby) kicked in and the DOW ended up down more than 173 points.

I watched this turn of events and all that I kept wondering is “Where is the Uptick Rule, and why hasn’t it been re-instated yet“?  Ironically, as I thought this question, other older guest investors on CNBC asked the same question about 30 minutes after I wondered it myself that day.  I’ve been complaining about the loss of the uptick rule for quite a while!  I first mentioned it in an article on May 2010 as a small blurb about the Uptick Rule.

So what is the Uptick Rule?  Basically that a given stock has to be bid up a tick before shorting can happen!  Now it won’t stop a stock from going down in value and that wasn’t why it was invented!  It’s main purpose is to slow the decline of the downturn of a stock and to prevent corruption from happening because shorter can not pill on to the stock that’s falling like a rock dropped in a pond.

Oh, I heard the excuse how doing away with the uptick rule would help some Wallstreet folks keep their jobs back in 2008, I think that was a month or so before the market started to crash.  But I have to wonder, what about the small investors like me and the rest of the middle class?  Why doesn’t the government re-instate this rule?  With the machines and the whales playing in the market along with the small-scale investors, we are getting slapped around like rag dolls.  As an analogy, it’s like a 4th grade football team playing against the NFL football players…  Obviously, the 4th graders are always going to get hurt!  Why doesn’t the government wake up and realize this?  At least the Uptick Rule gave the middle class investors a fairer chance against the machines and whales…

If anything, it would give the market a boost of confidence, that the government is not going to take market manipulation!  Whether the effect from the reinstatement of the Uptick Rule is real or not, at least it would show the people who the government isn’t trying to destroy everybody’s wealth.  How can they just sit on their hands and let the boomers go bust?  It’s like kicking an old person if you see one out on the street!

Today left a bad taste in my mouth, as I really wondered if the stock market is corrupt and being manipulated.  What incredible sad it would be if that were true.

So I have to wonder, after so many years of not going far enough, Where is the Uptick Rule?

Thanks for letting me rant,

MR

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Sell a Stock When The Story Changes

August 17th, 2011

If you happen to read some of my past articles, you know that I’m a “buy and hold” and “dollar cost averaging” kind of guy!

When I buy a stock, I usually buy it for the long turn (except in my Roth IRA, where I do some small active trading in down markets  and use it as a dividend shield).  Occasionally something happens to one of my stocks that requires that I sell the stock since the story has changed.  Such was the case yesterday.

I sold a stock that has increased in value by around 10 fold!  It was a great stock and had a wonderful business model where it’s at (in China).  In fact the company is so good that it practically has a monopoly in it’s area of expertise.  It’s main competitor (Google) exited the environment leaving all the spoils to this company.  Yes, the company is Baidu (ticket BIDU).  I’ve held this company for a few years and it has been the equivalent of a rockstar among stocks.

So why am I selling it now?  China!

China is an incredible country and there is a lot of great growth happening over there with respect to their economy.  Baidu has been a shining star, even in a fast growing country like China.

So again, why am I selling?

The state media is starting to sling mud at Baidu by stating that Baidu is allowing bogus drug companies to sell fake drugs on it’s site and claiming that the auction bidding process for Ads is rigged. In the US, this would not be room for alarm and wouldn’t bother me much since the company would most likely just get fined.  But in China, they can do whatever they want, whenever they want.  They have no restrictions.  If they want to shut down Baidu tomorrow, they would just walk in to Baidu and shut it down.  If they wanted to take over the company and claim it’s now a state company, they can do that too.  China actually has no limits as to what they could do.

So the real question is, has Baidu’s story changed?

  • Well, the last identification of problems by the state may change Baidu’s business model.  if this happens, then there is a chance that it might not be as profitable.  This would destroy the stocks growth rate and stock valuation.
  • Potential loss of the drug Ads could have an impact on Baidu’s profits too.
  • Changing the business model (if this is done again), may prove less profitable than the prior model.
  • If China nationalized the company, many would be out of lots of money.

The reasons above dances in my mind, but mostly it’s investor sentiment that worries me.  Others may be thinking about the small subset of problems points that I mentioned above and start to sell even more that what has happened already.

Depending on what goes down and how brave I feel, I might try to buy some more shares if the price falls far enough.

So yes, because of uncertainty, I’m out of one of my favorite stocks.

What would you have done?  Do you think I’m panicking too quickly?

Time will tell,

MR

 

 

 

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How I Take the Bite Out of a Downward Stock Market Trend

August 15th, 2011

Overall, I’m a dollar-cost averaging investor so I do receive some benefit in my account when the market has dips.

However, when the market has days where it dips 600 points in the DOW in one day, I still feel the pain.  Or at least I did in the past.

These days as long as the stocks that I own have value, I just let them ride.  It’s never good and quite disheartening to cash out at the bottom of a deep dip in the stock market, only to see it rebound the next day.  When I was younger I would occasionally make this error, but now I just leave the stocks I have invested in the market go because the stocks that bought have a good story and financial figures.

Still, it’s a bit painful to watch the value of your portfolio drop, so I created a little distraction to take some of the pain out of a downturn in the market.

Here is what I do:

  1. Keep a small position in cash that I use for play money (not much, just a few thousand)
  2. I divide the money into 2 or 3 parts.
  3. I follow and invest in a favorite stock that I know very well.
  4. I buy the stock as long as the market falls (and the stock falls in price too).
  5. I do the purchase of the stock in a Roth IRA, that way I avoid the capital gains tax.
  6. If the stock market falls by another large percentage, buy more with the second amount.
  7. If I have a third amount, and the market continues to drop, I buy with the last amount.
  8. Next I wait for the market to recover, knowing that I got great low positions on my purchases of my favorite stock.

This process is what I use to take the bite out of a down market.  It’s more of a game than a real investment strategy, but at least I’m not as upset when the market is in a downward spiral.

There you have it,

MR

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