From Bill Hall: Here’s a little-known secret about a new breed of traders that The Wall Street Journal recently crowned as “Today’s Kings of Wall Street.”
They account for an astonishing 27% of all U.S. stock trades. And that percentage is headed higher.
Think about that for a minute: That’s about one-third of the trades placed on America’s stock exchanges. Wow!
In other words, they set the buy and sell prices for about 1-in-3 of the securities traded on the exchanges every day.
And then, you need to pay attention to what they are doing.
In fact, their trades likely set the prices for many of the positions that you hold in your own personal portfolio.
As the editor of the Safe Money Report newsletter and the captain of the Safe Money ship, I’m here to help you protect and grow your money.
That’s why in this article I’m going to pull back the curtain and reveal to you these newly minted kings of finance. And more importantly, show you how you can turn the tables on them to propel your portfolio higher.
So, without further ado, here we go …
Last week, I introduced you to quants, bots and robos.
And guess what? These are the newly crowned kings that I referenced above that have gained such a stranglehold on market pricing.
Quants, Robos and Bots … Oh My!
Well, quants are simply traders and institutional money managers who rely mostly on math to make investment decisions.
They create trading programs with complicated mathematical models to take the human element out of investing.
These programs have become known as “bots” or “robos.”
Now that you know about them, here’s what you really need to understand about quants, bots and robos.
They use algorithms to power their software.
If you’re like me, you find the word algorithm a bit intimidating. But if you take a closer look at algorithms, you’ll find that they aren’t that complicated at all.
And best of all, you’ll discover the secret to cracking algorithms’ code for your own profits.
So, what’s an algorithm? Well, when you boil it all down, an algorithm is just a step-by-step method for solving a problem.
Think about an algorithm as being like a recipe. We all know that recipes tell us how to prepare food by performing a number of steps in the proper order.
For example, to bake a cake, you first preheat the oven. Then you mix flour, sugar and eggs thoroughly. Next, you take that mixture and pour it into a baking pan. And so on.
You can think of an algorithm as simply instructions for cooking up trades. And you figure out what the quants are cooking up with their bots and robos.
To do that, you need to peek inside their cookbooks. But it’s not that easy, because the quants regard their recipes as top-secret.
However, as a Wall Street insider, I’ve had a chance to get a behind-the-scenes look at the main ingredients that they’re using in their recipes.
And I can tell you that they are making them way too complicated.
I know a magic metric that you can use to beat the algorithms at their own game. But before I reveal this magic metric, it’s important that you understand that we’ve been here before.
Indeed, this not the first time that experts have predicted how Wall Street will be ruled by data-driven traders who live by recipes rather than instincts.
And when the quants go too far, it usually ends badly.
As an example, pick up a copy of Roger Lowenstein’s captivating book “When Genius Failed.” It’s a true account of the rise and fall of the of what was once the world’s largest hedge fund, Long-Term Capital Management (LTCM).
At the heart of the fund was a group of brainy, Ph.D.-certified speculators. In fact, two were Nobel Prize winners. At its peak, LTCM booked thousands of derivative contracts — representing a mindboggling $1 trillion of market exposure.
These contracts intertwined the company with nearly every major firm on Wall Street. When their algorithm blew up in 1998, it almost caused the entire global financial system to collapse.
But here is the fundamental flaw that eventually causes algorithms to fail: Data alone isn’t enough! Urban legend has it that Albert Einstein once said, “Information is not knowledge.”
And this is where computers meet their limits and our human brains triumph. We can know the difference between information and knowledge …
Market guru James Montier is a partner in the highly respected money management firm GMO. He says it this way:
“Often in the investment business — which has an obsession with minutiae — too much time is spent trying to find out more and more about less and less, until we know everything about nothing! Rarely, if ever do we stop and ask ourselves what we actually need to know.”
And this chart show’s all you need to know in this market…
And that’s as long as interest rates on the 10-year U.S. Treasury remain in the sweet spot…
Growth stocks — especially the carefully selected growth stocks and ETFs that I’ve specifically named in previous Money and Markets articles — will skyrocket higher.
And this one key market metric will give you the winning edge over the quants who blindly follow the decisions served up by the recipes their algorithms.
That’s because as I’ve just explained, history says that these newly minted kings and their quant recipes will eventually fall flat … leaving you with the royal treasure.
The Vanguard Growth ETF (VUG) was unchanged in premarket trading Friday. Year-to-date, VUG has gained 24.17%, versus a 16.36% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Money And Markets.