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We Are All Traders Now at Trader’s Narrative

We Are All Traders Now

behavioural investing james montier book coverThe chart below is from James Montier. It shows the average holding period for NYSE stocks (expressed in years) from 1920 to today.

Montier is an economist and global strategist who uses behavioral finance to make sense of the financial markets. He started his career at Dresdner Kleinwort, moved to SocGen and just recently moved to the hedge fund world. Montier has written several books, among them, Behavioural Investing: A Practitioners Guide to Applying Behavioural Finance.

I’m not sure where exactly Montier got the raw data for this graph but considering the caliber of research he does, I’m assuming it is an accurate reflection of the underlying change in the structure of the market over time. The chart is remarkable in setting out what we all intuitively know to be true. Driven mostly by high frequency trading, we’ve seen an explosion in advance decline volatility.

It seems I was wrong, when I said this isn’t your grandfather’s stock market. This is exactly your grandfather’s stock market. Indeed, your grandparents would readily recognize the sort of stock market we’ve had recently. What I should have said is this is not your father’s stock market (1950’s - 1960’s) where people actually invested by holding stocks for years at a time. In comparison, what we do now is push buttons with the attention span of a housefly:
average holding period in years NYSE stocks
Source: James Montier formerly of Société Générale

It is absolutely remarkable to notice that the turnover in 1929 - a time where trading was done over telegraphed message or scribbled notes and hand gestures - is equivalent to recent times when trading is done by blazing fast computers interconnected directly via FIX to the exchange.

If you enjoyed this, don’t miss Montier’s brutal take down of EMH (via John Mauldin’s Investor Insights). Also, in a world where we are all traders, the least we can do is be better traders:

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6 Responses to “We Are All Traders Now”  

  1. 1 Nick

    The reason why long-term investing in stocks doesn’t make sense in today’s market is the poor P/E ratios of most companies. Many companies don’t even bother to pay dividends. And those that pay have dividend yields far below the interest rate you can get by investing in corporate bonds.

    The stock market is overvalued for long-term investors. And the only reasonable way to profit from an overvalued stock market is to buy low and sell high. Which is speculation rather than investing. Because your success depends on finding an even greater fool to buy your shares from you at an even higher price than you’ve paid for them.

    It’s a pyramid scheme that has a tendency to fall apart once in a while and cause large losses for those who are holding stocks.

  2. 2 stantam

    Isn’t the data skewed in a BIG way by the enormity of the actions of the firms like Goldman Sachs who trade hundreds of millions of shares daily? Perhaps there is a way to filter that out?… though not likely.

  3. 3 Pej

    I must admit that I agree 100% with Nick. The only stock that I have kept for several years (since 2004) are my Apple shares (bought at $13) and my canadian trusts, and I have been buying some regularly. Other stocks are not worth holding.

  4. 4 stantam

    Yes PEJ, but keep in mind that the big boys, Goldman et al, are trading billions daily which the turnover rate to SECONDS per trade for them. Average that in with Joe Sixpack and the average holding period is volume adjusted to near zip. In other words, the reality of the world we live in is heavily weighted toward what the hot shot monied, computerized, sure thing, trade a zillion in a day, “experts” are doing. In other words, throw out this study. It’s flawed. Joe sixpack is still holding 90% of GM. That fact plus $3 will buy him a beer these days. That’s all she wrote!!

  5. 5 Josh Friedlander

    What a great site! Can you map that chart against the average dividend yield? I’ll bet there’s some inverse correlation.

  6. 6 Pej

    yes, very good point stantam. but let’s not forget pension funds, who are probably the bigger buy and holders, and sucking up 1% or 2 per year on the nipple of our retirements.

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