Anytime that you are looking at the management of your portfolio you want to take a macro view. When you take a micro view, then this is when you get in trouble. For example, let's say you invested some money two years ago. You put a lot of thought into it and invested in a portfolio of investments which could be stocks, bonds, mutual funds, or ETF's. You have completed only one small aspect of the job.
Portfolio management is an ongoing process of research, comparison, evaluation, selling decisions, replacement buying decisions and big picture thinking. What benchmark are you using to compare your portfolio against? What expected level of return are you seeking? What type of risk and volatility are you willing to stomach? How are you going to manage your investment expenses?
Just making the buy decisions in the beginning is only a smidgeon of the portfolio management process. There is constant work to be done along the way.
Occasionally, I meet someone who picks out a time period that has a good return and then they set their expectations at that level. This is a mistake. In fact, investment performance should not be your focus at all. You probably think I am crazy for saying this, but I can prove it to you.
If you invest in an index mutual fund or ETF like the S&P 500 for example, then you will receive the performance of the S&P 500 minus the expenses and the generally miniscule tracking error of the mutual fund or ETF. That's a fact Jack! So, this begs the question, why should you be concerned with the performance of such a mutual fund or ETF if you know it is going to closely track the S&P 500? The truth is that you shouldn't be concerned at all about this particular investment from a performance standpoint. You will get the performance you seek.
On the other hand, if you bought a pool of stocks, or some actively managed mutual funds, then you have a problem. You have just made your life more complicated for one thing. For another thing, now you have to worry about that pool of stocks, or actively managed mutual funds. Is it going to fail to out perform the benchmark? Oh, by the way, what is your benchmark for a pool of stocks or actively managed mutual funds? How will you penalize yourself for failing to meet a benchmark? I doubt very seriously that you would fire yourself, if you failed at meeting a portfolio benchmark, even if you had one in the first place.
Let's take a pool of actively managed stocks, for example. How many stocks are in this pool? Is is 10? 20? 30? or 40? What is the right number? How much are the trading costs going to be? How often will you re-balance? What sectors of the economy are included in your pool of stocks? Did you cover all the major sectors of the economy? What sub-sectors do you have in your pool? Are your stocks value stocks, or are they growth stocks? Are your stocks large company, mid-cap companies, small cap companies, micro stocks or international stocks? Then, once you know what size they are, then again, are they value, or growth tilted? What percentages do you weight towards each stock? Should large company have more than international? Should small cap have more than mid-cap?
Drilling down some more, we want to know how each of these stocks act in a recessionary time period? What can we expect when the market declines? Do these stocks pay dividends? Are we reaching for dividend yields like with preferred stocks that put our portfolio at greater risk? How do they act when the market is doing well? Are we missing out on returns because we are in the wrong stocks? Are we missing out on returns because we are not in the right sectors and sub-sectors? Are we trading too much?
I haven't even covered the statistical aspect of this pool of stocks like what is the beta, alpha, sharp ratio, R squared and other statistical figures that are very, very important to know. Most investors have no idea what any of these are, but they fail to know at their own peril. Yet, people think when they make the decision to buy a pool of stocks, then they can just sit back and watch their money grow. Wrong. There is a whole lot of work that must be done to stay on top of things.
Performance is something to worry about if you are actively managing a portfolio of stocks or actively managed mutual funds. It is nothing to worry about if you are investing in passively managed, low expense index funds or ETF's, because you know that you will get the performance of the index. You see this major difference? It is a huge difference. Believe me when I tell you.
Investors who are actively managing their own portfolios in a bull market fancy themselves as "talented" money managers. Here is the grim reality. When the market goes down, your "talent" goes out the window. You will then realize that this money management stuff is a little harder than you thought. Don't be so proud of yourself when investing in a bull market. Any one can have success by throwing darts at the Wall Street Journal and investing those stocks. It takes more to be a professional. As a professional, I moved all of our clients to cash on October 6, 2008. Do you or your advisor do that? I doubt it. Did they stay in cash until May of 2009? I doubt that also. What is the difference? I am a professional with years and years of money management experiences.
