If that is really his point, then he does not understand value investing.

From the point of view of a value investor, the numbers that you care about are the current price, and how successful you think that company will be. If the current price is below that benchmark, you buy and hold. If the current price is above that benchmark then maybe you want to sell short. (The reason for the maybe is that, the market can stay irrational longer than you can stay solvent.) Either way you're aiming to make a profit off of the difference between long-term returns and the price you bought it at.

Therefore from the point of view of a value investor, everything that helps people lose track of a company's long-term prospects is good for you.

I'm sure Mark Cuban understands value investing. That's not the issue here. He's not saying you can't still make bets on the future of a company. What he's saying is that because of the high frequency trading, it has become largely more DIFFICULT to be a value investor due to the fact that investing in a company no longer depends solely on said company's success.

When high frequency trading is allowed, the price of a stock becomes influenced by the simple act of trading itself, and while it is true (as @btilly mentioned) that this enables other methods of trading like benchmarking, it discourages investing purely for the sake of supporting the company's growth. THAT was Mark's point. Wall Street's purpose is to INVEST in companies, not to microtrade the crap out of their shares until the stock price is so volatile you'd think the CEO was schizophrenic.

Better than that, an irrational dip in a stock's price due to an analyst recommendation or another factor may represent a good opportunity for a value investor!

Exactly. And we should just stop calling them "Value" investors. This is true for growth investors, any kind of investors, in fact all investors.

Investing is about knowing the difference between value and the price.

When you can do that-- and when I say "knowing" I mean it, and I have a spreadsheet to calculate it-- then you can buy low and sell high.

The problem is wall street is in the business of managing other people's money and most people are ignorant of money, so you have a lot of people who just turn their money over to others to "manage"... and many of those that use other people's money end up gambling with it rather than investing it... this problem is compounded by the moral hazard created by the government bailing these companies out when the gambles turn south (or underwriting the gambling by buying bad securities as helicopter ben is doing right now to the tune of $40B a month.)

The problem with wall street is government regulation which is idiotically designed, and intervention-- in the form of bailouts-- that perverts the entire system incentivizing gambling.

And the people voting for all this, generally don't even know what money is, let alone how to invest it. (If you think the dollars in your pocket are money, then you're one of those people, and I suggest you read http://mises.org/money.asp )

If you walking into the saloon ready to play poker the proper way (you know, 5 cards, held in your hand) and every game at every table is mucking around with Texas Hold 'em, it's no good saying you know the real value of poker - even if you are right, and value is written into your spreadsheet.

Never ignore Keynes' rule - the markets can stay irrational longer than you can stay solvent.

If you are able to afford to buy and hold, then it does not matter how long the markets stay irrational - you've bought it and it should work out.

Where Keynes' rule applies in spades is when you are doing things like shorting an overpriced stock. Now as the price goes up you keep on having to put more money in, and should you run out of money you lose your shirt.

And about poker, there are a lot of variants of poker out there. Texas Hold 'em is what everyone is playing because it has the combination of more strategy and thinner edges. So good players have a real challenge figuring it out, and weaker players have a better chance of walking away lucky on any given night.

Without dividends, there's no reward for buy-and-hold investing, and no reason to pick companies that will actually perform well. Instead anyone who buys is gambling that they'll be able to dump their position at a fortunate time, which leaves them dependent on predicting the irrational market's perception of the company's prospects.

Unfortunately dividends are double-taxed relative to cap gains/interest/etc. Until that's fixed, we won't go back to the era of companies returning money to investors.

Companies can and do return money to investors through stock buybacks. To first order, it is the same as a dividend, except that only the investors who want money get it.

To first order, stock buybacks are equivalent to dividends. To second order, the IRS makes it complicated, as do regulators.

What - really double taxed ? Do you mean dividends are paid out of post tax cash, then taxed as income for the stockholder?

Just wondering

> The problem with wall street is government regulation which is idiotically designed, and intervention-- in the form of bailouts-- that perverts the entire system incentivizing gambling.

Deregulation. http://dealbook.nytimes.com/2009/11/12/10-years-later-lookin...

“Without the...repeal of Glass-Steagall...Washington might not have felt a need to rescue the institutional victims.”

"The market has changed in a way that an overwhelming number of external factors can have a negative (or positive) impact on that company's share price"

Really? In what way has it changed?

External factors have always had a huge impact on businesses. I'm sure there were lots of super well run businesses that went under durring the Great Depression (which was, you know, the mother of "external factors").

"In what way has it changed?"

Two examples:

1. High-frequency algorithmic trading.

http://blogs.reuters.com/felix-salmon/2012/08/06/chart-of-th...

3. Repeal of the Glass–Steagall Act, giving government-protected 'too-big-to-fail' commercial banks the ability to incur risks traditionally reserved for investment banks.

And how do those changes (especially #2) "have a negative (or positive) impact on that company's share price" ?

