Don’t waste your time in the stock market.
It’s Mr Bernanke, the big boys with their Bloomberg screens in the football-pitch-sized trading floors and the behemoth quant funds that make all the difference. These folks account for over 90% of the daily volume in major exchanges. Further consolidating this picture, the increasing presence of High Frequency Trading funds have pushed the puny individual value investors’ clout further out from the circle of influence.
As we are often reminded, large sophisticated insiders and professionals "move" markets and the rest of us “mere mortals” are left to pick up the metaphorical scraps left on the table. Is there in fact any hope for the individual investor or even the small value-based fund to challenge the battery of all-powerful traders, speculators with deep pockets and lightning-fast trading platforms?.
Maybe, most probably, not in the short run.
Applying a longer term horizon to our investments, however changes the tables rather significantly.
Although the volume data is incontestable, the actual performance in terms of returns on investment tells a very different story. Recent data published by Janet Lowe in her excellent book “The Triumph of Value Investing” points to the liquidity-providing function of high-speed trading funds rather than their market direction-setting impact.
Further analysis of stock market indexes performances since the 1960s confirms that high volumes of trading action in a single identifiable (bear of bull) direction are by nature both self-fulfilling and doomed to reverse violently. The tech-driven boom of the late ‘90s was immediately followed by the brutal ’00- ’02 correction and more recently the credit-fuelled speculation that raised all asset classes up until late ’07 was too replaced with a horrifying drop in securities prices for the subsequent 18months.
Despite having access to the “best” minds in the business, and armed with the most powerful computers and most comprehensive information networks, the afore-mentioned “big boys” failed themselves and their clients miserably twice in a decade.
And what about individuals and small value-based funds?. Information on the former group is by definition hard to come by (though not impossible, see “The Warren Buffetts Next Door: The World's Greatest Investors You've Never Heard Of and What You Can Learn From Them” by Matthew Schifrin for some enlightening showcases).
On the fund front, the performance of prominent value investors such as Daniel Loeb of Third Point Capital, Francisco Garcia Paramés’ Bestinver Asset Management, Mason Hawkins’ Longleaf funds or David Einhorn of Greenlight Capital show the benefits that accrue to contrarian investing. Each of these true investors, in direct opposition to the speculative nature that constitutes the bulk of today’s market action, has delivered bumpy but overall great annualized net returns, topping 10% at a time when indexes were barely in positive territory and large funds actually lost money (nominal and inflation-adjusted).
Just as interestingly, mimicking the actions of these value-investing giants requires none of the tools leveraged by the average large institutional players. In fact, being an individual investor, free from arbitrary investment mandates, conventional limitations or index-hugging temptations will result in a clear advantage from the start.
In the mind of the independent investor shall resonate the following phrase (To borrow from the current incumbent at the White House), yes we can!
When all is said and done, when the dust has settled after the latest CNBC-cheered uptick, prices invariably gravitate towards their true value.
I insist; no matter what happens in the meantime as the ticker tape on the bottom of your screen fluctuates randomly, prices must and will reflect underlying asset worth and earnings power. This is a fact and there is scant indication of it changing anytime soon.
As the French say, Plus ça change ...
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