If you picked 40 stocks and diversified them across all the major sectors of the economy, then guess what? You have built yourself your own mutual fund per se that is going to track the S&P 500. Congratulations! Oh, did you know that you could have just bought an S&P 500 indexed mutual fund or ETF and saved yourself a whole lot of headaches? This is the scenario if your pool of stocks performs as it should based on the sectors of the economy that each of those stocks are in. You will simply build your own mutual fund. It's kind of silly, don't you think? It is silly to put all that time and effort into building and managing a pool of stocks when you could have just purchased a passively managed S&P 500 index fund instead. Are you getting the picture now?
What if your actively managed pool of stocks under performs? Uh-oh! Now you are losing money compared to a passively managed S&P 500 index mutual fund or ETF. This not good.
I cannot tell you how many times I see people want to hold onto a small group of stocks, like 3 or 4, for sentimental or emotional reasons. If those 3 or 4 stocks make up more than 30% of your overall portfolio, then your results will be skewed by what those stocks do. Most times, they are crappy stocks or big name stocks where their major growth years are behind them. Look at your account statement. You know that what I am telling you is right. You are sitting there with a bunch of crappy stocks in your portfolio that needs cleaning up. Yet, you are not engaged to do anything about it. That is foolish.
If performance is your main focus, then I would ask a question. In relation to what? I know my plan, process and professionalism is well thought out. Is yours? Quit being so disengaged with your money. Hire a professional with (the three P's) a plan, a process and who is a professional.
Oh, by the way, I am available.
Did you read my book, Meet Wally Street. The Reason You're Stupid? Click the link in the upper right column to buy it at your favorite eBook retailer. Trust me. It is worth all three dollars and ninety-nine cents.
Friday, May 30, 2014
Tuesday, May 6, 2014
Crowd Funding and Rule 506(c)
I devoted a little bit of my book, Meet Wally Street. The Reason You're Stupid to Private Placements and Regulation D offerings. One of the main points that I wanted to get across is that you really have to keep your radar up when you are approached by people who want you to invest in their Regulation D offering.
As I mentioned in my book, there are several different ways for companies to raise money. Depending on the particular IRS Code Section, you might be able to raise $1,000,000, $5,000,000 or an unlimited amount from mostly accredited investors and a limited number of non-accredited investors.
The crowd funding people got out ahead of the regulators, specifically the SEC and were raising money without fully understanding the regulations. As a result, Congress passed a law, The JOBS Act of 2012 that basically allows crowd funding to continue. The crowd funding people were using the Internet and social media to raise funds for their ventures. However, it wasn't until The JOBS Act was passed and the SEC in turn in established a new rule named 506(c) that they were officially allowed to advertise their offerings. The private placements under this new rule 506(c) had to be made to only accredited investors. No non-accredited investors are allowed to participate in their offering on exempt securities.
The full details of the rule have not been fully implemented as the SEC is continuing to develop the final rule. They did however allow the rule 506(c) to go ahead. One of the things in the rule was that the issuer (the people promoting it and who want you to invest in it) had to "verify" that each investor was indeed an accredited investor. Well, what does "verify" mean as far as the SEC is concerned?
Verify means prove it with tax returns, bank statements, W-2's, 1099's, K-1's and the like. There is another way to "verify" a person or entity to be an accredited investor. You can obtain a written letter from a registered broker-dealer or an SEC registered investment adviser (RIA) to attest to the fact. As an alternative, you can also get an licensed attorney or a CPA to attest to the fact that you are an accredited investor. Some people are saying this is a little too much of a gray area. They rightly point out that the broker-dealer, SEC RIA, attorney or CPA would have an opportunity to fudge a little on the letter by saying someone is accredited when in fact they are not. Of course, I am not saying that all of these professionals would do this, but it leaves it open for conflicts of interest. For example, what if the issuer tells you this:
"If your attorney will not sign off on you being an accredited investor, then ours will."
Keep in mind that these people hawking these rule 506(c) Private Placements will exaggerate the merits of their offering, because they want your money. Some will say anything to get you to invest and if they are unscrupulous, they may "help" you get "verified" so you can invest. Now, I am not saying all these people are crooks or anything, but it certainly is a little bit of a gray area in my mind.
