- Traders have replaced investors in an ADHD investment world.
- Holding periods have dwindled from eight years (in 1970) to less than five days today.
- Investment history demonstrates that this almost always ends badly.
While I believe that some trading can play a role in generating good investment returns, the markets have become a roulette wheel in which fundamentals and investors have taken a backseat to sentiment mood changes, technicals, price-based algorithms, and (most important) traders and high-frequency trading and other quant strategies.
What is even more surprising is that dramatically dwindling stock holding periods have not only been popularized, but this phenomenon has been generally accepted by many investors.
When I graduated from Wharton in the early 1970s, the average holding period of a stock was nearly eight years. By the turn of this decade, the average holding period dropped to only five days. No doubt the average holding periods have dropped further since 2010.
In large measure, the proliferation of high-frequency trading strategies (now representing 70% of overall trading volume) has been the proximate cause for investors' ADHD (attention deficit hyperactivity disorder). In addition, with the popularity of short-term instruments (e.g., weekly options) and generally shortening investment time frames, investors have nearly disappeared and have been replaced by traders.
Many or most of these traders look only at a stock symbol and its chart and have zero knowledge of the underlying worth of an equity.
This may not be a healthy state of investment affairs.
This observation also helps to understand the popularity and binary nature of exchange-traded funds, which have become the trading community's delight -- and investment crutch -- and have become (for many) a substitute for individual stock security analysis.
It can also help to understand the increased frequency (arguably) of the disconnect between fundamentals and stock prices and the extreme differentiated moves both up (the five horsemen of the Nasdaq: Netflix (NFLX), Google (GOOG), Amazon (AMZN), Tesla (TSLA) and Priceline (PCLN)) and down (in disfavored stocks and unpopular market sectors).
As a vivid example, yesterday, Tesla (a large company whose market capitalization exceeds $30 billion) traded 24 million shares vs. only an 84 million share float (and 122 million shares outstanding). On average, 16.5 million shares have traded in each of the last 10 trading days. This means that (on average) every five days, the float of Tesla has traded.
Where have all the investors gone, long time passing?
It is no wonder that Mr. Market has no memory from day to day.
Investment history -- think of the period leading up to and into the October 1987 market crash -- demonstrates that this almost always ends badly.At the time of original publication, Kass was short TSLA and SPY.