Monday, April 25, 2005
Stocks for Jocks
Ameritrade CEO applies coaching maxims to investing; plus, pump up your brain
WHEN I’M NOT DIGGING UP NUGGETS from the online world for this column, I coach a high-school volleyball team. Volleyball has been my favorite sport since I discovered it as a seventh-grader many years ago. Although I still play, I get a lot of joy out of teaching what it takes to be a champion.
And as with volleyball, true champion traders possess not only superior skills, but also the mental capacity to stay a step or two ahead of the competition. Cross-training is important as well—developing skills in one area of your life that can be put to use elsewhere.
In that regard, any conversation I’ve had with Joe Moglia, Ameritrade’s chief executive, seems to migrate to athletics and coaching. Moglia spent years as a football coach before turning to business pursuits, and has now authored a book entitled, Coach Yourself to Success: Winning the Investment Game, published by John Wiley & Sons. We don’t usually review books in this column, but this one is worth a mention.
Moglia’s book may be too basic for some Barron’s readers, and in fact I would not recommend it for day traders. His “game plan” focuses on investing over the long term, and the book goes into great detail about the various types of investments available. He’s a proponent of asset allocation, saying “The mix is more important than the picks.”
But perhaps because I’m a sports nut and go in for sports-tinged analogies, I found Moglia’s book to be both entertaining and informative. He provides practical advice, such as avoiding portfolio rebalancing in the autumn if you’ve got a lot of mutual funds. Why? Capital gains and shareholder dividends are typically paid out from October to December, so Moglia advises readers, for tax purposes, to avoid purchasing a fund just before a distribution is about to be made. Of course, one of the big advantages of online investing is that virtually every fund family makes this information available online in advance of distributions, if there are any.
Once you’re out of basic training and into more frequent trading, you should check out Brett Steenbarger’s The Psychology of Trading: Tools and Techniques for Minding the Markets, which combines his profession, psychology, with his passion, trading. This book can help traders pick their own brains figuring out how to deal with loss as well as how to enjoy gains. Published by Wiley in 2002, it’s not the easiest book to find, but it’s a good read.
A Website with a package of interesting tools and tests is MyBrainTrainer (http://www.mybraintrainer.com), full of short, fun, mental exercises designed to stimulate different parts of your (trading) brain. The developer, Bruce C. Friedman, believes that just as regular workouts in a gym improve your physical fitness, regular mental workouts of only 10 to 20 minutes per day can improve your cognitive function and brain-processing speed.
Friedman got started with the Website as a spinoff of his medical imaging business, Heart Check America. One of his patients, who was looking for clinical applications for Alzheimer’s screening, demonstrated the technology for a series of brain tests and brain exercises. Friedman played with the tools for a few days, and thought they offered an interesting opportunity in the mental-training and exercise market—and from that was born MyBrainTrainer.
MyBrainTrainer.com uses a set of interactive mental challenges called elementary cognitive tasks to stimulate your neurons to fire more rapidly and to generate more connections within your brain. These tasks are believed to increase blood flow to the region of the brain being exercised; increase the number of neural receptors; and enhance the uptake and synthesis of neurotransmitters, especially those used by the brain to perform a specific cognitive task.
Friedman says that for those who have to make split-second judgments and then move on to make another judgment, cognitive speed is very important. “We feel confident that, with the use of our program, you will feel that you can think quicker, and make decisions with more confidence,” Friedman states. Exercise #4, which measures the speed and consistency of decisions, is his top recommendation for traders.
I’m several days into the 21-day “Basic Training” sequence and am seeing some improvement in my scores for the various tests. You can check out the site’s free “brain-speed test” (http://www.mybraintrainer.com/freetests) to see how quickly you think now. Speed up your thinking by signing up for a four-month membership, which costs $9.95
Online Broker News
The Securities and Exchange Commission narrowly passed a new set of rules that will govern trading in equities, called Regulation NMS (New Market Systems). The most controversial piece of the new regulations is an extension of the “trade-through” rule, currently enforced on the New York Stock Exchange, to the other U.S. exchanges.
The trade-through rule, which was first instituted in 1975, guarantees that investors will get the best price for their trade executions. A market system would not allow one customer to “trade through” an existing order without first matching that order. A customer’s order has to be routed to the destination with the best price at the moment the order is entered.
The SEC believes that, following start-up costs of $144 million for the markets plus $22 million per year in maintenance, investors will reap benefits of $320 million per year—with approximately $200 million going to those who trade Nasdaq-listed stocks. The SEC cites statistics showing that 1 in 40 trades on the Nasdaq would violate the “trade-through” rule. Both proponents and opponents of the extension of the trade-through rule point to that 1 in 40 statistic—one side saying that too many trades go off at prices that don’t benefit the investor, while the other side says the number of violations are negligible.
Over the last three years, online brokers have implemented “smart-order routing” technology, which scans the markets and finds the best place to execute a customer’s order, based on price and liquidity. Extending the trade-through rule most likely will negate much of that innovative development.
“The passage of Reg NMS was expected, but in our view it’s not a good thing for our investors,” said Vince Phillips, CEO of CyberTrader (http://www.cybertrader.com). Phillips fears that CyberTrader’s smart-order routing technology will be made ineffective next year, as the trade-through rule is extended to the Nasdaq and Amex exchanges. Analysts at Celent Communication say, “The effects of Reg NMS will be felt by exchanges, ECNs [electronic-communications networks], alternative trading systems, brokers, dealers, institutional and retail investors, and the technology vendors that provide the links between all these puzzle pieces.”
There will be an initial trial phase prior to full implementation, currently scheduled to start April 10, 2006 and run through June 9, 2006. During the beta run, there will be 100 NYSE, 100 Nasdaq and 50 Amex stocks that will be tested for functionality.
How will this affect retail investors who trade online? Daniel C. Goldberg, an analyst with Bear Stearns, says, “Regulation NMS will spur the migration of volume in listed names off the floor of the NYSE—thus benefiting Instinet, Amex and Nasdaq.”
Bill Cline of Accenture says, “The NYSE is clearly the big winner, as the extension of the trade-through rule to the Nasdaq will help it retain its dominant share in trading listed stocks, as well as helping it gain share in trading Nasdaq stocks.” Cline believes that extension of the trade-through rule will impact smaller orders much more than large institutional orders, and says, “The diversity of opinion on this ruling illustrates the difficulty in legislating best execution.”
Published in Barron’s April 25, 2005