Recently, I came across one of these fresh and new 506(c) Private Placements.This particular one was in simplistic terms a Non-Publicly Traded REIT. As I mention in my book, there are plenty of Publicly Traded REIT's that you can buy any day of the week on the NYSE with full liquidity where you can get to your money in as little as three days. Conversely, these 506(c) REIT's are not liquid and in my opinion, are designed to benefit the issuer's executives above all else.
After a diligent review of rule 506(c), I was surprised to learn that you need no type of licensing whatsoever to offer this Private Placement. You would think that a REIT might have someone on the executive committee who is advising them from a securities perspective like a registered broker-dealer firm. You would be wrong, because it is optional. They can have a brokerage firm involved if they want to, but it is not necessary. Normally, you want a brokerage firm involved, because the brokerage firm tells all of their registered representatives to promote the offering to their customers. So, if they decide to fore go the use of a brokerage firm, then they are going to be relying more on advertising, seminars, web sites and social media to promote their rule 506(c) Private Placements.
The other thing that I noticed is that none of the executives have any real estate licenses. You would think people who are selling a Non-Publicly Traded REIT via rule 506(c) would have someone with a real estate license. At least I would think that way. This particular group not only did not have any real estate licenses, but they did not have any securities licenses either. Does that scare you a little bit? It does me.
It is difficult for most investors to find, but you can find information on the executives and their offering. It is much harder if they do not have any licenses. I was able to dig deep and find out that this particular Non-Publicly Traded 506(c) Private Placement was previously offered through a registered broker-dealer. Interesting. Once I found the brokerage firm, then I was able to pull up their information. Much to my chagrin, they had their broker-dealer licensed revoked. Revoked? Yes, revoked. That made me dig even deeper to find out why they got their broker-dealer license revoked. It turns out that this broker-dealer got their license revoked for misleading people about Non-Publicly Traded REIT's they offered. Whoa Nelly!
The first offer of this Non-Publicly Traded REIT was offered pre-rule 506(c). They had to use a broker-dealer the first time. Fast forward a couple of years and now because of rule 506(c), they do not need a broker-dealer. Who can blame them after their first experience with the now revoked brokerage firm?
Now, when I look at this I see a company promoting a Non-Publicly Traded REIT via rule 506(c) without a broker-dealer, without a SEC registered investment adviser, without any licenses of any type and wonder if the accredited investors did their homework like I did. I seriously doubt it.
So, what is an accredited investor to do if they want to "verify" the issuer or people promoting this offering? Full disclosure here as I have no financial incentive or involvement with this firm, but there is a firm called Crowd Check that runs a background check on the issuer and its executives for a fee. To me, it would be worth the fee to have this done if you are real serious about investing in a particular Private Placement. Their web site is http://www.crowdcheck.com. They have lots of great information about all the different Regulation D Private Placement rules. In addition, they think like I do. Their goal is to protect investors.
As for me, I am going to stick with the advice in my book. Never invest in a Private Placement in the first place and you will be better off. Why do you want to invest in something that is totally illiquid and has restrictions against selling, requires you to hold it for several years, if not a decade and you have to hope that you get your money back, not to mention with interest? Why would you invest in such a thing as a rule 506(c) especially when you can invest in liquid investments and not take those risks?
Of course, this particular rule 506(c) Private Placement that I reviewed will have no trouble finding accredited investors to plop down their hard earned money. We will see in about ten years how they did. My guess is it will be not so good.
Be careful out there. More rule 506(c) Private Placements are coming and you will hear about them, believe me. Hopefully, you will not be easily swayed by all their hype.
As I mentioned in my book, there are several different ways for companies to raise money. Depending on the particular IRS Code Section, you might be able to raise $1,000,000, $5,000,000 or an unlimited amount from mostly accredited investors and a limited number of non-accredited investors.
The crowd funding people got out ahead of the regulators, specifically the SEC and were raising money without fully understanding the regulations. As a result, Congress passed a law, The JOBS Act of 2012 that basically allows crowd funding to continue. The crowd funding people were using the Internet and social media to raise funds for their ventures. However, it wasn't until The JOBS Act was passed and the SEC in turn in established a new rule named 506(c) that they were officially allowed to advertise their offerings. The private placements under this new rule 506(c) had to be made to only accredited investors. No non-accredited investors are allowed to participate in their offering on exempt securities.
