Tweet When I walked into Foundation, The Rolling Stones’ 1971 album “Sticky Fingers” was playing in the background. Peter and Alex Cohen, brothers and owners of the shop, lounged on chairs as they chatted with two customers who were flipping through their newest shipment. “We started to sell records on Instagram to fund the other stuff […]
Remember the old TV show “Get Smart”? (I’ll give you a second.) You know, the one where the often bumbling secret agent, Maxwell Smart, bounces around the world with the understanding that he is both brilliant and the primary reason the world has not been taken over by his rival, KAOS. (Ah, the good ole days of TV: rabbit ears, three channels and your little brother standing on one leg while holding a coat hanger next to the set so the picture would not fade.)
It seems today’s financial services model looks a lot like the aforementioned “Get Smart.” In the role of KAOS agents are the financial markets and a multitude of bad information and attention-grabbing headlines. Combine these with a financial services industry bent on selling you a “better” product every day and TV ads promising “new” ways to trade your way to riches, and you indeed have a recipe for “KAOS.”
If these day trading programs really worked, wouldn’t the people selling the day trading programs just be, well, day trading?
And, speaking of trading technology, it looks as if a new robot application debuts every day. (Great. Now we not only have to deal with markets and Wall Street but also with robots?) The concept, as you may or may not know, is that automated “robos” will simply allow you to input your hopes and dreams — in the form of personal economic data — and sit back and wait for the robo to spit out a miracle formula for your dream financial outcome.
Here’s the problem — chaos.
There are two chaos theories. Chaos theory one is best described as weather. We can (sometimes) predict the weather within reason. Despite our complaining, the weather forecaster is usually close. The fact that the forecaster says it’s going to rain will not in any way, shape, or form change the pattern of said weather. It will or will not rain despite what the forecast tells us.
Chaos theory two, which applies to financial algorithms, aka robos, goes more like this: I determine that every third Friday the market goes up. Thus, I build an algorithm in my robo to buy stocks for my clients that Thursday afternoon. Pleased with my brilliance, I sit back and wait for the money to roll in and — for a while — it does. However, after a few months of doing this, I start seeing that my returns are dropping somewhat precipitously, so I set about investigating why.
Apparently, after a few other robos saw my success, they decided to ride my coattails, and they also began buying on Thursday afternoons. The problem with this, of course, is that once more than a few of us figured out the secret formula, that formula changed. The formula of buying on Thursday and profiting on Friday no longer worked; many of us now paid more on Thursdays than we used to, and buying interest on Fridays diminished. Thus, the Third-Friday Algorithm no longer succeeded.
Type two chaos, when understood, changes itself. In short, by following it, we “missed it by that much.”
My point? Robos are coming, and they will continue to improve. They may even prove to become useful tools in gathering and keeping track of wealth. That said, they are not good substitutes for common sense and long-term, disciplined investing. You cannot plug in some personal data and have a miracle come out the other end without discipline and thoughtful planning.
If you succumb to the hype, you may find yourself talking into your shoe.
Scott Brown, Financial Advisor
720 Rugby Street, Suite 200, Orlando, FL 32804
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Keiron Partners is not a registered broker/dealer, nor is it affiliated with Raymond James Financial Services. Opinions expressed are those of Scott Brown and are not necessarily those of Raymond James.