In order to make money on a trade, the share price needs to move. So you've got algorithms whose attributes manage things like how much of an actual order is exposed to the market at one time, or how much they adjust your bid or ask as the order progresses. I've got some algo documentation whose algo "Watch Out For" notes warn "may be too aggressive and cause impact" and "must watch out for order size that adversely impacts market". But maybe you're a trader that decides you want to be "too aggressive" with your trade and now you've moved the market because you've used an algorithm in a way it wasn't intended to be used, and your employer's risk controls didn't care or didn't catch what you were doing until it's too late. Net effect is that your trade may sway the overall market in a way that moved that company, or that company's sector, or maybe the whole market depending on what impact your trade had.

And all of that assumes the algorithms behave in a way that they're expected to. I like this example from Amazon's pricing algorithms: http://www.pcmag.com/article2/0,2817,2384102,00.asp but you could apply the same concerns to pricing matters of the stock market where the unintended consequences of poorly-conceived strategies have a destabilizing effect on pricing.

HFT allows all of this happen so much faster than could have ever been done manually. And when high frequency trading is being done by entities with enormous balance sheets, and an increased tolerance for risk due to assurances by the government that they'll be bailed out should they make a bad bet, it's got the potential to destabilize the entire market.

> it's got the potential to destabilize the entire market.

No, it really doesn't. There's not a boogey man hiding under your bed just waiting to get you.

You know what would happen if a bunch of computer algorithms went crazy and mispriced a bunch of stocks? The guys running that code would get taken for a bath(1). If a bunch of computers went crazy today and started selling shares of GOOG for $20 then the humans would start buying like crazy and the share price would correct.

1. http://en.wikipedia.org/wiki/Knight_Capital_Group#2012_stock...

Well, that or they would go crying to the exchange operators, and if they're influential enough, they'll get their sales of Google at $20/share reversed.

We would see a lot less of these disruptions if exchanges would make everyone live with the stupid exchanges their computers made.

They do. Knight didn't get its trades busted.

"On the same day the company's stock plunged 33 percent, to $3.39; by the next day 75 percent of Knight's equity value had been erased."

So in the example you linked, a computer algorithms went crazy, and anybody invested in Knight Capital got hosed ... as did anybody elsewhere in the market that reacted to that instability. Not exactly a convincing argument that it can't or won't happen again potentially on a much larger scale. You basically confirmed my point.

Your original point was:

"The market has changed in a way that an overwhelming number of external factors can have a negative (or positive) impact on that company's share price"

Knight Capital loosing a ton of money was not due to an external factor. It was due to an internal factor. The fact that they (apparently?) accidentally deployed a bunch of test code to production. Oops!

My point was that external factors can have an impact on the stock price of an company in ways that previously hadn't been possible, and I cited HFT as one of those factors. You cited Knight Capital whose "internal factor [...] (apparently?) accidentally deployed a bunch of test code to production" resulted in "trading activities [that] caused a major disruption in the prices of 148 companies listed".

So yes - in this case, the internal factor of Knight running a flawed algorithm turned into a very real external factor for those 148 companies, as well as anybody else whose trading was impacted along the way.

The share price for those 148 companies barely moved.

Yet Knight Capital's share price never recovered. Say instead of KCG it was JPM, operating without the usual risk concerns because they've got assurance from the government of support. Should investors or taxpayers be okay with such an "internal issue" destroying part of their net worth? And wouldn't a too-big-to-fail company have a broader impact on the entire market if such a think were to happen? It's kind of the whole concept behind too-big-to-fail that they would.

In the extreme, repeal of Glass-Steagall and resulting shenanigans put the entire market at risk, which in turn put the macro economy at risk, which in turn changed the long term outlook of stocks.

That said, I do question the overall premise that HFT affects stock values over the long term.

That's fair. But I think that's getting pretty far from what Cuban was complaining about.

I also don't think that "government decisions can have a big impact on the economy" is a new phenomenon.

By external factors, I think he means factors unrelated (or at least not very related) to the success of the company, like wild stock speculation.

As someone who invests in small caps almost exclusively, I can tell you that 99.99% of the companies in existence today don't suffer from wild stock speculation.

This is only true if you're "investing" on unreasonably short time horizons. And this has always been the case:

"In the short run the market is a voting machine. In the long run it's a weighing machine." - Warren Buffet, quoting Benjamin Graham

The market has changed because there are a lot of imbalances that make expected returns bimodal. For instance, either the euro is going to implode, or it's not. Either there's going to be a recession due to [insert Europe/China/Japan/Middle East] or there's not. So in the short run returns might depend on the perceived likelihood of catastrophe (risk-on/risk-off).

Also, with interest rates low, return expectations might have gotten low enough that the significant vig of Wall Street is a bigger problem for some strategies.

You can always take out market risk by hedging against the index. i.e buy the stock, short the index and bet the stock will do better than the market overall.