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Dillian: Are You Happy Now?

I wanted to write a little bit about the price action here, which is downright soporific.  In 15 years of doing this, I have a tough time remembering a period of time that was more boring, with the possible exception of early 2006. But today is worse, because volumes are so very low. You'd think that, with the stock market on its all-time highs, the broker-dealer business would be swimming in cash. There is nothing further from the truth.

I had a discussion with a client yesterday, a hedge fund manager, who told me that his performance was good, but that he had paid 20%-30% less in commissions year-to-date. And I think that experience is pretty common in the "fast" money world, except that it isn't a fast money world anymore. Trading volumes are down and the average holding period is up. Hedge funds have gone from being swashbuckling day traders to sober risk managers doing Buffett-like buy and hold stuff. I'm exaggerating a little, but not by much.

Of course, 1) none of this should be a surprise and 2) isn't this what we wanted? Let me explain. When high-frequency trading began to consume most of stock market volume, it became exceedingly difficult to make money day-trading. Computers are very good at extracting short-term profits, but they are very bad at extracting long-term ones. It made sense for people to leave the short term to the computers and, instead, focus on the long term. It has taken about five years, but people are finally starting to get the joke.

So even in 2006, when the market was dull, we were still doing a hell of a lot of business on the Lehman ETF desk. But when I talk to folks on the sell-side now, it is dead, dead, dead. It is a real threat to their business. It is a serious threat. There have been a lot of layoffs over the last six years, but even at these bare-bones levels, the banks are still wondering if they are overstaffed.

So how do you trade a market like this? What I am about to say may be very unpopular, but here's how you trade it: you don't. You buy stuff, and hold it for a really, really long time. I was looking at my portfolio today, and there is some stuff in there that I can see myself holding for three years, at least. I don't know whose quote this is, but I am stealing it (and paraphrasing): not selling losers is the mistake of amateurs. Selling winners too soon is the mistake of professionals.

And for heaven's sake, please don't day-trade. Ok, there is a sector of the market -- the momentum stocks -- that you can day-trade. But that's doing it the hard way. The easy way is buying an undervalued name with compelling fundamentals that you can hold for years. Let me tell you a quick story and then I'll go. Back in my days on the P. Coast options exchange, I was clerking for a guy in the Microsoft pit named Mark. Microsoft (MSFT - Get Report) was the king momentum stock back then, the granddaddy of the tech bubble. There was a lot of options flow in that pit; big, giant orders, including the Bill Gates overwrites. It was hard work trading in there. The spreads were tight (by 1999 standards), the crowd had about 75 dudes in it, and everyone was fighting for orders.

One day Mark sort of looks at the screens in disgust, turns and looks at me, and says, "I should just be long."

"What do you mean?" I ask.

"I've been pissing into the wind in this pit for the last three years. I would have made more money if I just bought the stock and sat on the floor in the pit and hung out."

For years, financial pundits have lamented the fact that fast, aggressive traders dominated the markets. No more. Now, it is buy-and-hold.


At the time of publication, Jared Dillian had no positions in any of the securities mentioned.

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Chart of I:DJI
DOW 17,798.49 -14.90 -0.08%
S&P 500 2,090.11 +1.24 0.06%
NASDAQ 5,127.5250 +11.3820 0.22%

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