Wednesday, May 20, 2009

“I’m A Buyer”. . . Always.

If any of you have ever watched CNBC, you will have noticed an interesting phenomenon. No matter what is going on in the market, the economy or even the world, their fund manager guests always tell you that it’s a good time to buy stocks.

If the market is down, they tell you that stocks have never been cheaper and you don’t want to miss the coming rally. After all, "all the bad news is already priced into the stocks." If the market is up, they tell you to act fast or you’ll miss this incredible rally. When the market becomes obviously, ridiculously over-priced, they tell you that we’ve entered a new kind of market, where old-style valuation methods simply no longer matter.

So when do you sell stocks? You don’t. There’s even a theory for that: buy and hold. If you hold stocks long enough, you’re guaranteed to make money. Forget the fact that anyone who bought stocks in the last ten years lost significant amounts of money. . . that’s “just a matter of time frames.” Indeed, if you bought at the lowest point fifteen years ago and you sold right at the high point last year, you made a killing! So don't worry about that little ten year issue, just keep buying.

Why is this? As they say on CNBC, let’s begin with a few “disclosures.” Most of the fund managers who come onto CNBC are what is called “long-only fund managers.” This means they are forbidden by regulation or their investment charter to hold short positions. Thus, the only way they can make money for their funds is if stocks rise. But how does deluding themselves make the values of their portfolios go up?

It doesn’t. But here’s the dirty little secret, they aren’t paid for performance. They are paid a fee based on a percentage of the assets they manage. In other words, the more money you put into the fund, the more they make, whether they make you any money or not. Thus, they are not deluding themselves, they are baiting you.

But long only managers are not alone in this game. Wall Street is crawling with traders, people who move assets in and out of stocks (e.g. hedge funds). If one of these traders buys a stock, they want it to go up as quickly as possible so that they can get right back out. But if all of these trades have the same knowledge and training, and thus reach similar conclusions about the value of the stock, who will buy the stock from them? Wouldn’t the other traders’ analysis also say it’s time to sell? The answer is simple. They want you to buy it.

Indeed, during the last run up, the professional traders started buying in March, near the bottom. As the rally continued, they put more and more money into the market. They also started appearing on television to tell you that you better start buying stocks or you were going to miss the greatest bull market of all time. As we approached 900 on the S&P, the pros started bailing out. But as they were selling, they went on tv to encourage the “retailers” (you and I) to keep buying. Why? So that they would have someone to sell their shares to without the price collapsing before they could get out. Indeed, several cynically noted that “once the retail investors start buying, it’s time to get out and wait for the crash.” These same cynics, by the way, also shared a few stock names (that they coincidentally happened to own) that they felt would continue to rise even through the coming crash. So you can feel safe about buying those no matter what happens.

Nice huh? Well, gotta go, need to buy some stocks. . . they're up thirty percent in the last month, but I'm told they still have room to run!


SQT said...

My husband works for Merrill Lynch and he hates a lot of the so-called "professional" analysts. It makes his job so much harder when people stay glued to the business networks all day, listen to the "expert" opinions and think they know what to do better than my husband. Then what happens is that when my husband tries to get someone to sell something when it's in their best interests, usually when the market is at an unusual high (like 14,000) no one will sell. They're convinced by people who write books titled "DOW 36,000!" that they're just getting into a huge bull market. Then when the market drops to 6500 they panic and sell off. Getting people to take the long view and hold long-term is an on-going battle for him. One I hear about often.

AndrewPrice said...

I manage my own money (what little there is of it) so I watch a lot of CNBC and I honestly find it stunning what a lot of these people will say.

In addition to what I put into the article, I began to realize awhile back that many of these people are intentionally trying to say outrageous things to attract business. When oil hit $144 a barrel, people were trying to leap frog each other with estimates. It got as high as $250 by the end of the year (three months).

I thought, that was crazy. But then it suddenly made sense when I realized that they had nothing to lose but everything to gain by making outlandish guesses.

If they guess right, it can make their careers -- like Merrideth Whitney, who guessed the bank collapse was coming and has now parlayed that into her own firm (she left Oppenheimer). And if you guess wrong? No big deal, you just tell your clients that "market conditions have changed." They won't know the difference.

It's a racket.

Patti said...

i have linked you. consider yourselves badasses now.

and my money? it's tied up in candy cigarettes and martini mixin's. a gal's gotta have something to fall back on.

SQT said...


Oh you know the vice industry does well in a recession. You've got it pegged. ;)

AndrewPrice said...

We are now badasses! Thanks Patti!

Nice investment strategy. In the long run, you will be richer than all of the rest of us combined! Wish I'd thought of that!

Captain Soapbox said...

That is a good strategy Patti!

But personally I'm investing in firearms/ammunition manufacturing companies like Winchester and the like. If any of you tried to buy any ammunition lately, it'd be apparent why.

LawHawkSF said...

I worked for a short while for an investment banking firm. I was amazed to find how many "stockbrokers" had no idea what they were talking about when discussing the price/earnings ratio with a potential investor. That is basic building-block stuff in the investment business. Most of these wizards are really just lizards.

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