Wall Street’s Fast Disappearing Notion of Buy-and-Hold Investing

An article in Thursday’s WSJ talks about Wall Street’s fast disappearing notion that fundamentally solid companies with good growth prospects should have rising share prices. That suggests that the buy-and-hold investing as an effective way of riding out the markets’ short-term fluctuations – is history. Things have certainly changed since September of last year, and simply put, the stock market has turned into a giant casino. The Journal explains:

From The WSJ: Long before the June 1 negotiating deadline, it became quite clear that General Motors…was headed for bankruptcy….As the deadline neared, shares of GM did a funny thing: They kept trading at more than $1 each. They didn’t disappear.

Last month, shares rose a few pennies during a given trading day and fell a few pennies the next. Taken as a whole, GM shares reflected nearly $1 billion in value that did not exist. Even today, with GM in bankruptcy, the automaker’s shares are trading around $1.50.

Market analysts seem baffled, but trading in GM reflects the sea change that’s taken place in the markets during the last decade….[T]he market has slowly given itself to short-term traders. The traders control volume, and whoever controls the volume controls the price.

Today, a hedge fund investing billions using a quantitative formula can stall a stock; a couple hedge funds aligned can turn a profitable company into a Dow laggard. Toss in a few short sellers and you have the great Wall Street collapse of September 2008.

It wasn’t always this way. Before the machines and the shorts took over Wall Street, stocks were evaluated by an underlying company’s prospects. Buy-and-hold investing ruled the day. Investors such as Warren Buffett and Bill Miller were the models.

Those fellows are a far cry from this generation’s masters of the universe. Traders are in charge now. They rule the market. They dominate volume. That stock you bought because you thought the company was in good shape? It’s a pawn in the hands of a computer model or some supertrader….

To move a security, they don’t need to own it. They can have a short position. They can put an order to sell 1 million shares in a dark pool, those anonymous marketplaces that operate outside the walls of the exchanges. They can own options or futures contracts. Buy enough GM puts and watch the price begin to fall under the pressure.

A market dominated by nontraditional trading forces explains, in part, why GM shares have kept so much value. Arbitrage traders make a lot of contrarian moves. They buy to cover their short positions. They sell to take a profit. All they really need is for the price to move.

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