How To Be A Long-Term Investor In A High Frequency World
Wall Street so far in 2016 has had some insane swings both up and down that have been breaking all historical records, as the inmates are truly running the asylum this year and are totally off their meds while doing it. The main culprit causing this madness are the high-frequency algorithms that are just trading off the bid and ask spreads and now account for 90% of the volume on a daily basis. Thus, it is insanity to try to follow the daily movements of the markets as there is no way you can compete on a daily basis with these machines as they don’t care if stocks go up or go down and have no idea what the underlying companies do that they are trading 1,000 times a second. All they care about is if they can make a penny a trade profit for each of those 1,000 trades they make a second. By doing so, they make $10 a second in profit (1,000 trades), $600 a minute, $36,000 an hour and that comes out to $270,000 a day in profit. So as you can see, these algorithms in total are trading about $90 billion in volume a day so each firm can make around $270,000 profit a day. That’s a pretty penny but the damage it causes to the markets are intense as we get these wild swings. Anyways, these algorithms operate in milliseconds and there is no way to compete against them. The average day trader who tries, on average ends up losing 90% of their assets within three years of starting operations, as there is no way a human can compete against this madness. To combat this, though, you have to become a long-term buy and hold investor and pretty much pay little attention to what the markets are doing on any given day or week. All you need to do is just read the news on your holdings and that’s about it. But you must firstly have a tool that allows you to get the best analysis possible on Main Street. We don’t compete with high frequency algorithms on a daily basis, but instead have our own algorithm, Friedrich, that high frequency computer algorithms can’t compete against, as all they concentrate is on the bid and ask spread, while Friedrich concentrates 99.9% on Main Street. Thus, while high frequency algorithms are buying and selling 1,000 times a second, we are buying and holding until Friedrich tells us to sell, which could be 5 years from now or never. Thus, Friedrich emulates the strategy of Warren Buffett in a sense as that is how I designed him but is extremely high tech. How do I know that high frequency traders are controlling the direction of the market and have it do what they want? Well, Caterpillar (NYSE: CAT ) came out with a report the other day and said it would miss estimates by a ton next quarter, which should have crashed the stock by -20%, as analysts need to reduce their numbers dramatically. Well, the exact opposite happened as high frequency traders decided to crush the short sellers and force them to cover, and Caterpillar actually is doing amazing on Wall Street even though it is getting crushed on Main Street. Click to enlarge How do I know that Friedrich works so well? Well, I designed it to take advantage of the moon craters that these high frequency traders leave in their wake. So instead of getting rid of high frequency traders, I now welcome them as their destructive behavior actually creates bargains for us like we saw with our recent purchase, Ryman Hospitality (NYSE: RHP ), which we bought cheap after it was hammered and now is skyrocketing because its management is elite and the company is a virtual monopoly. Click to enlarge About a month ago, I tested a Chinese ADR to see if Friedrich works just as well internationally as it does in the USA. Click to enlarge As you can see, it is a Chinese auto dealership and the stock was $67.73 and fell to $16.09, but it actually scored a “6” on Friedrich in early February and was selling at $18.23. Thus, Friedrich recommended it to be a strong buy and just a month later it is now up +53.54% . Click to enlarge The Friedrich Datafile for Bitauto Holdings (NYSE: BITA ) that I created today; as you can see, it is no longer a “6” but is a “4” now, but still has a long way to run. In that Datafile, you will also see that we added a new row called “Super Three Sell Criteria” right under the Super Six rows. We are still in beta testing, which I will spend the weekend doing, but come Monday all future lists will also tell everyone when to “SELL” . How well does it work? Well, just look at the Datafile for BITA in your attachment folder and you will see that in 2014, it triggered an automatic sell at $88.18. Thus, that sell trigger would have had you sell when the Wall Street price was $89.11 and you would have not only got out at the top but would have avoided seeing the stock price of BITA being attacked by high frequency traders, who brought it down to $16.09. Thus, you would have avoided losing -81.94% in just a year and then would have gotten a Super Six buy signal at $18.23 and been up +53.54% in just a month. So just as Donald Trump says that he loves his protesters, we now love high frequency traders as they complement our own more powerful algorithm, Friedrich, as they create opportunities for him. Such results cannot be expected to happen every time, but in backtesting it, I could see some wonderful results. Hopefully, after beta testing the Super Three Sell Criteria, we will be able to launch on Monday and have all Datafiles include it from now on. Thus, in our constant effort to make Friedrich as user friendly for the pro as well as the novice investor alike, we have Friedrich basically giving you an opinion on when to BUY and then when to SELL, and when we expand internationally and are fully automated on that end as well, Friedrich will be an all seeing monster, with the ability to tell investors from all over the world when to buy and when to sell, and more importantly, when to stay in cash when markets are overvalued. Thus, we have “Extreme Capital Appreciation through