Let me pose a simple but important question. What really shapes the history? Is the main course of history determined by the decisions of governments,leaders or kings? Or is it determined by something else? Though we are accustomed to think in terms of the supremacy of politics in shaping the historical events; a deeper analysis may find another answer to this question. The hidden hand of technological change shapes the history more profoundly in the long term rather than the chaotic world of political bickering.
An end to medieval ages would not be possible without the gunpowder which brought down the castles of feudal seigneurs. Hitler may have won the Second World War if he was one step ahead of Americans in developing the atomic bomb. Industrial age was definitely impossible without the steam engine and the railways. Numerous more examples can be added to the list.
There is nowadays such a force in action which is quietly but conclusively shaping the future world. The name of this force is quite familiar. It is Internet. Think, for a moment ,a world without Internet. Would we be able to see Obama as president of U.S ? After all; it was almost beyond imagination to think an African-American as president of U.S only a decade ago. It is a known fact that the most important element in a U.S presidential race is the ability to raise enough funds to finance the campaign. It is also not a secret that Obamas presidential campaign was first of its kind in the sense that it was almost fully financed through Internet. Or consider the Wikileaks and that mighty blow that instantly smashed the centuries old tradition of behind the closed doors foreign diplomacy. Would it be possible to see a daily volume of trillion dollars in Foreign Exchange Markets in a world who does not know Internet? Internet is a very novel and different kind of soft power which may even overthrow the authoritarian regimes as we recently witnessed in Tunisia, Libya and Egypt. It is the new gun powder of this age demolishing the castles of todays dictators.
Given these facts; it may be proper to ask if Internet is also changing the ways of trading in the stock markets. I think; it already started doing this and we may be witnessing now the very early steps of a trend that may transform permanently the business practices of the financial sector.
The dominant professional view in the financial sector stresses the importance of diversification and suggests that it is much better to invest your money in a portfolio of stocks rather than trying your chances in one stock. One needs a lot of money to do that properly. Then the golden advise follows. Given that you are only a humble and most possibly unsophisticated small investor, do not try your chances in the intricate and sophisticated world of finance. Just leave the job to the high paid experts and investment funds. Let them run your money for you. If you are a bit hesitant to do that; the professional sector and academic world (with all the force of science behind them) is ready to supply convincing evidence about the impossibility of picking up a good stock. You are told that the markets are efficient. The stock prices follow something called Wiener process. Its meaning in more daily terms is this. Nobody can tell if the price of a stock will move up or down even tomorrow since what will happen is a matter of pure chance. Do not waste your valuable time struggling with thousands or more indicators of technical analysis. It is an attempt whose futility is already proven by rigorous science.
So far, so good. This story however does not tell you an important detail. These theories are nothing but an extension of Neo-Classical world view. Most of the arguments of Neo-Classical approach are based upon a perfectly competitive world where none of the producers or consumers can affect the market price. Consumers or producers have full information meaning that everyone in the market knows everything that needs to be known about the factors that may affect supply or demand. It is a nice theory but unfortunately no one has ever seen a perfectly competitive market in the real world so far. In a similar vein; efficiency hypothesis says that none of the players in the market can exert a perceptible effect on stock prices and the expectations of market participants are independent of each other.
I would say that this is a bit naive approach in the real world of finance with all these funds around with billion dollars at their disposal and we are expected to believe that they cannot exert any effect on prices with all that power. Let us close our eyes to the possibility of secret collisions between these funds or the secret collisions between fund managers and financial analysts whose one word is enough to cause a jump in stock prices. May be we may also forget the disastrous performance of most funds in the big 2007 crisis despite diversification and the professional expert teams.
One fact however shall not be forgotten. The financial world is a jungle where everyone is trying to earn money out of the pockets of others and it is perhaps the best strategy for a small investor to walk alone in this jungle. However it is also true that small investor needs a strong stick in his or her hand to walk alone through the dangerous pathways of this jungle. Internet enters into the picture exactly at this point.
Given the fact that almost every adolescent has an internet connection nowadays; suppose that there are internet sites around which provides you with this stick by correctly identifying the buy opportunities and also telling when to sell whose access is just one button away. Does it seem to be a dream?
No, not really. I have already found one. It is called www.americanbulls.com. The site scans more than 15 000 stocks from NYSE, AMEX, NASDAQ and OTC on a daily and weekly basis. They generate daily and weekly buy and sell signals based on Japanese candlestick pattern identification. I particularly liked the two features of the site. First, they have a rating system which ranks the stocks according to the conformity between the stocks historical movement and their signal system. Second; they provide a fairly transparent history table which tracks the gains and losses in the last two years of an $100 initial investment if the investors act according to the signals of the site. Some of the results they reported were staggering. There is, for example, a stock called Financial Bull 3X (quoted as FAS) from NYSE. This stock currently (on Dec.22,2010) trades at $26.95. It was trading at $6.69 on March 12,2009. A simple buy and hold strategy would yield a gain of %400. However the site signals after allowing for commission costs were powerful enough to increase the initial investment of $100 to $2251 today (a gain of 2250% or 22.5 times of the initial investment). A more careful analysis brings forth another interesting aspect. This stock was trading at a price of $38.34 on April 16,.2010 which means that the stock lost almost 30% of its value since then. Despite this; an investor acting on site signals was still capable of increasing an investment of $1072 on that date to $2251 today (more than doubling his/her money). I must also stress the fact that the sites reported performance for stocks do not include the possible short sale gains. The sites domain of interest is not limited to U.S. The same buy and sell algorithm is used to track the stocks of 35 different countries which gives the investor the chance of creating a global portfolio.
Turning back to the main issue in this article; I think it is proper now to ask what may be the long term impact of such sites on investment funds in the long term? The technological innovations rendered the unthinkable to daily reality in the past. Do the future hold a similar promise? Will there still be a need for investment funds after one or two decades when the small investor learns to cope with the challenges of financial world by the support of sites like the one mentioned above? Will Internet eventually demolish the castles of finance establishment in the future?