Doing the Opposite – Slow Frequency Trading

October 13, 2010 at 12:39 am 3 comments

The business of robot trading, or so-called high-frequency trading (HFT) has grabbed a lot of headlines recently. The recent exposé released by 60 Minutes on the subject  has only fanned the flames, which have been blazing harder since the May 6th “flash crash” earlier this year. The SEC is still working through proposed rule changes and regulatory reforms in hopes of preventing a similar crash that saw the Dow Jones Industrial Index almost fall 1,000 points in fifteen minutes, only to recover much of those losses minutes later.

The debate will rage on about the fairness of HFT (read more), but let’s not confuse active day-trading with high-frequency trading. In the case of HFT, the traders are actually getting paid to trade with the assistance of “liquidity rebates.” In exchange for the service of providing liquidity, these computer-based trading companies are earning cold, hard cash. Wouldn’t that be nice if individual day traders got paid money too for trading, rather than flushing commissions down the toilet?

Rather than warn unsuspecting working class Americans of the dangers of trading, discount brokerages and other trading firms peddle talking babies, loud music, back-testing voodoo software, and the prospect of discovering a profit elixir. As it turns out, investing is like weight loss…easy to understand, but difficult to execute. There’s no such thing as a miracle drug or chocolate diet that will shed pounds off your frame, just like there is no miracle trading system that will instantaneously generate millions in profits.

Doing the Opposite

Rather than succumb to the vagaries of the market, investors would be better served by following the mantra of character George Costanza from the hit, comedic television show Seinfeld. In the classic episode, astutely captured by Josh Brown (The Reformed Broker) and also cataloged in chapter four of my book, George realizes that all his instincts are wrong and discovers the road to success can be achieved by doing everything in an opposite fashion. George goes on to flaunt his contrarian approach when he runs into a blonde bombshell at the diner. Rather than boast about his accomplishments, George fesses up to his professional shortcomings by revealing his unemployment status and admitting that he lives at home with his parents. No need to worry, this strategy captivates her and results in George immediately getting the girl. George doesn’t stop there; during the same episode he gets his way with New York Yankee owner, George Steinbrenner, by telling him off. Before long, George is generating big bucks and making key decisions for the organization.

The same contrarian instincts of George apply to the investing world. Resisting the urge to follow the herd is key. The grass is greener and the eating more abundant away from animal pack. Investor extraordinaire Warren Buffett encapsulates the  idea in the following advice, “Be fearful when others are greedy, and be greedy when others are fearful.”

There will constantly be an urge to trade frequently and chase performance, whether you’re talking about technology stocks during the boom, real estate five years ago, or the perceived safe-haven of Treasuries and gold today. The melody sounds so beautiful, until the music stops and prices come crashing back down to Earth. If you want to win in the losing game of the financial markets, do yourself a favor and become a slow frequency trader – George would be proud of you doing the opposite.

Wade W. Slome, CFA, CFP®  

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

Entry filed under: Trading. Tags: , , , , , , .

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3 Comments Add your own

  • 1. Weekend reading  |  October 16, 2010 at 2:06 am

    […] Slow frequency trading – Investor Caffeine […]

  • 2. Sentiment Cycle of Fear and Greed « Investing Caffeine  |  November 10, 2010 at 1:46 am

    […] of sentiment cycles to hammer home the counterintuitive nature of successful investing (see also Doing the Opposite).  As Ritholtz correctly points out in his chart, “euphoria” is actually the emotional […]

  • 3. Waiting for the Hundred Minute Flood « Investing Caffeine  |  November 29, 2010 at 1:10 am

    […] Strategists urge us to follow the actions of the “smart money” and do the opposite (like George Costanza) when looking at the “dumb money” indicators. The bears would also have you believe the world […]


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