Another Can't Miss Strategy

Since the dawn of the modern world, man has devised umpteen ways to "beat the market". When any of these ways becomes really popular, the market tanks. Witness, for example, dynamic portfolio insurance, a theory which claimed that you could define how much money you were willing to lose if the market fell and that is all you would lose. The theory said it would be so. The theory became popular in the 1980s and October 1987 saw a 20% drop in the market on October 19. This is but one example, there are plenty more you're thinking about now.

Paul Wilmott writes about the latest craze - high-frequency algorithmic trading - in today's NY Times. This is a can't miss strategy where the computer does the buying and selling. It analyzes the data and in milliseconds (that's thousandths of a second) decides to buy or sell a particular stock. Wilmott fears that the herd instinct will lead to many 'investors' adopting the strategy and, like most crazes in the world of finance, winding up with the short end of the stick. The real problem in Wilmott's view is not the losses suffered but the impact this may have on the economy.

Wilmott concludes with this:

Buying stocks used to be about long-term value, doing your research and finding the company that you thought had good prospects. Maybe it had a product that you liked the look of, or perhaps a solid management team. Increasingly such real value is becoming irrelevant. The contest is now between the machines — and they’re playing games with real businesses and real people.