Roughly 10% of stock market activity can be attributed to real-life humans deciding which stock(s) to buy/sell.  Another 40% or so reflect decisions to invest in a specific industry or the entire market through indexes and ETFs.  This means half of all stock market activity is done automatically by Alexa “bots”/computers/algorithms.  And since there must be two parties to every trade it’s highly likely one automated system is trading with another.  It’s Rock ‘Em Sock ‘Em Robots for adults!

Automated trading ignores fundamentals.  It focuses on changes in prices.  The bot vs. bot world thrives on high volume, short holding periods (think minutes or even seconds) and borrowed money that leverages “advantages” measured out to tens of decimal places.  Another layer of complexity is added when a trade is actually a combination of trades – buy a stock, short an ETF and sell an option simultaneously.

If this sounds like a convoluted mess it should because it is.  And yet we ignore these scenarios in order to hang on the word of every dope the financial press marches in front of us.

In early February the markets were jolted from a multi-year slumber.  Volatility was the uninvited party guest.  Here’s what the talking heads told us:

“Markets are efficient.”  “It’s a technical correction.”  “We were overdue.”  “The market is consolidating gains.”

Why is it when markets climb by leaps and bounds it’s a genuine reflection of fundamentals but when in freefall we’re supposed to write it off as a momentary lapse in rationality?

In the short term markets can and often are as irrational on the way up as on the way down.  Automated trading exaggerates the impact.  It’s herd behavior.  It’s the reason prices are not an accurate reflection and why investment decisions must not be swayed by them.  Buying/selling in volatile times is an emotional decision.

The best decisions are made with a long-term focus.  The nonsense looks smaller the farther we get from shore.  With a focus on fundamentals investors can follow solid, proven strategies.  Sustaining this approach is the difference between investing and flipping a coin.

Which one sounds like the better option?  (HINT:  Don’t ask Alexa!)