I've been reading a lot of books lately, with the holidays a few weeks ago I threw some fun books in the mix (including Q by Ben Mezrich). I also read Openan interesting book on Andre Agassi (I recently took up Tennis). One book that I recently read that I wanted to share more about though is Business Adventures by John Brooks. It was on all the book lists in 2014 because Warren Buffet lent the book to Bill Gates and Bill Gates read it some years later, finally recommending it after it went out of print. Well the stories in this book are right in line with all the others I've been sharing such as Sam Walton starting Wal-Mart, Les Schwab starting Les Schwab, and so on. The book is a collection of business and stock market stories from the decades around the 1950s.
Every chapter in this book brings all sorts of lessons to mind. Reading the reviews on Amazon, you'd think these were just random stories. They go much deeper than that though. Most of the stories could be unfolding today as if they were brand new and you wouldn't know the difference. This first one is obviously a little older though. The version of High Frequency trading that was occurring in AT&T stock back in 1958 was a little different than the HFT fluctuations that we see today. Getting closer to the source meant bypassing the tape and getting on the phone or having a private conversation with someone who knew what the tape delay would eventually report. On the surface this sounds boring and mundane, but it lends some insight into what HFT is really all about.
The stock market spun wildly as a result of the ticker tape being delayed. The tape would report one price and in actuality the stock would be trading with a 5 or 10 dollar variance. The resulting whipsaw of the price contributed to the confusion and the irrationality in the market at that time. Similarly today, we blame irrationality and steep price fluctuation on the HFT algorithms. In reality though we should think about the stock market as offering two main functions, speculation and liquidity. For those that are speculating, one way to have an advantage is to know the clearing price before anyone else. This is as true in the HFT world of today as it was in the ticker tape world of yesterday. For those that want liquidity, one way to have an advantage is to recognize what is the result of speculation and what is the result of true changes in company value.
If you take a historical perspective that only one can by reading books about the past, this becomes more obvious and easier to ingrain in your investing strategies.