Economists who adhere to rational-expectations models of the world will never admit it, but a lot of what happens in markets is driven by pure stupidity – or, rather, inattention, misinformation about fundamentals, and an exaggerated focus on currently circulating stories.
I think the entire quote is nearly flawless, but the part I’ve highlighted, primarily the latter two issues, strikes me as effectively epitomizing the behavior I see day in and day out, whether in the financial media, my twitter/stocktwits stream, or in closer knit financial/economic circles.* In a world of momentum and technical trading, these missteps are so widely prevalent and painfully apparent I often find myself close to banging my head on my desk. I regularly see stocks return 5% or even 10% DAILY, on no real material news, let alone news that suggests a firm is instantaneously worth 10% more.
Efficient markets my ass.
When you treat stock prices as if they’re some ephemeral, transitory dot on a chart that moves based of supply and demand & trade accordingly, you ignore a great deal of information and, while you may make money in the short term (and good for you if you do), you’re taking on an enormous amount of unaccounted for risk in so doing. Look at a firm I’ve briefly discussed here, ZAGG. It’s up ~80% in the past 2 months, and up over 100% year to date, showing no signs of going down anytime soon. Has business improved so much, in less than a quarter, to rationalize such a run in the stock and current valuation? I’d like to remind you of a quote from casino magnate Steve Wynn I’ve used here at least a handful of times before, via Long or Short Capital:
[Responding to a question as to why Wynn issued equity at $154 at the end of September and then paid a dividend of $6/share on December 10th. Note that Wynn shares had traded in the $80s in June of last year and at $120 yesterday.]
It is the job, and you can take this as a final statement on the subject going forward. It is the job of board of directors and especially of the CEO to take advantage of the market when that market movement is extreme. When a company increases its value by 100% in 60 days, that’s an unnatural movement of value and the market also goes the other way sometimes. These unnatural movements in value, no company gets to be worth twice as much in 60 days as it was before to any intelligent person, so when that happens, we take advantage of it.
New distribution deals are great, as are new product launches, but more often than not when you read beyond the headline, they’re little if anything to write home about, let alone send the stock price soaring. In this case, the great new distribution deal is only for one freaking product for one phone on one cell network that combined will likely add maybe a few hundred thousand dollars in sales to a firm doing over a hundred million annually. New products are great, but there’s probably not nearly as many people lining up to buy $100 iPad case/keyboards as there are iPads. Not that ZAGG needs to sell the keyboard/case to everyone who buys an iPad, hell I’m sure they’d be ecstatic to sell to 1 out of every 100 of the 9.25 million iPad buyers last quarter. Unfortunately, 1. they aren’t that popular (and likely won’t ever be) and 2. these announcements and the stock price moves they seem to instigate seem to be completely disconnected from the extremely long list of orange and red flags in the firm’s SEC filings.
I do not have, nor have I ever had a position in ZAGG. Would I have liked to make money as the stock marched upwards? You bet your ass! Did I see it coming, even with strong momentum? Nope. Do I think it’s topped out? Probably not, especially with the large short interest, although I’m not going to lie, if I can get my hands on some Aug or Sept $16 puts for under $2, I very well may pull the trigger.
Just to be clear, I don’t mean to attack momentum/technical/swing traders, not even by accident, as I have learned alot from them and I count many among my friends. However I am absolutely attacking blind adherence to the strategy (or any strategy!) without paying attention to other factors.
As a fundamental guy, I’ve learned that I have to check out the technicals on a stock before I get in/out of a trade and set stops, lest I decide to say, bet against the market and get steamrolled ala Whitney Tilson and Netflix. Similarly, technical traders would be well served, at the very least from a risk management perspective, to learn a little more about the fundamentals of firms they trade and monitor their own confirmation bias, especially when a lot of the time, all it takes is look at Stocktwits and a few financial sites! I think just as fundamental investors can utilize technical/momentum information, tech/momo traders can use fundamental information to help them. As lame as it sounds, I think we can all help each other, so long as we’re open minded to other perspectives.
Short term profits are absolutely awesome, until they suddenly go *poof* when the market capitulates or changes its mind. Better to use all available information to see it coming and get out before hand (or avoid putting capital at risk in the first place).
*No doubt I, myself, am sometimes guilty of these very things, but I try quite hard to be acutely self-aware, however good I am at it is another conversation for another time.