The full details of the rule have not been fully implemented as the SEC is continuing to develop the final rule. They did however allow the rule 506(c) to go ahead. One of the things in the rule was that the issuer (the people promoting it and who want you to invest in it) had to "verify" that each investor was indeed an accredited investor. Well, what does "verify" mean as far as the SEC is concerned?
Verify means prove it with tax returns, bank statements, W-2's, 1099's, K-1's and the like. There is another way to "verify" a person or entity to be an accredited investor. You can obtain a written letter from a registered broker-dealer or an SEC registered investment adviser (RIA) to attest to the fact. As an alternative, you can also get an licensed attorney or a CPA to attest to the fact that you are an accredited investor. Some people are saying this is a little too much of a gray area. They rightly point out that the broker-dealer, SEC RIA, attorney or CPA would have an opportunity to fudge a little on the letter by saying someone is accredited when in fact they are not. Of course, I am not saying that all of these professionals would do this, but it leaves it open for conflicts of interest. For example, what if the issuer tells you this:
"If your attorney will not sign off on you being an accredited investor, then ours will."
Keep in mind that these people hawking these rule 506(c) Private Placements will exaggerate the merits of their offering, because they want your money. Some will say anything to get you to invest and if they are unscrupulous, they may "help" you get "verified" so you can invest. Now, I am not saying all these people are crooks or anything, but it certainly is a little bit of a gray area in my mind.
Recently, I came across one of these fresh and new 506(c) Private Placements.This particular one was in simplistic terms a Non-Publicly Traded REIT. As I mention in my book, there are plenty of Publicly Traded REIT's that you can buy any day of the week on the NYSE with full liquidity where you can get to your money in as little as three days. Conversely, these 506(c) REIT's are not liquid and in my opinion, are designed to benefit the issuer's executives above all else.
After a diligent review of rule 506(c), I was surprised to learn that you need no type of licensing whatsoever to offer this Private Placement. You would think that a REIT might have someone on the executive committee who is advising them from a securities perspective like a registered broker-dealer firm. You would be wrong, because it is optional. They can have a brokerage firm involved if they want to, but it is not necessary. Normally, you want a brokerage firm involved, because the brokerage firm tells all of their registered representatives to promote the offering to their customers. So, if they decide to fore go the use of a brokerage firm, then they are going to be relying more on advertising, seminars, web sites and social media to promote their rule 506(c) Private Placements.
The other thing that I noticed is that none of the executives have any real estate licenses. You would think people who are selling a Non-Publicly Traded REIT via rule 506(c) would have someone with a real estate license. At least I would think that way. This particular group not only did not have any real estate licenses, but they did not have any securities licenses either. Does that scare you a little bit? It does me.
It is difficult for most investors to find, but you can find information on the executives and their offering. It is much harder if they do not have any licenses. I was able to dig deep and find out that this particular Non-Publicly Traded 506(c) Private Placement was previously offered through a registered broker-dealer. Interesting. Once I found the brokerage firm, then I was able to pull up their information. Much to my chagrin, they had their broker-dealer licensed revoked. Revoked? Yes, revoked. That made me dig even deeper to find out why they got their broker-dealer license revoked. It turns out that this broker-dealer got their license revoked for misleading people about Non-Publicly Traded REIT's they offered. Whoa Nelly!
The first offer of this Non-Publicly Traded REIT was offered pre-rule 506(c). They had to use a broker-dealer the first time. Fast forward a couple of years and now because of rule 506(c), they do not need a broker-dealer. Who can blame them after their first experience with the now revoked brokerage firm?
Now, when I look at this I see a company promoting a Non-Publicly Traded REIT via rule 506(c) without a broker-dealer, without a SEC registered investment adviser, without any licenses of any type and wonder if the accredited investors did their homework like I did. I seriously doubt it.
So, what is an accredited investor to do if they want to "verify" the issuer or people promoting this offering? Full disclosure here as I have no financial incentive or involvement with this firm, but there is a firm called Crowd Check that runs a background check on the issuer and its executives for a fee. To me, it would be worth the fee to have this done if you are real serious about investing in a particular Private Placement. Their web site is http://www.crowdcheck.com. They have lots of great information about all the different Regulation D Private Placement rules. In addition, they think like I do. Their goal is to protect investors.
