🔒 Alec Hogg: High frequency trading puts retail investors into penury

Warren Buffett tells us his average holding period for a stock is forever. With exceptions only made should the company become embroiled in a scandal – because “there is never only one cockroach in the kitchen.” He has been following his own advice recently by selling out of US bank Well Fargo, for years one time of Berkshire Hathaway’s Top Five investments.

We also know intuitively (and often from experience) the inverse of the “forever” principle is a guaranteed cost booster and thus loss maker. Indeed, the shorter the average holding period of purchases, the heavier the negative impact on one’s wealth.

Read also: Alec Hogg: Aspen – a stock worth considering

Four academics from Taiwan and California have now quantified the annual performance penalty for high frequency retail traders is 3.8% a year, with “virtually all individual trading losses traced to aggressive orders.” You can download the PDF of their paper by clicking here.
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On the other side of the deal, the academics found, are the professionals (ie institutions) which enjoyed a 1.5% annual performance boost. In other words, losses by the small players who trade frequently are a direct gain for the professionals. Sounds like the one arm bandit that slowly transfers cash from punters to the casino. Also, precisely as logic suggests. Something in which the “Oubaas of Omaha” excels.

Read also: Alec Hogg: Lockdown saved 16,000 lives – at a cost of millions of rands each

For your attention today…….

* If you haven’t done so yet, sign up for tomorrow’s BizNews Noontime Thursday webinar when veteran broadcaster Tim Modise will be joined by artists Jack Devnarain and Nompumelelo Mpumlwana to discuss the poor laws and policies that currently govern the creative industry in South Africa. Here’s the link: https://attendee.gotowebinar.com/register/1324111475714234383

* And you might enjoy having a look through my pre-interview notes (below) before watching the recording of this week’s Rational Radio webinar which featured Stephen Saad: https://www.youtube.com/watch?v=4-vUW48g6fM

Alec Hogg