today’s discounting mechanism


Discounting is Wall Street jargon for new information being factored into stock prices.

Discounting isn’t a single thing.  In the 1920s, for instance, company managements issued unreliable financial statements while happily passing along inside information to their bankers.  Ordinary investors fended for themselves with the only tool they had back then–watching prices and stock charts.

When I entered the stock market in late 1978 there were already laws requiring publicly traded companies to file detailed financial statements with the SEC.  From the early 1970s cadres of well-paid analysts poring over them and creating the microeconomics of firm and industry behavior.  Yes, there were still throwbacks who expected analysts to be part of their public relations efforts…and there was pressure on analysts who worked for brokerage houses to make their ideas known to the proprietary trading  desk before anyone else.  Still, the playing field was a lot more level.  There were significant rewards for original research conclusions, particularly with traditional growth companies, where the game was, and still is, finding situation where the consensus was too pessimistic about the rate of profit growth and/or the length of time unusually high earnings gains could be sustained.  Typically, stocks would start to rise a year or more in advance of confirming earnings.  In over-bullish markets investors might discount as much a three years into the future; in the depths of bear markets investors would stick to actual earnings and not discount the future at all.

In the 1990s this dynamic began to change, as investment managers began to lay off their in-house analysts on the idea that relying on brokerage research was a lot cheaper and a lot less effort.  In 2000, the SEC passed Regulation FD, which required publicly-traded companies not to make selective disclosure of corporate information (the presumed recipients were investment bankers and institutional shareholders).  Replying to an analyst’s novel question or inadvertently revealing information through body language became worrisome enough that companies either stopped having meetings or developed canned presentations and pretended they were news.  In the wake of the financial crisis, brokers laid off virtually all their experienced analysts.  Since academics are totally clueless about finance, this left no place for newcomers to learn how to do traditional analysis.

Enter AI–whose specialty is reacting to newly released information with lightning speed rather than anticipation of yet-to-be-announced developments.

What is a fundamental analyst to do?

Strategically, fundamentals-based investing remains the same, I think–figuring out potentially market-moving information before the average market participant does.  Today’s tactics are different, though.  Fifteen years ago, the best strategy would have been to amass a large position in a given stock and wait for the market to work out what you already knew.  Price action would tell you when/if that was happening.  There would likely be bumps in the road, but these would offer opportunities to add.

I think the better course of action now is to start with a smaller position and use AI-induced volatility to add and subtract.






3 responses

  1. Thank you for intelligent insight and commentary. Refreshing compared to what’s out there in mainstream press.

  2. Pingback: What stocks to invest in = today’s discounting mechanism « PRACTICAL STOCK INVESTING | Stock Investing

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