CNN Money has just published a story about the ‘summer rally’ in stock markets. They say that in fact there hasn’t been any evidence for a summer rally for the last 40 years. There is an increase in stock markets in the summer but there is also increases in the other seasons too. Winter and spring increases tend to be larger than the summer ones.
Jeff Hirsch, editor in chief of the Stock Trader’s Almanac, is quoted as saying ‘things tend to be slow in the summer, and this is a way for brokers to round up business’.
So, would brokers really claim an unproven effect to get their clients to invest?
Of course they would: their incentives aren’t aligned with their client’s incentives.
The broker makes money if the client makes a trade, it doesn’t matter to the broker if the trade is successful or not. The broker wants a high volume of trades as that is how they make money.
In game theory this is known as the principal-agent problem.
Today’s takeaway: Try to make sure that anyone you employ to carry out a transaction for you has the same incentives that you do.