Wednesday, March 29, 2006

Investment Horizons Part 2: "There Will Be Headlines....."

This morning, on CNBC, an energy market guru was being interviewed to explain and predict oil and refined products prices, and the related prices of the companies that produce them.

During the conversation, the guy referred to the seemingly-unjustified rise in oil futures prices, given various inventories, drawdowns, seasonality of usage, etc. Then he said something pithy that made it all come together for me.

He said, "....well, this is largely a headline-driven market," after which he went on to explain that the various unexpected news regarding things like the Hess refinery being offline a week longer than expected was moving prices.

This elegantly and consisely states what I was grappling with in my earlier post on this topic....."There will be headlines."

Many investors, traders really, attempt to anticipate, and then trade on, actual headlines. And because those headlines are "news," they do move markets. But which headlines will occur on which days is, of course, impossible to predict consistently.

Thus, my strategy's style is to assume that "there will be headlines" over the long term, say, six months. I don't know which ones on which days, but it's a good bet that they will occur. Currently, my selection process has remained significantly invested in energy equities. It appears that, the incredible volatility of January and February notwithstanding, the headlines are even now pushing energy prices back up.

You would think that, from a distance, it would be clear that the global energy picture has not changed since Katrina in a way that will deliver substantially more supply to a growing global economic system. So my strategy's selections continue to include energy equities.

But, "there will be headlines." During the months I am holding energy stocks, other "investors" will be playing those daily headlines, like so many surfers trying to ride every big waved into the beach standing up. Rather than spending time and money trying to capture every headline's effect on the market, my research has convinced me that it's just as lucrative, but less risky, to get the longer-term trends right, and let the headline-chasers roil the daily markets without me.

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.....

Tuesday, March 28, 2006

CNBC's New Contest

The staff of CNBC's Squawkbox has been flogging the show's new contest this week. It consists of selecting a "portfolio" of equities for an eight-week duration. The entrant with the best return over the contest's duration wins a very expensive Masserati.

What struck me about this event is the duration. Eight weeks?

When I think of "portfolio," I think of a selection of financial instruments whose objective is to provide long-term return for appropriate risk levels.

Instead, this eight-week financial sprint being offered by CNBC makes a mockery of the concept. While it's not my style at all, I would guess the winner will be found to have simply chosen the hottest momentum stocks du jour. Or be extremely lucky with one pick. Then again, the promos for the contest did not rule out using "inside" information, and it is not, technically, "real" investing which would make using such information illegal.

I guess what the contest makes very clear, though, is CNBC's commitment to entertainment over value-added. It's easy to imagine the network brass and the show's producers arguing over how long to let the contest run. The network probably wanted a few months of heightened attention, to justify the expense of the prize. I would guess the producers felt anything longer than one or two weeks would exceed the attention span of their audience.

If this is the paragon of responsible television financial news, we are badly served. I can't recall the CNBC slogan just now- I think it is something like "America's financial news source." What a pity. When we need investors to realize that longer investment horizons make for healthier portfolios, not to mention avoiding individual stocks in favor or paid, professional money managers, we have this nonsense pushing people in the other directions.