Why 'free' trading short-termism is indistinguishable from gambling

CIO also takes aim at 'gimmicky' ETFs that have taken over like a 'toxic bloom of algae'

Why 'free' trading short-termism is indistinguishable from gambling

The modern-day landscape of high-frequency trading and social media-induced campaigns mean short-term investment strategies are more hazardous than ever, according to a CIO.

Gerry Frigon, who is also president of Taylor Frigon Capital Management, is a believer in “predicting businesses, not markets” and draws a clear line between true investing and “short-termism”.

That’s not to say he disagrees with the concept of retail investors participating in the market. However, Frigon argues that Robinhood’s emphasis on so-called “free” trading, which may not have traditional commissions but are not free, and its gamification of the entire process, has pushed an entire rising generation of retail investors into even more short-termism, which ultimately becomes indistinguishable from gambling. 

He said: “The short-term gyrations of individual stocks, and in fact entire markets, almost never have anything to do with actual business fundamentals - sometimes they do, but more often not.

“Trying to predict these short-term moves -- or worse, trying to base one's investment strategy on predicting and timing such moves -- has always been impossible, and in the modern landscape of high-frequency trading, massive algorithmic trading schemes, and now the social-media induced get-rich-quick flavours-of-the-minute being touted on Reddit and traded on RobinHood, we would argue that short-term strategies have become more hazardous than ever.”

With this type of volatility a constant threat, he added that it’s crucial to stay calm, centered and still. The firm has been warning clients for months that a correction was inevitable but Frigon stressed that if proper planning has been done, an investor should have ample cash on hand to handle whatever near-term needs he or she may have.  

“More so than ever, stock prices, in any short-term period of time, are impacted by almost anything but fundamental business activity," he said. "Over time, those business fundamentals will ultimately drive values of companies.  

“However, those who react to the crazy volatility that can occur in these short bursts -- as we are witnessing now -- do so at their own peril.”

In the meantime, prudent investors should focus on looking for solid businesses, and analyzing and predicting the prospects of individual companies, rather than markets, central banks, hedge fund shorts, bond yield gurus, and “the plethora of ETF gimmickry which has invaded the investment world like a toxic bloom of algae”.

Frigon added: “The most-recent round of earnings has only solidified our confidence in the outstanding prospects of the businesses we own on behalf of our clients, and highlighted the importance of focusing on the business, rather than running around in circles trying to predict the next move of the market.”