As for me, I am going to stick with the advice in my book. Never invest in a Private Placement in the first place and you will be better off. Why do you want to invest in something that is totally illiquid and has restrictions against selling, requires you to hold it for several years, if not a decade and you have to hope that you get your money back, not to mention with interest? Why would you invest in such a thing as a rule 506(c) especially when you can invest in liquid investments and not take those risks?
Of course, this particular rule 506(c) Private Placement that I reviewed will have no trouble finding accredited investors to plop down their hard earned money. We will see in about ten years how they did. My guess is it will be not so good.
Be careful out there. More rule 506(c) Private Placements are coming and you will hear about them, believe me. Hopefully, you will not be easily swayed by all their hype.
Thursday, April 24, 2014
Don't Make It a Sad Day for Everybody
As I describe in my book, "Meet Wally Street. The Reason You're Stupid.", "don't make it a sad day for everybody" when you pass away. This was one of my dad's favorite sayings. He was right about one thing. Most people have way too little life insurance. When you make the decision to buy life insurance, you are making a good decision.
Recently, I had the honor and privilege of helping a young, married father of three obtain some life insurance on himself. He is the primary breadwinner in the family. Now, how much life insurance do you think he should have on himself? Perhaps, $250,000, $500,000, $750,000 or $1,000,000? I didn't even have to tell him. He knew that the best answer was $1,000,000. You see, he was thinking of something other than himself. He thought for a moment about what his family's life would be like without him. He realized that since he is the breadwinner and his wife takes care of the kids, then he had to protect his family from being destitute.
Sure, he could have forgone the $1,000,000 death benefit and chosen $250,000 or less to save money, but this would have hurt his family. His wife would have to get a job and we all know how easy that is today, don't we?
In fact, I know a professional who posted a job on Craig's List for a $10 per hour job and received over 70 applicants in just a couple of days. Do you really think your spouse, who is a housewife and hasn't worked for several years, can easily go get a job? If so, then my friend you and me need to have a heart-to-heart talk. Unfortunately, the odds are that she would have a very difficult time finding a job. Even a $10 per hour job, believe it or not. For those 70 people who applied for that job, 69 of them did not get the job. When you spouse is thrown into a dark pool with 70 other people, please tell me realistically what are her chances? I can tell you. Slim to none. It doesn't matter if she has a college degree. She has been out of the workplace too long. HR people are brutal when it comes to going over resumes. They are looking for the most experienced and highly skilled person that they can find. Unfortunately, a housewife who hasn't worked anywhere in four or five years, even one with a college degree, is not going to be at the top of an HR person's list. You know that I am right about this fact. Perhaps, you might want to rethink that life insurance issue again. Term insurance for a young guy is nothing. There is simply no excuse for not having life insurance.
It was so refreshing to see a young man care so much about his family that he would buy $1,000,000 of death benefit to make sure that they were taken care of if something were to happen to him. This is what life insurance is all about. Taking care of your family.
Do you care enough about your family to buy $1,000,000 worth of life insurance? I hope that you do.
Recently, I had the honor and privilege of helping a young, married father of three obtain some life insurance on himself. He is the primary breadwinner in the family. Now, how much life insurance do you think he should have on himself? Perhaps, $250,000, $500,000, $750,000 or $1,000,000? I didn't even have to tell him. He knew that the best answer was $1,000,000. You see, he was thinking of something other than himself. He thought for a moment about what his family's life would be like without him. He realized that since he is the breadwinner and his wife takes care of the kids, then he had to protect his family from being destitute.
Sure, he could have forgone the $1,000,000 death benefit and chosen $250,000 or less to save money, but this would have hurt his family. His wife would have to get a job and we all know how easy that is today, don't we?
