Investing in stocks is no longer a safe bet

Alexandru Cobuz
May 18, 2018 · 5 min read

Hey viewers, this is a complicated subject and it’s my personal view of mix feelings about what is happening right now in the stock market.

You may not know it yet, but it’s influencing our lives in a major way and something that’s happening on a daily basis. It’s influencing prices and it’s all part of a big messed “war” between computers. As ugly as it may sound, I assure you that’s a process that’s taking place for quite a long while and we like to pretend like always that we’re in control.

Please bear with me, I’ll try to put my thoughts in a normal, human-readable terms how and why this is happening. I’ll insert some financial terms here and there, but generic ones.

What stocks actually represent?

This article has a small learning curve, you’ll need to understand basic concepts like what stocks represent and what’s going on in the current markets.

I don’t want to give you book definitions, everyone can read those. Investing in stocks it’s like putting your money in that country’s economy by buying shares from a public company. The good part is that if you are doing your research well, you can separate the good apples from the bad… meaning that you can find good companies where you can invest your money.

The balance sheets

I mentioned that you can separate the good companies from the bad ones, for that you’ll need to learn how to read a balance sheet.

You can find a lot of useful informations regarding how a company is doing, removing all the fuss from the media. One of the great things is that you can see what’s the direction of a company, you can create forecasts, calculate how the management is doing and predict the next quarters.

You don’t need complex machine learning algorithms to do all of this, you can familiarised with the majority of those terms and the concept of investing by read a book about all of that and you’ll probably understand more than the majority of people. The book is called “the intelligent investor” by Benjamin Graham who also was Warren Buffet’s teacher.

Why I have mix feelings now about long term investing in stocks

Statistically, if you think of S&P 500 that has an annualised return rate in between %7 — %8 per year , and that you can be a lot more conservative thinking of a mix between the stocks and bonds at a 5.5% rate. Everything seems to be fine considering a long term investing period. But I think we’re missing a new phenomenon that’s currently taking place in the stock market.

Introducing a new concept, high-frequency trading which complicates things.

I was and I am a big fan of stocks, keeping them for long-term investing was something that I did in the previous years but this changed. Looking at the market and seeing how robots are trading on a daily basis changed my way of viewing the stock market. While it may be true that companies are owned and managed by people, the stocks are no longer traded by us, people.

What is high frequency trading
High-frequency trading bots are a new breed of traders, this new field has less than 4 decades it’s more disruptive than we can think and it’s well hidden in plain sight. In 2010 we had the flash crash and more and more events are occurring when robots are going crazy to compete against each other, but they are getting better and better.

Did you know?
Just one frequency trading robot is capable of doing a transaction every 20 milliseconds, some even lower than that, so in a second just one robot is capable of doing 50 transactions.

It was estimated that for a human trader it takes somewhere close to 6 seconds to respond to a market event, but in that time a single robot could do 300 transactions. Another way of seeing this is that we’re no match for an AI in the stock exchange.

My big concerns regarding long term investing

Because robots are so fast at trading, this has big implications because the pricing of a stock is no longer controlled by a human. You may consider that humans are programming the robots, but that may no longer be the case either, it’s not uncommon to see an AI creating better AI’s. This is just the start and it’s a disruptive event that’s occurring right now. Where I want to get at is that the pricing of a stock which represents a company that provides values is no longer in the control of the humans, the majority of the shares are now being traded by what robots are evaluating as a“correct price”.

Worse case scenario and it’s not far from the truth
The scary part is more and more things are correlated, just look when S&P 500 goes down 3% and you’ll see all over the world same event happening in other countries that shouldn’t be impacted at all.
It’s not a myth, all the markets around the globe are reacting to the same event and here’s the scary part, we can have a global crash in a matter of seconds and no human will be able to react to it too fast.

Investing in the long-term stocks?
Thinking about all the high-frequency trading that’s occurring right now makes me wonder how the markets will look in the next two decades.

The bright side is that companies are still providing value and owning a part of them represents having an asset, but I wonder how long before we’ll have simulated crashes when robots will decide to take advantage to maximise their profits? How can someone even prove that’s not what the robot had intended?

My view about investing in stocks for long term
I’m not an expert on this subject, I want to raise awareness that the long-term investing in stocks doesn’t seem like a safe bet (probably, it never was a safe bet). There’s a lot of secrecy surrounding high-frequency trading because it’s a multi-billion industry. You can find info about this topic like I did, there are plenty of videos, books and content mentioning how it works and what’s doing in the market.

My advice is to look at areas where the competition is smaller and it’s not under a threat of being disrupted by a new startup. I know it’s hard to figure all this out, may start a side project or look what other alternatives are out there. Besides talking about finances I also write about best metal detectors, it’s something that was more like a hobby and later on I transformed it into small side income.

Alexandru Cobuz

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I'm a developer at heart that likes to manage his own assets and I'm living the dream :)