The Cost of Free

“When I run massive positions, at best I feel apprehensive, but I usually feel like crap,” he admitted, lightening up enormous European longs. “I don’t know what I would’ve done on Sunday if markets had been open.” Last weekend was the most politically volatile in recent memory. “Having them closed probably saved me from myself,” he admitted, knowing stocks would’ve tanked on the break-up of the Eurogroup meeting. But by the open, a deal was done, stocks surged. “If I knew then how savagely Germany would treat Greece, I would’ve been short. So how do I feel now? Blessed.”

The S&P 500 gained 2.4% last week, in the wake of Greece’s missed interest payment and political meltdown. I have an even better one for you – the EuroStoxx index, which is like the Dow Jones of Europe, was up 4.3%!

Even if you knew the news ahead of time – “Greeks Vote No on Referendum” – you still have no way of knowing how this news will be interpreted by the markets (tens of millions of people you’ve never met, all buying and selling for different reasons).

Remember that stocks kicked off 2013 with a massive rally as the sequester got underway. Remember that Treasury bonds actually spiked higher the day that Standard & Poors downgraded them for the first time ever in 2011. Had you entered the intuitive sell trade on these and many other big bad events over the last few years, you’d have been poleaxed by what Jeff Gundlach likes to refer to as “the bloodless verdict of the market” again and again. Your intuition can reliably keep you out of trouble in the real world, but the markets function differently. They are not set up to reward you for your instincts.

The CIO that Eric Peters is quoting above is fortunate that markets aren’t a 24/7 affair with wide open access. I believe that most investors are as well.

Silicon Valley is enamored with a slew of new tech startups that offer free and instantaneous trading. The technology is cool and the price is, well, as good as it gets, but the larger question to me is “Why?” If an investment isn’t promising enough to justify paying seven dollars to execute the trade, maybe it’s not an investment worth making. Maybe there’s an unexpected benefit to there being some layer of friction between people and their ability to make moves.

Perhaps the relatively minor gateway of a trade confirmation screen – “Are you sure you’d like to place this order?” – or a small trading commission ends up being the thing that stands between the kind of frivolous transacting that undoubtedly destroys more value than it creates.

Warren Buffett and Charlie Munger say it is very unlikely that they can make hundreds of smart decisions each year. They can get the relatively few big decisions mostly right, which is why their investment process is oriented away from having to make a lot of good calls all the time. Can a guy trading out of boredom from his phone say otherwise with a straight face?

I’m all for efficiency and the trend toward lower investment costs. It’s a huge win for investors in the long run. But at what point do lower short-run costs create larger long-run costs by encouraging self-defeating behavior? Investors who are free and unfettered to act on their every impulse and whim are not necessarily being empowered – in many cases they are being endangered. Jack Bogle has made this case in terms of the ETFs that have gradually sucked assets away from traditional ’40 act mutual funds. He views them as carrying a built-in incentive to trade rather than invest because they’re moving up and down all day. He’s partially right – but a tool is only as good or as bad as the end user.

Free is never free; there’s always a price. This includes market access.

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