How the equity markets had changed but the brokers had not

These experiences were far different from the lessons I learned growing up. My father’s attitude toward investing was conservative. He always said to buy blue chips—buy them and hold them. In the long run, he told me, that’s how you make consistent returns.  So when I looked to start a career in finance, I didn’t stray outside the realm of traditional investing. I took an internship at a major firm in Greenwich, Conn. This was my entrée onto Wall Street.

But even before I started, my perspective had begun to change.  I have always had a contrarian streak, and I had traveled abroad and read much about the history of other cultures. Increasingly, I began to doubt the prevailing wisdom that a patient investor is rewarded over time.

To me, even as the world grew closer, it had also become increasingly unstable and volatile. The speed of change had become so great that it often was chaotic. Just think of the whole dot-com explosion. From this perspective, entering into a long-term investment strategy seemed risky. My investments were sitting ducks, exposed to market risk for extended amounts of time.Perhaps, I thought, times had changed, and a new investing perspective and corresponding strategy were needed.

So I put on my best suit and headed to my new Greenwich office. What I found was pretty much what I expected. I was working under a broker and his assistant, who put me in a cubicle watching tech stocks on a computer screen—Compaq, to be exact.  They really didn’t know how to handle the new volatility inherent in these speculative issues. So I spent a lot of my days just watching the markets.

Watching these blinking numbers for hours, day after day, I realized that the world and the equity markets had changed but the brokers had not. They were still investing their clients’ money like it was 1950. Their philosophy continued to be buy and hold, and believe that in the end, time would heal all investment wounds.  But this no longer worked. Although the market indexes—the Dow and the S&P 500—still showed strong returns, the individual companies on these indexes had become much more risky than the blue chips of the past. Think about it—few of the top 50 American companies from the ’70s, ’60s, or ’50s have survived to the present day. So why should an investor believe that the companies listed today will be there in 10 or 20 years?

My boss in Greenwich had been in the business for decades and wasn’t going to change. He would advise his clients to buy “good solid companies” and hold them, whatever happened.  Before I go any further, let me say clearly that I still believe a diversified buy-and-hold strategy is suitable for the core portion of any investor’s portfolio, but another part of the portfolio needs to be flexible, opportunistic, and aggressive. Not in the sense of taking extravagant risk, but having a philosophy of rapid action and defense. Practitioners would call this dynamic allocation.  (At another asset management firm I worked at, the directors said they could do nothing to protect their clients after the stock market bubble burst in 2001. They just watched as the market took back five years of gains and more. I’m confident the same thing happened at my old firm in Greenwich.) So there I sat in Greenwich, watching a single stock that my boss didn’t understand. After a while, I began to think that his investment strategy wasn’t “buy and hold” but “hold and pray.” If the market spiked or plunged, he wouldn’t exit. If the market environment changed, he wouldn’t take a defensive position or create a new strategy. Perhaps he had a little concern, but no real plan of action.

Another strong impression was the lack of connection that stock speculation had with the real world. As soon as a stock begins to trade in the secondary market, the gains or losses affect primarily the speculators in the stock. Even the company isn’t directly affected. If a solid company’s stock drops from $100 to $1, this doesn’t change daily business or the lifestyle of individuals (unless they were hoping to cash out).

These experiences had a profound effect on me. They steered me toward the Forex market, gave me an understanding of the currency markets, and helped me develop trading strategies.  Many traders, entering the Forex market for the first time, have been led to believe that it is just like any other market, and that their skill sets are easily interchangeable. That is only partly correct.  Without a broader understanding of the role Forex plays in the world, a trader will realize lower returns and may even fail to reap a profit.

And that is the basis of my approach to the Forex market. The best traders don’t see the market as just prices moving up and down, regardless of actual trading style, but as a fundamental part of a society and the world economy.