On Monday, August 13, I had the pleasure of being a guest on CNBC's Closing Bell hosted by Bill Griffeth and Sue Herera. One of the subjects was the fairness of the market for the individual investor. Just that morning, Tony Tassell of the Financial Times wrote "Retail investors have had their confidence battered."
Bob Pisani, CNBC's stock market maven, and I were the guests. Bob pointed out that the S&P was near (and has since surpassed) its high going back to 2008. He said new highs usually bring investors into the market. I was asked by Bill if investors were feeling that the market was rigged, which was a question raised by Mr. Tassell in his article. I answered that this was a great time to be an investor in US companies. With SEC disclosure rules and broadband Internet access there is an unprecedented amount of information available to both retail and institutional investors.
Corporate websites provide a wealth of information about a company, including overview strategy presentations, videos, live and replays of quarterly conference calls, and presentations at investor conferences. Similar information is available about suppliers and competitors. Just a few years ago, corporate websites were viewed as adjuncts to a corporate communications strategy. Today corporate websites are seen as the primary face of a corporation. Today's broadband speeds make it practical to access this information.
Beyond corporate websites, a simple Google search such as "XYZ Company fraud" or "Dr. Fred Furd, CEO legal trouble" may yield information useful to making an investment decision. Glassdoor.com, LinkedIn and Facebook profiles can give a sense of the backgrounds of people doing work at a company.
I got the sense that my answer was not exactly on target for the discussion. I later realized that the question I was asked did not relate to investors but to traders and speculators.
So I offer a few definitions. Investing is providing the equity capital for a business. If asked to invest in the corner deli, one would want to know and trust the management, know that the sandwiches were good and the kitchen was clean, and have an independent idea of what future earnings and cash flow might be. As an individual investor, you could have a strong point of view that would make you an ideal investor for this deli. Investing in public equities should not be much different. Peter Lynch, former super-star fund manager at Fidelity, wrote about the individual investor's advantage in his classic book, One Up on Wall Street.
Trading is buying and selling stocks for shorter periods of time. You may have a short term point of view that you think is not reflected in a stock price. Trading is not for everyone, but works for some.
Mr. Tassell cites the Knight Capital case and high frequency trading as examples of a market rigged against the retail investor. He quotes, "By the time the ordinary investor sees a quote, it's like looking at a star that burnt out 50,000 years ago," said Sal Arnuk, a partner in Themis Trading, recently told Wired magazine. We do agree with Mr. Arnuk that the world would be better off without high frequency traders trying to see who can get their servers closer to the exchanges pricing sources.
Funny how that word investor snuck into his quote. High-frequency trading has little to do with our view of investing. We can see how high-frequency trading can be upsetting for traders. We are looking to buy undervalued stocks for long-term gains, not trying to scalp a hundredth of a cent in a trade. Philosophically, we would be glad to be buying additional shares in some of our favorite holdings from Knight's errant computers.
Speculating is trading or investing without having a point of view other than thinking a stock will go up. Flipping IPOs is an example of speculating. It may work but more likely over time, it will not work.
Mr. Tassell criticizes dual-class structures and the Jumpstart Our Business Startups, or JOBS Act, which aims to make it easier for emerging companies to raise capital by reducing regulatory requirements in areas such as information disclosure. We say these are not examples of rigged markets. If investors do not like a corporate structure or the amount of disclosure, they should not buy the stock. If speculators try to make money on these companies without understanding what they own, they must accept the associated risk.
Five years of equity mutual fund outflows illustrates the lack of retail interest in the market. On the other hand, it could also illustrate that much of the speculation has been removed from the market, which could make for attractive valuations.
Investing is hard work, but we believe the opportunities for investors have rarely been better. The opportunities for speculators are the same as ever. Some will work, but many will fail.
Now if Mr. Tassell had wondered about a rigged market and written about Government bonds, he'd have received a sympathetic friend here - however, I'll save that idea for another installment.