Long before the June 1 negotiating deadline, it became quite clear that General Motors (GMGMQ, news, msgs) was headed for bankruptcy. Its debtholders were going to get crushed. The shareholders were wiped out.
Except that they weren't. As the deadline neared, shares of GM did a funny thing: They kept trading at more than $1 each. They didn't disappear.
Last month, shares rose a few pennies during a given trading day and fell a few pennies the next. Taken as a whole, GM shares reflected nearly $1 billion in value that did not exist. Even today, with GM in bankruptcy, the automaker's shares are trading around $1.50.
Market analysts seem baffled, but trading in GM reflects the sea change that's taken place in the markets during the last decade.
Simply put, the market has slowly given itself to short-term traders. The traders control volume, and whoever controls the volume controls the price.
The old notion that profitable companies with good growth prospects should have rising share prices -- and that failures like GM should be gone, or at least trading in the pennies -- is history.
Today, a hedge fund investing billions using a quantitative formula can stall a stock; a couple of hedge funds aligned can turn a profitable company into a Dow laggard. Toss in a few short sellers and you have the great Wall Street collapse of September 2008.
It wasn't always this way. Before the machines and the shorts took over Wall Street, stocks were evaluated by an underlying company's prospects. Buy-and-hold investing ruled the day. Investors such as Warren Buffett and Bill Miller were the models.
Those fellows are a far cry from this generation's masters of the universe. Traders are in charge now. They rule the market. They dominate volume. That stock you bought because you thought the company was in good shape? It's a pawn in the hands of a computer model or some supertrader like Steven Cohen at SAC Capital Partners or Bridgewater Associates' Ray Dalio.
To move a security, they don't need to own it. They can have a short position. They can put an order to sell 1 million shares in a dark pool, those anonymous marketplaces that operate outside the walls of the exchanges. They can own options or futures contracts. Buy enough GM puts and watch the price begin to fall under the pressure.
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The buy-and-hold guys are still there, but lately they've been less successful than their hedge-fund counterparts.
Buffett and Miller ride the wave of the overall market, hoping that their undervalued holdings will someday be valued by investors. The hedge fund guys create their own wave. Buffett is slow and deliberate with his investments, usually holding stakes for years. By comparison, Miller is a speed demon. He turns over 20% of his portfolio every year.
Quants, hedge funds and today's new breed of trader can turn over their holdings in a day or even just a few hours.
Slowpokes like Buffett and Miller don't bring Wall Street enough fees for the brokerages to care about them. For all the success markets and regulators have had in slashing trading costs, those reforms have inadvertently hurt small investors.
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Is buy-and-hold investing passé?Americans whose portfolios have been pared by a third or more may be wondering whether long-term investments are still capable of significant returns.
As spreads on the exchange have shrunk, trading margins have squeezed middlemen on every transaction. The best way to offset those losses has been to increase the number of transactions. Brokers have been happy to step up to heavy traders such as hedge funds and provide margin loans. Those loans not only increase volume, but carry more lucrative fees.
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