Thursday, August 02, 2007

CNBC's Erroneous Focus on "The Trade"

As the equity index volatility of the past few weeks continues, it makes the prospect of buying or selling equities fraught with concern that the market price is not truly reflective of long term factors.

Rather, the price at which one might sell an equity could be heavily influenced by temporary forces or misconceptions.

As such, it's caused me to reflect on something I see quite a bit these days on the cable business news network, CNBC. It seems that every day, some of the anchors and/or on-air staff will bark at a guest,

'so, if that's true, what's the trade?'

Or a correspondent will breathlessly describe some equity's price movement in terms of 'the trade' between it and something else.

This is a mistake. It's not about the trade. Here's why.

Unless you know what someone already holds in their portfolio, describing 'the trade' is a meaningless term. It is a mistaken focus on 'the trade,' rather than relative buying or selling opportunities.
For example, suppose you and I each hold a single equity. I hold a technology-oriented company's stock, while you hold the stock of a durable good manufacturer.
We are sitting together, watching CNBC, when a reporter announces a significant rise in the price of oil. The on-air anchor then turns to a guest and excitedly asks,
"so, what's the trade here, Ron?"
Well, Ron can't know what's in either of our portfolios. So Ron can only say, univocally for all viewers, something like,
"I can't say what 'trade' to make, Dylan, because I don't know each viewer's portfolio composition. However, given the reporter's news, I would say that this makes energy stocks more attractive, relative to other things consumers might buy. So several sectors may now be less attractive, such as consumer discretionary items, luxuries, durables, etc. However, I don't think it will affect business technology spending."
But "Ron" never actually says something like that. Instead, there will be some platitude about selling this and buying that.
It's just typical business cable "news" network entertainment nonsense.
Last week, I believe, I saw a really excellent few seconds of commentary from CNBC's morning guest host, Liz Ann Sonders, Chief Investment Strategist for Charles Schwab & Co. She basically made light of the current equities volatility, and called attention to the real investment needs and objectives of Schwab's retail base of customers. Sonders noted that, for the average retail investor, or any investor with a long time horizon, this recent spate of market turbulence and volatility are no basis to "trade" anything.
Rather, she argued for simply continuing with existing investment strategies, and ignoring temporary, emotionally-based pricing dislocations and hysteria-based volatility.
I think this is very wise. Volatility is no reason for trading, per se, for most investors. Perhaps for those investment bank and hedge fund trading desks for whom this is their business. But not longer-term investors.
Temporary valuations driven by fears involving sub-prime mortgages, counterparty risks in credit derivatives, and overall debt liquidity, are hardly the stuff on which to base long term investment approaches. These influences on equity prices will be volatile and uncertain during their duration.
Certainly, these factors cannot be the basis for someone in the business media to solemnly announce 'the trade' which is now compelling. At best, their exhortations are simply silly. At worst, they can cause real damage for the unwise, who are not well-advised or knowledgeable as to what, if anything, they should remove from their portfolio, in order to buy the hyped equity.
For investors, trading is simply the means by which our strategies are implemented. We trade when our investment processes indicate to own less of some equities, and more of others. We don't trade simply for the sake of trading.
We invest.

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