Extreme Capital Preservation”. Thus, as you can see, having Friedrich in my hands, I no longer try to predict what the market will do but just concentrate all my attention on Main Street and in waiting for buy signals from Friedrich. It is my belief that if Main Street is in serious trouble, eventually it will show up on Wall Street. I find that the Federal Reserve, the bureaucrats and corporate CEOs are all lying all the time and are cooking the books. Want proof? This is what came out from the SEC this week. Click to enlarge For those of you who have been with me for some time, you know that I have been screaming from the rooftops about how non-GAAP reporting results in very bad behavior by management, analysts and the press as the Pro-Forma reporting is actually fiction and even Warren Buffett wrote about it in his latest Annual Letter to Shareholders as his biggest concern. “Wall Street analysts often play their part in this charade, too, parroting the phony, compensation-ignoring ‘earnings’ figures fed them by managements,” Buffett said. “Maybe the offending analysts don’t know any better. Or maybe they fear losing ‘access’ to management. Or maybe they are cynical, telling themselves that since everyone else is playing the game, why shouldn’t they go along with it. Whatever their reasoning, these analysts are guilty of propagating misleading numbers that can deceive investors.” ~ Warren Buffett Thus, I am happy that the SEC will finally address this corruption. Friedrich is already GAAP ready, so you will actually see what a company is actually doing on Main Street when you use any of our Friedrich Datafiles as it is “AS IS” reporting. The markets have come back in the last couple of weeks as the following game is being played by management and by hedge funds taking advantage of the following phenomenon: There is such a thing on Wall Street called a “black out period” where for 5 weeks during earnings season companies and management cannot buy their stock back, so the crash of January was caused by this black out. Well, when the black out was lifted CEOs went hand over fist to buy back stock, borrowing at extreme levels to do so. This forced the shorters to cover and the rest is history as even oil shorters covered as well and that is why oil has rocketed as well. So for about 20 weeks of the year, companies cannot buy back their stock and for 32 weeks they can. This, of course, causes the wild market swings that we saw this year, as in January, there was the black out going on, and thus, there was no backstop to stop the selling. Then when the black out stopped in February, every CEO and their mother went and bought their stocks, borrowing insane levels of money and putting each firm’s balance sheets in serious trouble. The reason Friedrich cannot find anything to buy is because the debt on Main Street is insane and the prices on Wall Street are so overvalued as no one does any research anymore and people are just buying and selling without any clue what they are doing. With the Federal Reserve lying to us that Main Street is doing great a few months back, Friedrich knew they were lying as he sees what results each company is reporting on Main Street and was not believing a word of it. Well, just this week the Federal Reserve came out and said that the economy was not doing as well as they previously thought, so they did not raise rates. Now when someone tells you that things are bad, do you rush out and buy stocks or do you logically hold off and use caution? Well, hedge funds took the “bad news as good news” and bought anything that was not tied down. Unfortunately, this bad behavior is starting to catch up with the hedge fund industry, as 979 hedge funds closed operations in 2015 and 864 closed in 2014. This is all because these hedge fund portfolio managers basically do zero analysis as a group and just take massive risks with their clients’ money. Bill Ackman, who is the poster boy for terrible analysis and high risk, is down -26.4% this year on top of the -20.5% that he lost in 2015. When his main holding Valeant (NYSE: VRX ) fell -56% in one day earlier in the week, he lost -$764 million of his clients’ money in just one day! So as you can see, hedge funds are closing down as their clients are losing tons of money due to their doing little, if any, analysis and being totally reckless with their clients’ assets. In just two years 1,843 hedge funds closed down operations and those were flat years. Imagine what will happen when the trap door opens and the markets finally get hit? As for the government, the numbers by the Fed are cooked as well, and this is mainly because of ObamaCare, as many people cannot work more than 29 hours at one job otherwise the business owner will need to pay into the system. For example, if I were to decide to go work 5 jobs at 8 hours a week in each, I would be counted five times in the government’s jobs report. So those forced to work two to three jobs so their employers don’t pay ObamaCare tax are the reason the unemployment rate is only 5%. So as you can see, with everyone cooking the books at extreme levels, you can see that this will end badly one day. But investors have no clue what they were doing because you would imagine with Donald Trump and Hillary Clinton looking like they will compete against each other for the Presidency, both are going to cause massive changes to the international business environment by using tariffs and going after the drug industry. But instead of being concerned about all this and selling stocks, investors are just piling in because their neighbor is and thus we have HERD MENTALITY! DISCLAIMER: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from our research. Factual material is obtained from sources believed to be reliable, but the poster is not responsible for any errors or omissions, or for the results of actions taken based on information contained herein. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.