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The Top Ten Market Mysteries

Tyler Durden's picture





 

To paraphrase Mark Twain, "It isn't the stuff you don’t know that will kill you – it's the stuff you're sure about but is totally wrong that will do you real harm."  As a corollary to this fateful phrase, Convergx's Nick Colas has collected a list of market "knowledge" that is questionable at best and harmful at worst.

Via ConvergEx's Nick Colas,
 
For years I had a pet theory about how your abilities improve over time in any given vocation.  My thought was that every year you work, you learn one critical aspect of the job. Over the first few years, the percentage improvement in your knowledge is quite impressive: 50% in the second year, 33% in the third, and so on as you pick up new and important insights.  And while years 15-20 might offer up slower growth, you also have less competition from your more junior peers.  They’ve figured out fewer points, after all.

A few examples of these critical lessons from my 20+ years analyzing stocks, markets, and the economy on both the buy side and sell side:

Rule #1: The marginal buyer and seller set prices for everything.  You may have point of view on value, but the actors setting the price don’t care about your opinion.  Seriously – they don’t.

 

Rule #2: If you don’t know what to do or say, don’t do or say anything.  Boredom is investor’s greatest enemy.  Thrashing around is for mosh pits and three year olds.

 

Rule #3: If you can’t explain your competitive advantage in three sentences, you don’t have one.  That’s true for analysts, portfolio managers, company executives, startup companies, writers, etc.

 

Rule #4: It is OK to be wrong.  Just don’t lie to yourself or anyone else about being wrong.

The second part of my imaginary rule set was that there were 20 questions that mattered to any job, so two decades of experience should get you to the end of the journey.  I can tell you that, with 22 years in the business of analyzing financial assets, this part is wrong.  And in keeping with Rule #4, I am fessing up.  The true count is probably more like 100, which is why only vampires have a shot of figuring everything out. Zombies would have a shot, too, if it weren’t for the whole mindless existence thing.

To be fair, part of the problem of harvesting those elusive 20 – 100 points from the sea of capital markets aphorisms and rules is that there are so many false leads.  At first they look useful, but like a poorly made tool they eventually shatter under heavy use.  Since I am prone to list-making, I have also kept a short collection of these false gods.

The balance of this report is a Top 10 list of those as well as a brief assessment of where and why they go off the rails. I use questions rather than statement to lead off each point.  After all, these are points that seem right but are – ultimately – misunderstood.

#1 – Why the fixation on price earnings multiples?  Say a stock trades for 10 times projected earnings.  Does that make it a better investment than one trading for 20 or 100 times?  The short answer is no.  Valuation is a three dimensional chess game of the returns a business can generate, its competitive position, and its growth prospects.  No matter how much you try to stuff the duffle bag that is P/E analysis with those bulky items, you simply aren’t going to get them all in.

 

#2 – Why do technical analysts use an arithmetic price axes instead of log scales?  Don’t get me wrong – I love good technicians. They are the shamans and storytellers of the capital markets, drawing pictures and relating price levels to events in the past. But look at the average technician’s work and you’ll see that all the price charts treat the move from $10 to $20 the same way as $90 to $100.  One is a double; the other is only an 11% move.  That could all be solved with a logarithmic scale for the Y-axis, but very few people do it that way.

 

#3 – Why do investors care about the price at which a company buys back its stock?  It isn’t the Chief Financial Officer’s job to figure out if his/her stock is over or undervalued.  That’s for investors to do; it’s pretty much the job description, actually.  Stock buybacks return money to shareholders rather than allowing the company to reinvest it in the business.  That’s it.  Now, if a company is going to blow a quarter, maybe the CFO should lighten up the repo and buy lower.  Fair enough.  But CFOs aren’t stock pickers.  So if the market tumbles and company with a repurchase plan in place happens to buy higher than current prices, don’t complain.  Stock picking is your job.