In fact, I know a professional who posted a job on Craig's List for a $10 per hour job and received over 70 applicants in just a couple of days. Do you really think your spouse, who is a housewife and hasn't worked for several years, can easily go get a job? If so, then my friend you and me need to have a heart-to-heart talk. Unfortunately, the odds are that she would have a very difficult time finding a job. Even a $10 per hour job, believe it or not. For those 70 people who applied for that job, 69 of them did not get the job. When you spouse is thrown into a dark pool with 70 other people, please tell me realistically what are her chances? I can tell you. Slim to none. It doesn't matter if she has a college degree. She has been out of the workplace too long. HR people are brutal when it comes to going over resumes. They are looking for the most experienced and highly skilled person that they can find. Unfortunately, a housewife who hasn't worked anywhere in four or five years, even one with a college degree, is not going to be at the top of an HR person's list. You know that I am right about this fact. Perhaps, you might want to rethink that life insurance issue again. Term insurance for a young guy is nothing. There is simply no excuse for not having life insurance.
It was so refreshing to see a young man care so much about his family that he would buy $1,000,000 of death benefit to make sure that they were taken care of if something were to happen to him. This is what life insurance is all about. Taking care of your family.
Do you care enough about your family to buy $1,000,000 worth of life insurance? I hope that you do.
Wednesday, April 2, 2014
Flash Boys Book Review
Michael Lewis's book, Flash Boys was dutifully read and digested by yours truly and I thought that I would give you my review of it. Mr. Lewis is a talented writer and I felt as though I was watching a movie rather than reading a book. It was a novel with a story line full of interesting characters that could definitely be made into a movie. Since Mr. Lewis has other books of his that were made into movies, then I am certain he wrote it with that possibility in mind. Pretty smart on his part, don't you think?
The content is probably not easily understood by your average investor who doesn't understand trading securities or how Wall Street works. However, people like me can follow along without much effort, because of our background in the business. Regardless whether you are in the business or not, it provides a good education and the book is well researched.
I always admire people who achieve success in their endeavors and Mr. Lewis is no exception. He is extremely talented at telling a story. Although, I learned something long ago about these people. Generally, they are not that different from you and I. In fact, at some point in his writing career he was an unknown, but this did not deter him from his dream of being a successful writer. He kept at his dream and worked very hard to achieve that status. Other people give up too easily. People like Mr. Lewis show a tenacity to achieve their dreams no matter what obstacles stand in their way. That is the major difference in his success and the success of others like him. They have the tenacity to never give up.
In Flash Boys, he talks about a group of guys that you would never think could work together. It was almost like they were a bunch of misfits, weirdos and nerds. However, it was evident that Brad Katsuyama knew what he was doing. He is the guy with the talent to put the team together and that is precisely what he did. Most managers who hire people make the mistake of hiring people who are just like them. Mr. Katsuyama understands that he needed people with skill sets that were totally unique from his own. In fact, almost none of the people he hired for IEX had the same skills. They all were specialists who were very good at what they did. Mr. Katsuyama was the guy with the draft board, if you will. He had some spots to fill at each position and he and his team set out to draft the players.
Mr. Lewis goes into intricate detail about the personalities involved and how each of these team players found their way onto the IEX team. That is the story of the Flash Boys. The guys who worked at different jobs, but still managed to find their way to IEX. I have no doubt that IEX will be a success. All of the players on the team are focused to deliver their trading exchange services in a transparent manner. Sunlight is always good in business as opposed to the hidden tactics of some Wall Street firms. I would bet on the transparent guy over the opaque guy every time.
I think the people jumping up and down about high frequency trading have not read the book. They are making assumptions. My suggestion is to read the book, before you go on TV and spout off.
High frequency trading has it place. To me, like I mentioned in my last blog article, it is not much different than the market maker on the floor of a stock exchange with an order book. He can see all the people with the buy orders and all the people with the sell orders. He matches the orders and keeps the spread. This is similar to what they high frequency traders do, although I will admit that they have an advantage. Keep in mind however that their advantage might be fleeting. Nothing ever stays the same for very long, especially when it comes to technological innovation. Something else is sure to come along and upset the apple cart.
Unfortunately, this book is liable to get people all emotional about high frequency trading and cause some problems for these firms and their principals. Supposedly some of these firms are already under investigation by the FBI and the SEC. My advice is before you slap the cuffs on people, you should read the book and pay special attention to the story about Serge Aleynikov. What they did to him was totally ridiculous. His arrest was a result of a rush to judgment by people at Goldman Sachs who didn't know their ass from deep center field and conned the FBI into believing the he was stealing Goldman's secret sauce. All Serge was doing was being a computer geek and saving his open source work in a manner highly typical of computer geeks. Here is a lesson for anyone working in Corporate America. Whatever you make, design or write as an employee is not yours. You cannot take it with you when you leave, even if it was taken innocently like it was in Serge's case. Goldman was just sending a message to all computer programmers that worked for their firm and poor Serge was the sacrificial lamb.
