I’ve updated Current Market Tactics, based on recent price action of the S&P 500. If you’re on the blog, you can click the tab at the top of the page.
Category Archives: Trading
trading between now and yearend
Practically speaking, 2012 is already in the books for investment professionals around the world. Many are already on vacation. Many global stock markets will be closed for most of the handful of business days between now and December 31st–Wall Street being a notable exception. On days that markets will be open, trading volume will doubtless be very light.
Is there anything useful we can do as individual investors during this deadest of all trading weeks? …other than celebrating the holidays and resting up for the challenges of 2013, that is.
Yes, there is.
1. If you haven’t done so already, check the year-to-date tax position in your brokerage account. You may want to consider either selling losers to minimize taxable gains or winners to lessen realized losses.
I believe very strongly that transactions driven solely by taxes are invariably a bad thing. But I also think that tax considerations can be a useful way of overcoming one’s psychological aversion to admitting a mistake (every rookie professional’s biggest stumbling block) and thereby be an excuse for exiting a bad investment. Yes, it would be better to man up and just sell the loser, without rationalization. But the most important thing is getting the weak stock gone.
2. the “window dressing” phenomenon. I guess there really are professional portfolio managers–most of them soon to hit the unemployment line–who buy trendy stocks to “dress up” their portfolios so they’ll be cosmetically more attractive right before meeting with their customers. And there may be financially illiterate customers who are fooled by this. But that’s not really what I’m talking about.
There’s also a type of illegal stock manipulation of small-cap stocks on the next-to-last or last trading day of the year that is euphemistically called window dressing. The stock “magically” rises (or falls, if a short-seller is at work) ten or fifteen percent, often in the last half hour of trading–in a way that helps a manager, or group of managers, achieve a higher performance-based bonus. Nowadays, this most often happens in smaller markets in the EU or in the Pacific. But it also happens in the US on occasion.
In my experience, this is always a good chance to sell. The stock in question invariably crashes back to earth the first day of the new year.
3. the fiscal cliff. As I’m writing this, the S&P 500 futures are down about 1.5% on worries that Washington won’t reach an agreement to soften the economic damage from already legislated tax increases and government spending cuts slated to go into effect on January 1st.
It’s possible that politicians are even hoping for a 5%-10% stock market decline to give them the political “cover” they feel they need in order to justify compromise to the ir constituents.
In my view, 1.5% isn’t enough to act on, but a larger decline would doubtless an excellent opportunity to buy a stock you want to own, but think is too expensive–or to add to a position you have strong conviction in but think is too small.
confirmation bias
what it is
Confirmation bias is the idea that you analyze something, form an opinion—and then spend the rest of your time searching for data that support your initial conclusion. Anything that doesn’t confirm your opinion, you simply ignore or attribute little significance to.
To some extent, everyone does this. And in many situations in life, you can argue that everyone should. What if Michael Jordan had accepted the fact he wasn’t good enough to play high school basketball?
But it’s one of the worst faults an equity investor can have.
I can see three reasons it’s so bad:
–it takes a long time to become thoroughly acquainted with a company you invest in. My experience is that it takes at least a year of watching management at work—and maybe a lot longer–to figure out whether they’re any good at running a company and whether their strategy makes any sense.
In practical terms, almost no one is going to wait twelve months after getting an idea before taking a position. This is especially true if the stock price is already starting to move up as more people discover the company’s possible profit potential. So professionals always make provisional “buy” decisions.
For a considerable portion of a stock’s life in a professional’s portfolio, then, it’s more or less on probation, subject to being kicked to the curb if a deeper inspection of the company proves the initial impression to be wrong.
That never happens if the investor spends no time looking for leaks in the boat, or refuses to acknowledge they’re there as the vessel beings to list.
–the world changes. Markets become saturated. New competitors emerge. Old competitors improve their game. The business cycle advances from recession to recovery to expansion—and then back to recession.
In addition, stock prices change, both in absolute terms and for one industry group vs. another. …one stock vs. another within the same industry, too.
–companies change. Managements become more—or less—responsive to alterations in the competitive environment. Great companies reinvent themselves as the environment changes; merely good ones often don’t.
APPL, for example, was a failing personal computer hardware company. Then it became the iPod company. Then it became the iPhone company…
NOK was once an obscure, failing Finnish conglomerate. Then it was the world’s leading cellphone firm. Now it’s a mess…
where the problem arises
It’s unusual to see a working professional suffering from terminal confirmation bias. Normally, anyone infected is quickly fired. In places where office politics counts for a lot they may be kicked upstairs—not a great move for the organization’s long-term health. But it solves the short-term problem.
For private individuals, I think this phenomenon surfaces mostly as lack of awareness of how smart the market is—a naïve belief that after a brief perusal they understand more about a company than the people they’re trading with.
Professionals face a different issue. Your analysis says the stock should be going up. It’s going down instead. When do you concede that the market knows more than you—either about the company, the environment or the stock valuation? No one wants to be scared out of a stock by adverse price action. On the other hand, no one wants to be caught looking only for information that supports his position, either.
what to do?
Many professionals use mechanical rules. For example, if a stock underperforms the index by, say, 15% (or some other fixed number), at least part of the position is sold–maybe the whole thing.
Others. like me, don’t like fixed rules and depend on aggressively seeking out negative information about the positions they own, instead.
In well-run organizations, the Chief Investment Officer plays a role here, creating an atmosphere where portfolio managers feel able to sell losers, as well as limiting the size of iffy holdings where he/she sees the question of what to do with an underperformer is likely to arise.
individuals in this situation?
Thinking about a 15% rule before buying anything would be my advice.
better days ahead for Facebook(FB)?
yes
I think so. Insiders appear to be unwilling to sell at the current market price and Wall Street seems to have forgiven FB for what I regard as the less than ethical behavior of the company’s main underwriter during the IPO.
recent trading
Yesterday marked the end of the third–and final–period over which FB employees and early investors had agreed not to sell shares. Just north or three-quarters of a billion shares were thereby released from lockup. Wall Street was bracing for the worst.
But only about 50 million shares appeared for sale at 9:30. Total volume for the full day yesterday was just under 230 million shares, or about 5x normal. More important, the stock went up 12.6% in a flat market.
As I’m writing this just after midday Friday, FB is up about 6% while the S&P 500 is flattish. Volume is high again, but I read this as professional investors reacting positively to the small percentage of insider shares that were put out for sale and to the strong price action that soon developed.
the IPO, in hindsight
Not Morgan Stanley’s finest hour.
The main underwriter threw gasoline on speculative flames instead of tamping them down. And NASDAQ’s computers broke down just as it was dawning on individuals dreaming of instant riches that they’d been had.
That was bad enough. But the really damaging part of the IPO, to my mind, was the way I think the underwriters “spun” the mandated company disclosure in a way that made FB look better than it is.
Any professional investor would take it for granted that Morgan Stanley knew exactly what it was doing. The real question is whether company management was complicit in this shady process–in which case they couldn’t be trusted and buying the stock could be hazardous to your career. On the other hand, maybe FB executives were just too inexperienced or naive to understand what was going on.
The price action of the past two days seems to me to be saying portfolio managers and buy-side analysts have decided the latter is the case.
So, two plusses for FB.
I’ve just updated Current Market Tactics, 11/15/12
I’ve just updated Current Market Tactics. If you’re on the blog, you can click on the tab at the top of the page.