the most disturbing thing about talking babies
the etrade talking baby is either irreverently amusing or more than a little bit unsettling, depending on how he strikes you, but i think his most disturbing trait has to be his profound lack of making any sense at all--neither anthropomorphic, nor investment. for example, as during a commercial during the second period of tonight's debacle at the garden, and while (apparently) flying home from a bachelor bash, he brags on the "pant load" he has saved while relying on etrade's automatic "stop loss" capabilities to save him while he was distracted by whatever might distract a baby while living it up on a bachelor party get-away. (he's drinking milk on the airplane--ha ha--and, yes, i'm being facetious about the ha ha).
for those not familiar with the jargon, a "stop loss" order is one that is set to execute whenever the price on a stock you own falls below a pre-determined amount.
if the logic of such a thing makes intuitive sense to you, than i would strongly advise either you do NOT invest your retirement nest egg in the stock market, or, if you must, you first go back to school and learn something about value investing before jumping in.
stocks are intrinsically worth nothing other than their proportional share in the company from whence they are issued, no more and no less, and only by market manipulation do they take on any other value. if you are buying and selling securities with a mind towards benefitting from market manipulation without regard to intrinsic value, let me be the first to inform you that you WILL become busted sooner or later.
like casinos rigging the house against individual gamblers, large investment houses rig the financial markets against individual investors. each IPO is part and parcel with the investment bank's cut, (not to mention preferred sales to their own accounts and to their favorite clients' early in the issue), and each "book" in each security that is bought and sold on an ongoing basis is made with a spread that is baked into the price (higher if you're buying, and lower if you're selling) in order to compensate (legally) the exchange member who fronts the market for the stock, and (illegally) his business cronies at the investment houses who funnel him most of his business. the net result is that every retail bet on a stock (that's what you're doing when you're buying--you're betting it's going to go up in price) comes with a vig. every time. (and i'm not even talking about the brokerage house's transaction fee, which only makes that worse, just the built-in charges you never see on your statement). yes, that vig means that it's not even a zero-sum game when all you're doing is betting on market swings--it's always a losing game.
the only thing that can make the stock market a winner for the individual investor (i.e. one who is not in on the rigging of a market) is that the underlying value of a stock grows alongside the value of the underlying business, and will eventually overcome the vig--IF the investment is based on the value of what is bought and sold.
so, back to "stop loss" orders.
let's say you buy a stock at $10 because you know it's a good value--you know the underlying business is sound, and that the business is growing and will assuredly bring the value of its stock higher than $10 in the future. even if the whole market tanks, as it did back at the end of 2008, you know it's price has to come back up over $10, because the business is worth that much based on its annual profits, and that calculation has nothing to do with its market price on any given day.
so let's further say that the market does tank as it did back at the end of 2008, and that $10 stock might be trading at $7--down 30%. the etrade baby perhaps would have set a "stop loss" order at $7.50--25%--so he can save himself that proverbial pant load--and he's out of the market and down $2.50. he thinks he's happy, cuz you're down $3. (it's baby schadenfreude--everyone feels it). so let's say the market keeps tanking, and now the price is down to $5. the baby is even happier, cuz now you're down $5. and what should you feel?
remember the value of the stock? the etrade baby doesn't even know what that is, but you should. (you bought the stock in the first place, and you did your homework about its value, right???) so it's down 50%, and, instead of panicking, you're throwing a party, too. seriously--a huge party. why? because you now have an opportunity to double down on an investment that you know is going to be worth more than $10. (remember keeping yourself well-allocated in cash from the other lesson a few days ago?) if the stock was a good buy at $10, it's twice that good buy at $5. it's simple math. so you buy that second pile of the stock for half price, and you smile, because when the price of that stock that the etrade baby fled comes back to $10, you will have doubled your money on that market-bottom buy. yes, you will have doubled your money. like clockwork. fish in a barrel.