Anyway, I hope cooler heads prevail, because slamming the brakes on high frequency trading firms will shut down over half of the stock market which is already weak since the 2008 Wall Street and banking debacles. If you want to guarantee another market meltdown, then do something really stupid and stop high frequency trading. Let's hope they don't do it.
The content is probably not easily understood by your average investor who doesn't understand trading securities or how Wall Street works. However, people like me can follow along without much effort, because of our background in the business. Regardless whether you are in the business or not, it provides a good education and the book is well researched.
I always admire people who achieve success in their endeavors and Mr. Lewis is no exception. He is extremely talented at telling a story. Although, I learned something long ago about these people. Generally, they are not that different from you and I. In fact, at some point in his writing career he was an unknown, but this did not deter him from his dream of being a successful writer. He kept at his dream and worked very hard to achieve that status. Other people give up too easily. People like Mr. Lewis show a tenacity to achieve their dreams no matter what obstacles stand in their way. That is the major difference in his success and the success of others like him. They have the tenacity to never give up.
In Flash Boys, he talks about a group of guys that you would never think could work together. It was almost like they were a bunch of misfits, weirdos and nerds. However, it was evident that Brad Katsuyama knew what he was doing. He is the guy with the talent to put the team together and that is precisely what he did. Most managers who hire people make the mistake of hiring people who are just like them. Mr. Katsuyama understands that he needed people with skill sets that were totally unique from his own. In fact, almost none of the people he hired for IEX had the same skills. They all were specialists who were very good at what they did. Mr. Katsuyama was the guy with the draft board, if you will. He had some spots to fill at each position and he and his team set out to draft the players.
Mr. Lewis goes into intricate detail about the personalities involved and how each of these team players found their way onto the IEX team. That is the story of the Flash Boys. The guys who worked at different jobs, but still managed to find their way to IEX. I have no doubt that IEX will be a success. All of the players on the team are focused to deliver their trading exchange services in a transparent manner. Sunlight is always good in business as opposed to the hidden tactics of some Wall Street firms. I would bet on the transparent guy over the opaque guy every time.
I think the people jumping up and down about high frequency trading have not read the book. They are making assumptions. My suggestion is to read the book, before you go on TV and spout off.
High frequency trading has it place. To me, like I mentioned in my last blog article, it is not much different than the market maker on the floor of a stock exchange with an order book. He can see all the people with the buy orders and all the people with the sell orders. He matches the orders and keeps the spread. This is similar to what they high frequency traders do, although I will admit that they have an advantage. Keep in mind however that their advantage might be fleeting. Nothing ever stays the same for very long, especially when it comes to technological innovation. Something else is sure to come along and upset the apple cart.
Unfortunately, this book is liable to get people all emotional about high frequency trading and cause some problems for these firms and their principals. Supposedly some of these firms are already under investigation by the FBI and the SEC. My advice is before you slap the cuffs on people, you should read the book and pay special attention to the story about Serge Aleynikov. What they did to him was totally ridiculous. His arrest was a result of a rush to judgment by people at Goldman Sachs who didn't know their ass from deep center field and conned the FBI into believing the he was stealing Goldman's secret sauce. All Serge was doing was being a computer geek and saving his open source work in a manner highly typical of computer geeks. Here is a lesson for anyone working in Corporate America. Whatever you make, design or write as an employee is not yours. You cannot take it with you when you leave, even if it was taken innocently like it was in Serge's case. Goldman was just sending a message to all computer programmers that worked for their firm and poor Serge was the sacrificial lamb.
Anyway, I hope cooler heads prevail, because slamming the brakes on high frequency trading firms will shut down over half of the stock market which is already weak since the 2008 Wall Street and banking debacles. If you want to guarantee another market meltdown, then do something really stupid and stop high frequency trading. Let's hope they don't do it.
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