Critical Information You'll Never Know

It makes perfect sense that the securities industry wants you to trade. Trading means commissions and commissions are the lifeblood of brokerage firms.

Shills and emperors with no clothes

The financial media is often a shill for brokerage firms. Its daily grist is a parade of pundits who tout which stocks to buy and sell. Cramer is the worst of the lot. He recently opined that Bristol-Myers (NYSE: BMY) is "for the long run"; ABM Industries (NYSE: ABM) is "a good business due to Trump" and CBS (NYSE: CBS) is a better stock to own than Viacom. Cramer "is not a fan" of Viacom.

There is no credible evidence that Cramer has stock picking expertise, and overwhelming data to the contrary. His stock picking views should not be taken seriously by anyone, but CNBC gives him a platform to spew nonsense relied upon by gullible investors, often to their detriment.

Cramer is not alone. There's an endless parade of "pros" encouraging investors to buy stocks or sell.

What they won't tell you

While Cramer and others are keen to express their opinions, there's one area they never discuss: Their predictive track record. And with good reason. Based on an analysis from those who actually track these things, most "gurus" have an accuracy rate that is about what you would expect from random chance. Cramer's is actually worse at only 46.8 percent. You would do better if you flipped a coin.

Critical information

Here critical information you don't know -- but should -- before you conclude a stock is mispriced and place a trade. Who's on the other side of the trade?

These statistics, compiled in 2011, give you a good idea. If anything, the percentage of institutional trading has increased since then.

  • High frequency trading accounted for 56 percent of trades.
  • Institutional trading accounted for 17 percent.
  • Hedge funds accounted for 15 percent.
  • Retail (and "other") accounted for only 12 percent.

Given this data, the most likely entity on the other side of your trade is not another individual like you, but rather a professional trader, with access to high-speed computers, complex algorithms and an army of stock analysts. Trading for these entities is not something they do in their spare time. They are focused on it every minute of every day.

Institutions have the ability to program their computers for automatic selling triggered by proprietary data. When they are selling, do you really want to be a buyer?

When you buy individual stock, you are making an assumption that is often unwarranted: That you know something the person on the other side of the trade doesn't. But since you don't know whose on the other side, you have no rational basis for this assumption. And since it's probable the entity selling while you are buying is a high-frequency trader, the likelihood you are right and it is wrong is considerably diminished.

The next time Cramer and other "pros" recommend you buy a stock, ask yourself this question: Who is selling?

Then buy a low management fee, broadly diversified, index fund instead.

The views of the author are his alone. He is not affiliated with any broker, fund manager or advisory firm.

Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.

Get Dan's investing insights by signing up for his free, weekly newsletter here.