market idiots like the etrade baby will say, yeah, but they could buy in at the bottom, too, but, i will have to tell you and all your fellow babies the truth and the very bad news--you can never tell when the market peaks, just the same way you can never tell when the market bottoms. all you can do is track the value of the stocks, and buy them and sell them accordingly. (or you can keep betting against the vig and wait to be busted). any investor, baby or otherwise, who says they can detect the bottom and know when to buy should be asked why they would have been holding a stock after its top, and have to rely on one of those "stop loss" thingies beforehand, if their investment mojo was that strong. simple answer is that it can't possibly be, unless their investment mojo is based on intrinsic value. THAT's the only basis on which a stock price will rise or fall over the long run. if you're stopping losses, you're also stopping profits, and losing the vig (and the transaction fee) in the process.
know the value. buy accordingly. laugh when the market goes down, and buy in while it's tanking. laugh again when the market goes up, and sell out while it's soaring. if you're buying when things are going down, and selling when they're going up, you will always win. it's why those guys who own seats on the exchange have all that money. (ever ride around the hamptons and count the boats?) that's what they do. when etrade babies are stopping losses and selling, the exchange guys are laughing all the way home in their lamborghinis, because they picked up their bargains at the fire sale. (when you sell your stock, the person who takes it from you is the market maker with the corresponding seat on the exchange, and when you buy your stock, the market maker is the one from whom you buy it--the fact that it looks like someone else bought it from you is the game that they play to hide the extraction of the vig, and the ultimate nature of the crime is that the guys holding the stock in between the sell and the buy orders won't buy it unless they already have a seller at a lower price, and they won't sell a stock unless they already have a buyer at a higher price--it's a license to steal, and steal from you and me they do).
so, it's up to you. play the "stop loss" game and lose, or buy value and win. either way, you shouldn't be listening to talking babies, even if they do seem to you to be amusing. all etrade wants are their transaction fees.
for those not familiar with the jargon, a "stop loss" order is one that is set to execute whenever the price on a stock you own falls below a pre-determined amount.
if the logic of such a thing makes intuitive sense to you, than i would strongly advise either you do NOT invest your retirement nest egg in the stock market, or, if you must, you first go back to school and learn something about value investing before jumping in.
stocks are intrinsically worth nothing other than their proportional share in the company from whence they are issued, no more and no less, and only by market manipulation do they take on any other value. if you are buying and selling securities with a mind towards benefitting from market manipulation without regard to intrinsic value, let me be the first to inform you that you WILL become busted sooner or later.
like casinos rigging the house against individual gamblers, large investment houses rig the financial markets against individual investors. each IPO is part and parcel with the investment bank's cut, (not to mention preferred sales to their own accounts and to their favorite clients' early in the issue), and each "book" in each security that is bought and sold on an ongoing basis is made with a spread that is baked into the price (higher if you're buying, and lower if you're selling) in order to compensate (legally) the exchange member who fronts the market for the stock, and (illegally) his business cronies at the investment houses who funnel him most of his business. the net result is that every retail bet on a stock (that's what you're doing when you're buying--you're betting it's going to go up in price) comes with a vig. every time. (and i'm not even talking about the brokerage house's transaction fee, which only makes that worse, just the built-in charges you never see on your statement). yes, that vig means that it's not even a zero-sum game when all you're doing is betting on market swings--it's always a losing game.
the only thing that can make the stock market a winner for the individual investor (i.e. one who is not in on the rigging of a market) is that the underlying value of a stock grows alongside the value of the underlying business, and will eventually overcome the vig--IF the investment is based on the value of what is bought and sold.
so, back to "stop loss" orders.
let's say you buy a stock at $10 because you know it's a good value--you know the underlying business is sound, and that the business is growing and will assuredly bring the value of its stock higher than $10 in the future. even if the whole market tanks, as it did back at the end of 2008, you know it's price has to come back up over $10, because the business is worth that much based on its annual profits, and that calculation has nothing to do with its market price on any given day.
