Tahoe Market Pulse: Here’s how to level the playing field
February 18, 2015
In his book, "Flash Boys," Michael Lewis describes how Wall Street is "rigged" because high-frequency traders and others "front run" buyers and sellers.
The latter, to their surprise, are not able to buy at the asked price or sell at the bid, as one should expect. I saw first-hand how that works last Thursday.
Several of my clients own Auburn National Bancorp (AUBN), a "dividend aristocrat" because of its consistent record of raising their dividend.
AUBN doesn't trade much, some days not at all. That's because it's a comfortable stock to own and most of those who are in it have no intention of selling.
Last Thursday, 500 shares of Auburn were offered at 24.25 for most of the day, but there were no trades at any price. Then a 500-share trade was executed at 24.249. The order to sell at 24.25 remained.
What happened? A market maker with a super-fast computer and cutting-edge program, in a fraction of a second, stepped between the public buyer willing to pay 24.25 and the seller wanting to receive 24.25.
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Only one was satisfied (the buyer saved a fraction of a penny, but the seller was shut out).
Some feel the market is rigged and they avoid stocks for that reason and others. Rigged isn't the right word, but clearly it's not a level playing field for public traders.
What's a person to do? Invest.
Front-running shenanigans aren't factors for those who invest for the long-term. In fact, the market is "rigged" in favor of long-term investing because stocks rise over the long term.
In every 17-year period the market has delivered a positive after-inflation return to investors. The average real return on stocks has been around 6.5 percent, a return that is remarkably consistent over many decades.
Readers of this column, and clients of my investment advisory service, know that the way to build wealth is not to trade, but to own leading equity ETFs and quality companies that increase their earnings and in most cases dividends year after year.
So far, so good.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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