 

#4 – Why does the negative case for an investment always sound smarter than the positive one?  Remember that over the long term (really, really long term, anyway), most equities rise in value.  Short sellers therefore typically have to do more work to find the right ideas.  Their rap is, therefore, generally stronger than the “Sit tight, be right” crowd.  I think, however, that humans are generally wired to be scared by a negative story and it therefore holds our attention better.  It’s not always right, but our innate biases make us remember it.

 

#5 – Why is there a Nobel Prize in Economics?  There are only five “Real” Nobels, instituted by the old man himself: Peace, Chemistry, Physics, Medicine/Physiology, and Literature.  Alfred Nobel invented dynamite, among his +300 patents, and these prizes were essentially a way of being remembered for something other than arms dealing and the industrializing of human misery.  Unlike these awards, which started in 1901, the Economics “Nobel” is a newcomer, with the first prize given in 1969 by Swedish Central Bank.  Putting the social science of economics on par with either the hard sciences or human ideals such as peace or literature seems odd, at best.  At worst, it imbues the discipline with a notional precision that it can never attain.  If you need any further proof, consider this year’s award to Gene Fama and Robert Shiller.  One believes markets are efficient, one doesn’t.  Its sort of like the committee  is saying “You figure it out…”

 

#6 – Why is investor and social attention negatively correlated with stock market direction?  When the global equity markers were imploding in 2008-2009, cable business news channels enjoyed relatively high ratings.  Now that the U.S. equity market is hitting new highs, no one but Wall Street seems to tune in.  We’re used to equating social attention with value (the valuation of social media stocks is a great example), but with the stock market, the opposite is true.

 

#7 – What ever happened to “Growth” and “value” investing?  When I started in the business, mutual fund and other institutional managers differentiated themselves by these monikers.  The hedge funds came along, with much broader mandates.   After that, passive management with low fees and transparent trading through exchange traded funds became popular.  Managers still use the terms, to be sure, but the delineation is nowhere near as rigid as it used to be.  Most investors just want to find stocks that go up.

 

#8 – Why does it take capital markets so long to embrace technological change in its own back yard?  Over the last 20 years, equity trading has moved from three exchanges to scores of virtual venues.  You can see the same process occurring throughout modern society.  Online shopping supplants old brick and mortar retailers.  Mobile apps replace singles bars.  You can play scrabble with a friend in another country on your smartphone.  Yet, somehow, the clever people in capital markets seem shocked that their jobs are subject to the same technological advances.  There’s no going back to the old days…  Sorry.

 

#9 – Why does anyone doubt the value of gold?  Humans have valued gold for 5,000 years. Some of the first money – coins minted in ancient Anatolia – was minted with the stuff.  The world functioned on a gold standard of sorts until 1971.  I think the reason some people dislike gold as an investment is because it reminds them that humans are the same across space and time.  We like to think we are “Better” than the ancient Romans with their gladiatorial spectacle and will never again need a portable method of transferring wealth like the European refugees of the 1940s and 1950s.  Gold was the fiscal anchor of the former and the salvation of the latter.  Are we so different?  Let’s see how the next 100 years turn out.

 

#10 – Why do humans always fight the last battle rather than focus on future challenges?  Put another way, would it be so bad if we banished the word “Bubble” from our collective consciousness for the next decade?  Humans are prone to herd behavior – we like the security of crowds.  If our ancestors had been rugged individualists they would have never made it out of Africa.  And if any of them were, they certainly succumbed to the local fauna. And their genes died with them.  Bubbles are as much a part of human behavior as breathing, and it will always be thus.  At the same time, not everything that rises quickly in value is a bubble.  Using that rubric and hearkening back to other asset price collapses is lazy, at best. 

Now - watch CNBC for an hour and check off how many of these 'red flags' you hear...

 


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Tue, 11/26/2013 - 22:13 | Link to Comment Number 156
Number 156's picture

How do we know that the markets haven't already crashed and all the numbers we see aren't fabricated?

Tue, 11/26/2013 - 22:40 | Link to Comment CharlieSDT
CharlieSDT's picture

We'd probably be seeing supply shortages if that were the case.

