Daily Investment Interpretations

January 6, 2011

2011-1-6 (Thursday Night): Stocks ended the day mixed: Retail woes hit Wall Street, All eyes on jobs reportThe NASDAQ Composite advanced 7.69 points (0.28%%) to 2,709.89. The Dow dropped 25.58 points (-0.22%) to  11,697.31, while the S&P 500 fell 2.71 points (-0.21%) to close at: 1,273.85. Oil closed at $88.17 a barrel, and Gold ended at $1,371. The VIX declined 0.38 to 17.40.  
    Facebook plans 2012 IPO  
    How to buy shares of Facebook  
    The unsavory elements behind Facebook deal   
    Boehner cries; birds drop, yet stocks rise   
    Retail fail- High hopes went unmet  
    Jobs optimism is growing  
    Debt debate to test GOP  
    Deficits will climb if health law is repealed- CBO  
    Delamaide on a changing White House  
    See the special report on 2010 performance and 2011 outlook  
    Cyclicals: The new market darlings  
    TopStock Portfolios' new variation on their Daily Decision Model is the The Daily Decision Stock Trade service. Their website shows a list of daily trades carried out by their lead trading manager, Richard Meier, between April 8th and July 16th, 2010. Over this slightly-more-than three month period, Mr. Meier, trading one stock a day, slightly more than doubled the capital entrusted to him. At that rate, he would 16-fold an investment nest-egg in a year, 256-folding it in two years, and 4,096-folding it in three years. Of course, I don't expect this to actually happen. Even if Mr. Meier can maintain his track record over a longer period of time than three months, some of the stocks he's trading probably couldn't handle huge inflows and outflows. What works for a $10,000 trade probably wouldn't work for $10,000,000 trade. Also, I don't know if the gains and losses in the list of daily trades in the example cited above included the spreads between bid and asked prices, and if it also included trading commissions. Still, it's an intriguing story.
    Someone like me who has his money in a Roth IRA would experience two problems in trying to use the Daily Decision Stock Trade service. 
    First, the brokerage firm that hosts my account charges about $8 per trade. This means that with two trades a day (one to buy the stock-of-the-day and another to sell it), the daily transaction tab would be $16 a day, the weekly transactions bill would add up to $80, and the annual cost would be $4,000 a year.
    Second, when I sell a stock, I don't get paid for three days. This means that ¾ths of my portfolio would have to be tied up in money market funds, since, for three days, I'd have to use "fresh money" each time I made a trade, until I got back the money from the sale I had made four days earlier.
    Fortunately, there's a way out of this dilemma. Interactive Brokers charges 1¢ for the first 100 shares you buy or sell, and ½¢ a share for each additional share. In addition, Interactive Brokers can set up, for IRAs, margin accounts that aren't subject to the three-day settlement rule. We aren't allowed to trade on margin in a retirement account, but we can trade daily at Interactive Brokers in a retirement margin account.
    Trading costs with Interactive Brokers are still an issue if the number of shares we're trading becomes large (hundreds to thousands of shares). If we're trading more than 1,500 shares, an $8 flat rate for any number of shares traded becomes cheaper than the Interactive Brokers ½¢-a-share trading commission, but if we're trading more than 1,500 shares a day, we can probably afford to pay $4,000 a year in trading costs. But the main thing is: at least it becomes feasible to trade daily in retirement accounts.
    I'm in the process of setting up an account and shifting some Roth IRA money into it to test these ideas. I'm also thinking of establishing a taxable account with Interactive Brokers because (1) if my wife or I withdraw money from one of our IRAs, we can't put it back, whereas in a taxable account, we can, and (2), we can margin a taxable account that slowly, steadily goes up. This would double our rate of gain, or, conversely, halve the three-month doubling time of the Daily Decision Stock Trading service, reducing it to 6 weeks. 
    OK. What would this mean in terms of your (and my) money?
    If Mr. Meier's trading skills can double our money every three+ months, we should be able to 10-fold it in a year. Whether we could 100-fold it in two years would depend upon how much money we were trying to 100-fold, and upon how well this trading process works when more than one or a few customers are involved.
    There's a corollary to this. If you or I come up with a stellar trading scheme that really returned more than. say, 25% a year, it would seem to me that it wouldn't be long until one or more of the people in the chain between us and stock market detected it, and their organizations began to emulate it. And it wouldn't be long after that before so many were trying the same thing at the same time that our stellar trading scheme would no longer work.
    I suspect that "playing" the stock market is a competitive, combative, zero-sum game. I also suspect that what works this year may not work next year.
    The minimum account balance for margin and day-trading at Interactive Brokers (per federal regulations) is $25,000, so you have to be able to come up with that much equity to open an account with them.
    I'm in the process of opening an account, so we'll see what happens.