May 15, 2012
I had to check repeatedly to make sure that it is not April 1 when I read a NYT editorial complaining about too little trading on Wall Street. The editorial does raise a legitimate point. Many people are wary of Wall Street because they don’t trust the financial sector to treat them honestly for some of the reasons mentioned in the piece.
However this has little to do with trading volume. Middle class people should be able to be comfortable putting money in the stock market, but they should also know that they will generally make more money with a portfolio that does not trade frequently. Trading does not on net increase returns, it just redistributes them. Frequent trading means that a larger share of the returns generated by the stock market will end up in the pockets of the financial industry, with less going to investors.
This piece also notes the poor returns from the stock market since 2000. This was not a surprise. It was a direct result of the high price to earnings ratio at the peak of the bubble. Price to earnings ratios in excess of 30 to 1, virtually guaranteed poor returns in the years ahead. People who took third grade arithmetic understood this fact. Unfortunately most of the people with top positions in the government and financial industry are not among this elite group.
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