Are You Ready For The Next Flash Crash?

The Motley FoolI sometimes wonder, just for my personal amusement, what the collective noun for fat fingers should be. There certainly seems to have been a lot of fat-finger activities or computer-driven errors going on in the markets these days.

Maybe we should call it an ambush of fat fingers? Or perhaps it should be a pathos of fat fingers? My personal favourite, though, would be an embarrassment of fat fingers.

Here, there and everywhere

Whatever collective noun we decide to settle on, fat fingers can cause unwanted chaos in international markets. In China, a fat-finger mishap at Everbright Securities led to billions of yuan of buy orders for certain shares at elevated prices. It even triggered a 5% jump in the Shanghai Stock Exchange Composite Index before the benchmark eventually settled just 0.6% lower.

Meanwhile, on the other side of the world, Goldman Sachs’ computers spat out millions of dollars of unwanted orders within a 17-minute window. These were for stocks with tickers that began with the letters of the alphabet between “H” and “L”. It is reckoned that the mistake may have affected about 400,000 contracts.

Elsewhere, a technical glitch brought the Nasdaq exchange to an abrupt standstill for three hours. The exchange said it opted to impose the suspension to prevent computerised traders from gaining an unfair advantage over other investors.

The highs and lows

Whether you call them fat fingers, mishaps or just downright incompetence, private investors are likely to experience an increase in computer glitches. The reason for this is really quite simple: computers are increasingly being used to carry out lightning-quick trades. It is reckoned that last year almost half of all trades in the US were implemented by high-frequency trading firms.

The upshot is that fat-finger accidents could send your share portfolios soaring to unbelievable heights or plunging to implausible lows. However, it is important to bear in mind that while the market values of your investments may gyrate, the underlying or intrinsic values of your investments have not altered one iota.

Unlike some investors who may find market gyrations disconcerting, for me it is nothing more than water off a duck’s back. Thing is, I don’t use share prices as a barometer to gauge how well my investments are doing. I much prefer to use the underlying economics of the business to determine how well the companies I invest in are doing.

There is a difference. You see, I invest in businesses – I don’t invest in tickers.

If the fundamentals of the company are solid, and the business is creating value for shareholders by improving its bottom-line profit, then it is very likely that the share price will follow. The share price may not reflect the improvements immediately, but it should do over the long term.

In this nine-word quotation, Warren Buffett succinctly sums up the investing philosophy that we should try to learn to adopt: “If a business does well, the stock eventually follows”.

Investing really is that simple.

Successful investing is about gauging the true earning potential of the businesses that you own. By analysing and studying the underlying economics of a business, you should be better able to determine if the company can grow itself profitable.

If it can do that successfully, then the share price should reflect that over time.

The successful investor therefore focuses on the economics of a company and then weighs up the probability of whether certain events will or not will happen. If you can do for every company that you own, then you should be well on your way to becoming a better investor.

This article first appeared in Take Stock – Singapore.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.