Everybody Does It

"The main purpose of the stock market is to make fools of as many men as possible." -- Bernard Baruch

Years ago, the head of trading at one of my old firms once stopped me before the opening bell and asked what I thought of a particular company. Being happy to be asked, I started headlong into just about everything I knew about the company. After about ten seconds, with his eyes never leaving his trading screen, he interrupted, "ya, ya, ya...is all that good or bad for the stock?" I answered by picking up where I left off, intending to help him better understand what I was saying. He finally looked up at me and said, "you don't get it - which way is the stock going to move, today?" To this I deadpanned that it will probably trade lower. I got a "thanks," and I walked away.

The fact that I still remember this brief exchange, is mostly a testament to just how disappointed I was with it. I wanted him to "understand," and only later did I come to realize why this wasn't going to happen -- it wasn't his job -- all he needed to do is follow a simple rule of traders, "if it moves, trade it!"

"...we don't trade companies, we trade stocks..." -- Jim Cramer, Mad Money

Today, it’s more difficult than ever to determine why someone is "investing." While you may own an investment for the long-term, others care no more about your investment beyond the next trading opportunity. Just among the trading set, there are momentum, technical and swing traders, as well as high-frequency trading done purely by computers. This group of market participants tends to believe that all available information is already "in the market;" relying solely on internal market data -- prior prices, trading volume and charts -- that indicate the short-term supply and demand for a security. It's the nature of this group to appear bullish one day and bearish the next, often with little rhyme or reason for their change in sentiment.

There are also those that invest in stocks that "act well," or have “a great story.” This might be the most deceptive group of them all. This type of "investor" appears to be talking about the company and its business, but in reality they're still just trading a stock's story. Who knows, perhaps it's because our parents read us bedtime stories, or because media outlets work 24/7 to get our attention, but we seem to have a tendency to want to hear and tell stories, even when it comes to investing. Unfortunately, the draw to storytelling plays a bittersweet role in financial markets.

If we knew which type of market participant a storyteller was, we might be able to distinguish between insight and bias, but unfortunately participants don't wear name tags identifying which they are, and any security can be owned by investors, speculators, or both. Even well-respected "investment professionals" are closet speculators much of the time because of their objectives -- seeking short-term trading profits from market predictions rather than the long-term business fundamentals. What this ultimately suggests is that the means of investing are commingled, even though the "ends" of market participants are often wildly at odds with one another.

The key to making sense of all of the above, is to recognize that the business of investing has very little to do with investing. Thanks to many exchanges similar to the one at the outset of this commentary, I learned this lesson long ago.

The reality is, the business of investing is largely about effecting transactions. It's a big business, with literally billions of shares trading every day and millions in trading commissions at stake. Meanwhile, the businesses underlying securities are in the business of doing business -- Coca Cola, for example, simply tries to sell more drinks on Tuesday than on Monday, every week of every year, irrespective of whether their shares are higher or lower today.

Interestingly enough, despite billions upon billions of shares trading each day, it's a pretty small amount of the total shares that actually trade. Consider the largest publicly traded company in the U.S. -- Apple. On an average trading day, roughly 70 million shares of Apple are traded. This amounts to roughly $6.5 billion of transaction value, though represents just 1.2% of their more than six billion shares outstanding. So whether Apple shares are up or down, a little or a lot, each day this relatively small number of trades determines that Apple is a $600 billion company.

Simply because sentiment becomes skewed, giving rise to either more sellers or buyers, shares can experience a sharp gain or decline irrespective of the fact that only a fraction of the total shares changed hands. This isn't typically how it appears, since the financial and media industries have built sizeable businesses around shares "moving," sensationalizing news, large and small, and giving the impression that everybody is trading and so should you. This serves their respective businesses well, even if it doesn't necessarily benefit traded companies, investors, or investor objectives. The point being, just because it seems that "everybody does it," doesn't mean that you should too.

From an investment point of view, day-to-day pricing is largely irrelevant, and as fundamental-minded investors, we largely ignore it. We do so because we're respectful of the fact that there is no possible way to try and predict the rationale of investors ahead of any given trading day, and because we also know that sentiment alone can't create a $600 billion company.

As investors on behalf of our clients, we focus on the real factors that determine the value of client holdings, making changes where merit exists so as to be aligned with high quality, consistent and predictable businesses; maintaining a sharp focus on certainty of outlook from a fundamental perspective. Quality and consistency of expected return is what drives the value of all investments over the long-term, and what share prices ultimately come to reflect and reward.