Wednesday, March 29, 2006

Investment Horizons

Much of my initial academic training was in marketing, rather than finance. Thus, I continue to be fascinated by the way in which people interpret the buying and selling of financial products, such as equities.

If you watch television coverage of a day's market activity, or read a summary in the Wall Street Journal, you will typically find the market personified. Phrases such as "it's not a stock market right now, it's a market of stocks" abound.

When I see or hear comments like that, it takes me back to my days stocking shelves and driving a delivery car for a high-end grocery store during high school. Pricing for items like food is usually very different than for stocks. Yet how many times do we hear market pundits infer meaning from the tape? Using just volumes and prices, motives are attributed to the many different investors who have traded that day.

Yet, buying investment products is certainly quite different than buying food in a grocery store. When someone buys a can of soup, you can bet they plan on eating it fairly soon. And we don't obsess over the "valuation" put on the can of soup, because the seller prices each can alike, usually irrespective of daily demand for soup.

When someone trades a stock, all we really know for sure is that, at that moment, that stock was the least profitable perceived place for the money represented by that stock's price. And we know that the price at which the stock traded is surely not the value of the stock to either party. It's below the value to the buyer, and above the value to the seller. These gaps would seem to be the most interesting information about the trade, but, of course, we are stuck with just the trade price and quantity. So those pieces of information are analyzed in lieu of the truly valuable information about the market activity.

Another aspect of such shallow and, almost certainly, incorrect analysis, which fascinates me is investment horizons. Taken together with over-analysis of the tape, I notice that immediate value judgements are imputed as a class to those who bought, or sold, some stock. Or perhaps even all sellers, or buyers, on a given day.

But what about those who own the stocks, and didn't trade that day? Or who simply needed to raise cash for other purposes? How are these motives divined?

Despite trading only a few times during the year, and typically out-performing the S&P500 by doing so, I still follow the markets daily. So, I am an investor, but the motives attributed to me, as such, are wrong for all but perhaps 2-4 days per year. In an investing sense, I do not "see" the other days. I follow them for informational purposes, in order to understand more about how my portfolios fare on a given day or week, but not in order to trade them because of such performance.

If this is true for me, how many other investors' behaviors, or lack thereof, are similarly mis-attributed?

I believe the truth is that the "stock market" is very much like a grocery store, in that it offers a concentrated location where many similar goods may be bought. However, I believe the stock market is always a "market of stocks." Individual issues are bought or sold for many different reasons, and not always just because of market-level dynamics. In fact, it is largely because such short-term forces affecting individual stocks are, behaviorally, so difficult to understand, that I hold portfolios for comparatively long time horizons. What may be a clear trend over some months can get hopelessly muddied in the daily volatility of stock prices.

Still, it can be amusing to watch people who are paid to deliver entertainment on a daily basis, reporting daily market activity as if each day's action had real direction or purpose, and the market is a deliberative person. Reminds me of that old adage about silk purses.....

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