But I don't put anything past those fuckers.

Tue, 11/26/2013 - 22:53 | Link to Comment Uber Vandal
Uber Vandal's picture

Like the empty shelves earlier this year, or the difficulty in finding 22 LR?

http://business.time.com/2013/03/27/hey-walmart-its-hard-to-make-sales-w...

And then there are food pantries.....

http://www.freep.com/article/20131121/NEWS05/311210026/

 

Wed, 11/27/2013 - 02:03 | Link to Comment kchrisc
kchrisc's picture

That Wal-Mart management is allowing stock to backup in store warehouses says a lot about the general malaise in the general economy.

Wed, 11/27/2013 - 01:30 | Link to Comment Seize Mars
Seize Mars's picture

Number156

They did, and they are.

The financial world fell apart in 2008/2009. Look at a graph of the stock market since then. If you don't immediately recognize that as a made-up picture, then I would say you don't have a lot of experience. We are in the eye of the storm.

The US Government is currently preparing to make war on you.

What are you doing about it?

Wed, 11/27/2013 - 10:41 | Link to Comment Zarba
Zarba's picture

Because there are too many people involved to keep it a secret. Occam's Razor.

More importantly, those who made it through the recession with jobs intact are doing fairly well.  Their 401(k)'s have come back, and their houses are starting to go up again as well. 

However, those who lost jobs in the last few years are really struggling to get back in The Game.  Long term unemployment is very high in relation to unemployment in general, and those who have been jobless for a long time are finding it nearly impossible to get in the door. A lot of this is because companies can hire younger, cheaper workers rather than more expensive experienced ones. And the ranks of those who have entirely given up and quit the job market is higher than ever. That structural unemployment is what's holding the economy back, and it will take years to solve. If ever. Add in the insane amounts of new regs, and it is likely that these folks will never go back to work.

Lastly, we have the student loan bubble to deal with. Total student loan debt has gone over a trillion dollars, and much of that will never be repaid. I see folks every day with $80K, $100K, $125K+ in student loan debt working at menial jobs just to eat. They can never hope to repay their debt, and the servicing of that debt (if they can) will keep them out of the housing and new car markets for a long time, further depressing housing and manufacturing.

As R Lee Ermey said, "We are in a World of Shit"

Wed, 11/27/2013 - 19:56 | Link to Comment WhiteNight123129
WhiteNight123129's picture

Actually the propositions co-exist, the numbers are  fabricated, the market knows it but is willing to catch the latest buck thrown into the pit. Many market participant know the market is dead (EPUSTOT Index is the total electricity production on bloomberg, it is 1.5% lower per capita than in March 2009). The market of equities as a whole does not know it is dead like "the 6th sense", it will realize its own death and panic.

Tue, 11/26/2013 - 22:17 | Link to Comment ebworthen
ebworthen's picture

A company that buys back it's own stock is in trouble; one way or another.

Nobel prize in Economics?  Well, look at Obama taking the Nobel Peace Prize and there is your answer (Droner in Chief).

Gold is worth twice if not ten times more than it's current price; this is a battle of tangibles versus intangibles and tangibles always, ALWAYS win in the long run.

 

Tue, 11/26/2013 - 22:20 | Link to Comment Trampy
Trampy's picture

 

SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS

Well. Not one person has replied. I don't bite and always try to be a good person. And I love cats and I don't lie. Yes, it's very difficult living in this world surrounded by zombies. All of these here highly-educated, high-income males who live alone, and not one of them has answered my plea. Have all the decent people of the world been killed or made too scared to email a decent stranger who is clearly in need?

It's really not that difficult to extract my email from the PGP key posted here. And it's OK if you don't want to use PGP. And I really don't care what your handle here is, if any of the tech stuff too intimidating. Try wait, maybe it's ME who is intimidating because I show off my knowledge. But that's the whole Fight Club meme, and it's not me, or at least not always.

