Robbing Peter to Pay Paul, Then Robbing Paul

Ever whistled a tune? If so, then congratulations, you’ve committed to something for a longer period than the average hold time for a stock investment.

“Take any stock in the United States. The average time in which you hold a stock is – it’s gone up from 20 seconds to 22 seconds in the last year,” explains Michael Hudson, a former Wall Street economist at Chase Manhattan Bank.

Buy-and-hold might be a winning strategy, but for most, it’s not the one favored. Instead, investors move their money from one place to the next like robbing Peter to pay Paul, then robbing Paul. Each move incurs fees, and often losses.

This life-sized game of hot potato isn’t limited to just equities. Hudson continues, “The average foreign currency investment lasts – it’s up now to 30 seconds, up from 28 seconds last month.”

We see a trend towards brevity elsewhere. For example, the “average job tenure steadily declined, from 9.2 years in 1983 to 8.6 years in 1998,” according to research.

Much of the declining holding period for stocks is explained by high-frequency trading (HFT) which accounts for 70 percent of all equities trading. Moreover, “fundamental discretionary traders” – people who logon and make a trade like an ordinary human – only account for about 10 percent of all trades according to research from JPMorgan. Simply put, the wild swings seen in recent market activity has more to do with machine than man.

But the fact remains: man made those machines. Therefore, their high-frequency trades reflect our incessant need to change our minds, often at our peril.

This “flash dance” is the inherent problem with equities; even the most stalwart buy-and-hold investors suffer at the hands of faceless machines.

Is an investment in gold any different?

The answer is yes. Gold is, in fact, different. Researcher Joerg Picard wanted to understand what trades are most directly responsible for steering gold’s price. He examined the market and learned that ETF gold trades, which can be traded as easily as HFT equities, “do not contribute much to price discovery.” This finding illustrates why gold is a stable investment. It’s not subject to the violent convulsions of the HFT world that have come to dominate the markets.

Curious investors can take a look at the CBOE Gold Volatility Index (GVZ) over any period and see how rarely the metal gets spooked. However, looking at the same chart for equities (VIX) often called the “Fear Index” presents an entirely different picture. The bottom line: the equities market, as we’re seeing today, is highly emotional. Gold, however, enjoys more stability as if its weight is keeping it secured to the ground.

Meanwhile, the wild ride for equities will continue. As the  global head of quantitative and derivatives research at JPMorgan remarked, “big data strategies are increasingly challenging traditional fundamental investing and will be a catalyst for changes in the years to come.”