Joe Nocera, "Frankenstein Takes Over the Market": Can You Beat the Machines?

A while back, a friend called to complain about the decline in the share price of a particular company on a certain day: "What the f@#% is wrong here? Where there's smoke, there's fire!" "In fact," I replied, "I think the company is just fine. What you're watching is computerized trading."

Many investors today, when reviewing their share portfolios, don't understand that the bid and offer on their computer screens is often not generated by orders to buy or sell from human beings, but rather by algorithms, which do not take into account the financial and commercial well-being of a company. Rather, these computerized algorithms, aided by the elimination of the Uptick Rule (see: http://jgcaesarea.blogspot.co.il/2010/02/reinstate-uptick-rule-immediately.html), are intended to milk small shareholders of their money on a day to day basis.

In his latest New York Times op-ed entitled "Frankenstein Takes Over the Market" (http://www.nytimes.com/2012/08/04/opinion/nocera-frankenstein-takes-over-the-market.html), Joe Nocera laments:

" . . . the market feels less and less hospitable to individual investors, while becoming, increasingly, a playground for the big boys, the way it was before the creation of the Securities and Exchange Commission in the 1930s. Yes, if you can shut out the white noise — à la Warren Buffett — rapid-fire trading shouldn’t matter over the long haul. But very few of us have Buffett-like blinders.

. . . .

One wonders if Wall Street itself is beginning to question if it can rely on the monster it has created — and which it no longer seems able to control. In the immortal words of the screenwriter William Goldman, 'Nobody knows anything.' He was talking about Hollywood. But the same could be said today for Wall Street and its fixation with computerized trading."

Which brings us to the next question: Can you beat the machines? (Sounds a bit like "The Terminator" movies, but without Arnold Schwarzenegger to help you.)

Well, I have repeatedly asked in this blog for the reinstatement of the Uptick Rule, which would do much to heal the American economy, but this would throw a monkey wrench into the highly profitable computerized trading programs of the investment banking firms, and neither the Democrats nor the Republicans will heed my words.

However, if you are not a day trader playing against the computers at what they do best, if you can "shut out the white noise" as suggested by Nocera, and if you can seek medium or long-term profits based upon an in-depth understanding of a company's product and business plan (something the algorithms barely take into account), you stand a shot at beating the machines.

But do you have this in you? Today, in a world of gloom and panic, can you block out the white noise and see beyond your nose? If not, stay away from the market - the machines will devour you and ultimately themselves.