Let's try this again, please. And I'm gonna keep at it until I get at least one genuine response. I'm not just repeating the exact same post over and over again. It will keep changing and will be reposted until I get a civil answer. Mahalo!

Inmate of open-air prison run by lunatics and populated almost entirely by zombies is desperately seeking a pen-pal ... because Aldous Huxley gave someone to Winston Smith.

For mutual support in these trying times, am seeking fellow non-zombie intelligent, open-minded, and well-informed inmate for discussing topics of mutual interest, such as:

  1. Both actual and notional nuclear accidents, and nuclear technology of all sorts. Is nuclear safety always an oxymoron? I'd love to find a fellow atomic scientist here, as in Bull. Atom. Sci.;

  2. Same as it ever was. “Kill the man, kill the problem,” Joe Stalin. Change is a process, not an event. Chicken Little has always been wrong, so why not now?;

  3. Same as it ever was. Bankers v. The People is nothing new. In 1833 Andrew Jackson took on and succeeded in killing the Second Bank of the United States. In 1963 JFK took on the Fed and was killed. The bankers will do “whatever it takes” to keep it going as long as possible;

  4. Same as it ever was. Historical Revisionism of WW1 and WW2 as a battle of valiant truth-telling historians versus the plush OSS/CIA myth-telling “historians” as waged notably by the largely, and very sadly, forgotten Harry Elmer Barnes, 1889–1968. Many brave souls such as he have seen history through the lens of The Truth is First Casualty of War and lived to tell the tale, or at least published before their death. Big Mahalo to the CIA for renaming the quaint (and hifalutin) pre-JFK historical revisionism into the much more catchy (and contempo) conspiracy theory;

  5. Same as it ever was. John Kenneth Galbraith 1975 Money: Whence it Came, Where it Went about the Capitalist Crisis as predicted by Karl Marx. Four decades later and still going?;

  6. Same as it ever was. George Orwell's intended title for his most famous book was “1948,” its year of completion, nuff said. 1984, Alice in Wonderland, and The Wizard of Oz as works of history – and Newspeak, shunning, straw man, murder, etc., as (largely) effective social controls;

  7. zerohedge.com as an island of sanity, albeit very sadly wholly lacking in collegiality; and, most importantly,

  8. weaknesses in the open-air prison system which might allow its escape and/or subversion, because a mind is a terrible thing to waste.

SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS SOS

Tue, 11/26/2013 - 22:30 | Link to Comment ebworthen
ebworthen's picture

I replied before, willing to engage.

Publishers couldn't let Huxley title it 1948 - too close to the bone - had to push it off a few generations.

"Ground control to Major Tom" ...and... "Ashes to Ashes, Funk to Funky"...

Tue, 11/26/2013 - 23:38 | Link to Comment WmMcK
WmMcK's picture

Orwell/Huxley

Wed, 11/27/2013 - 01:26 | Link to Comment Seize Mars
Seize Mars's picture

Trampy

What the fuck are you talking about?

Tue, 11/26/2013 - 23:18 | Link to Comment adr
adr's picture

What I learned from 16 years in the business of actually selling real manufactured products to people is that everything associated with the stock market is absolute bullshit.

Most advertising isn't done to get people interested in a product, but to get investors interested in a stock. A 10% gain in a stock makes more money for executives than selling 1 million units of real product.

The real reason why people can't use data to analyze the stock market is that the stock market doesn't trade on any measure of the real economy. The stock market imploded in 2008, but for a lot of people who didn't rely on it for their lifestyle, they were fine. For a short time private business thrived. The best years for a lot of small companies I work with were 2008-2010. They were passed up once the stock market could return more wealth than real business thanks to Bernanke.

When fake business can't generate returns, you need to run a real business to make money. Is it really a coincedence that the greatest scams seem to occur during bull markets? 

Wed, 11/27/2013 - 01:14 | Link to Comment Clowns on Acid
Clowns on Acid's picture

Mr Colas never mentioned Fed printing like never before in the US history, in his article. Has he learned nothing from 22 years of bullshitting ?

So it is different this time.... for a while.

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