so let's further say that the market does tank as it did back at the end of 2008, and that $10 stock might be trading at $7--down 30%. the etrade baby perhaps would have set a "stop loss" order at $7.50--25%--so he can save himself that proverbial pant load--and he's out of the market and down $2.50. he thinks he's happy, cuz you're down $3. (it's baby schadenfreude--everyone feels it). so let's say the market keeps tanking, and now the price is down to $5. the baby is even happier, cuz now you're down $5. and what should you feel?
remember the value of the stock? the etrade baby doesn't even know what that is, but you should. (you bought the stock in the first place, and you did your homework about its value, right???) so it's down 50%, and, instead of panicking, you're throwing a party, too. seriously--a huge party. why? because you now have an opportunity to double down on an investment that you know is going to be worth more than $10. (remember keeping yourself well-allocated in cash from the other lesson a few days ago?) if the stock was a good buy at $10, it's twice that good buy at $5. it's simple math. so you buy that second pile of the stock for half price, and you smile, because when the price of that stock that the etrade baby fled comes back to $10, you will have doubled your money on that market-bottom buy. yes, you will have doubled your money. like clockwork. fish in a barrel.
market idiots like the etrade baby will say, yeah, but they could buy in at the bottom, too, but, i will have to tell you and all your fellow babies the truth and the very bad news--you can never tell when the market peaks, just the same way you can never tell when the market bottoms. all you can do is track the value of the stocks, and buy them and sell them accordingly. (or you can keep betting against the vig and wait to be busted). any investor, baby or otherwise, who says they can detect the bottom and know when to buy should be asked why they would have been holding a stock after its top, and have to rely on one of those "stop loss" thingies beforehand, if their investment mojo was that strong. simple answer is that it can't possibly be, unless their investment mojo is based on intrinsic value. THAT's the only basis on which a stock price will rise or fall over the long run. if you're stopping losses, you're also stopping profits, and losing the vig (and the transaction fee) in the process.
know the value. buy accordingly. laugh when the market goes down, and buy in while it's tanking. laugh again when the market goes up, and sell out while it's soaring. if you're buying when things are going down, and selling when they're going up, you will always win. it's why those guys who own seats on the exchange have all that money. (ever ride around the hamptons and count the boats?) that's what they do. when etrade babies are stopping losses and selling, the exchange guys are laughing all the way home in their lamborghinis, because they picked up their bargains at the fire sale. (when you sell your stock, the person who takes it from you is the market maker with the corresponding seat on the exchange, and when you buy your stock, the market maker is the one from whom you buy it--the fact that it looks like someone else bought it from you is the game that they play to hide the extraction of the vig, and the ultimate nature of the crime is that the guys holding the stock in between the sell and the buy orders won't buy it unless they already have a seller at a lower price, and they won't sell a stock unless they already have a buyer at a higher price--it's a license to steal, and steal from you and me they do).
so, it's up to you. play the "stop loss" game and lose, or buy value and win. either way, you shouldn't be listening to talking babies, even if they do seem to you to be amusing. all etrade wants are their transaction fees.
posted by kad barma at 8:31 PM
1 Comments:
I think this falls under that sub-category of really good advice that could most benefit the people least willing to pay attention and listen, and vice versa.
I tried to do a comprehensive sweep of all the major, popular investment books last year and my favorite takeaway from the entire thing was the consistently-reported statistic that the most money from individual investors flows into the market when it's peaking, and the most money is being pulled out as it's tanking.
It completely goes against the concept of buying low and selling high, but you hear it all the time...back in MAR/APR 2009, I heard so many people talk about yanking money out of their 401ks and IRAs because "they could have just put it under the mattress and done better."
The best thing they could've done would be to heed the advice written here and in so many other level-headed financial writings...resist the urge to give in to panic or hysteria..
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