Did Nothing Happen?
Another day where it seems on the cover that nothing happened; but underneath we had an afternoon “mini-rally,” gold and silver rose a bit, and also notably a few companies with good news blasted out of trading bases (Tractor Supply Co – TSCO being one).
What’s going on? Before I get to some hypotheses, let me just say that these calm days eventually lead to some kind of wild action up or down. So be ready. Back to my guesses for today’s action – we could hypothesize many things…
1. Maybe people are still expecting Europe to come out and tell everyone their gig is up so people sell in the morning, then when nothing happens people feel it’s ok to buy? or
2. Maybe people know the pros buy in the afternoon so traders wait til then to make a move
3. Maybe buyers are buying slowly into a rising market out of caution?
4. Something else?
In Defense of Traders
Or if you’re a trader, you don’t really care because prices are the best indicator to a trader. Traders by the way, get a bad rap from “investors.” Oftentimes, investors are the “smart” people who received their MBAs from Wharton or Harvard and do extensive research and find creative ways to choose investments. Traders are oftentimes Chicago-born local boys (or New York local boys – both often with Italian names, and some Polish names in Chicago:) who learn the craft from a mentor and start by trading commodity futures and either stick with that or end up trading currencies and index futures in addition to commodities.
The trader’s mantra is that price tells him everything he needs to know, and he feels that he could never out-analyze investment firms with numerous intelligent analysts doing on the ground research. So they prefer to “follow” the big investors, like fund managers and pension managers. An article I read a little earlier today makes this point exactly and actually gave me the idea to write this tidbit about traders.
From Steven D. Jones of Dow Jones Newswires (and no I don’t think the “D. Jones” in his name means Dow Jones:):
” In addition to the breadth of their picks, Buffalo fund managers said they rely on a three-stage process to select stocks. They identify growth trends to pick sectors to invest in, followed by fundamental analysis to identify leading companies in each sector. Finally, the team buys and sells in a deliberate manner that is anchored to price forecasts based on its research.
A year ago, for example, fund managers built a stake in communications equipment makerAdtran Inc. (ADTN), sold that stake last spring when the stock reached their$40price target and then began rebuilding the position in September when Adtran dipped below$30. ”
Let me give you a second to see if you can understand my point… Ok time’s up. Let me ask you something – do you think you can out-analyze these guys? You sitting at home by yourself – are you going to do better research than them? By the time you find an investment it’s probably well on its way to being overvalued. And if you do find a stock early, maybe the price doesn’t move for years – and yes you can wait but you’re not getting any younger. Bottom line – professional full time investment firms like the Buffalo Fund family managers have a BIG advantage over you with fundamentals. Especially in a market right now when good news pushes a $1B company stock up 10% in one day (TSCO) and bad news blasts stocks down.
Don’t Try to Outsmart, Just Follow
Instead of trying to be smarter than fund managers, you can simply wait for stocks such as the one mentioned, Adtran, to start moving up. Why is it moving up? Because someone is buying it. The stock priced moved from the mid 20s to over $47/share from 2010 to 2011 mainly because these guys were buying it. Then they sold it over $40 as the article says and that helped cause the price to drop. Now, you can try to copy their analysis or you can do as traders do, and just buy as it moves up and sell when it moves down. Or you can try to pick bottoms and tops (who really can do that? You only hear about people who pulled it off after the fact – those are the guys on TV interviewed for their “genius”).
Of course traders have specific signals for buying and selling and they follow their rules strictly but they don’t try to buy at the bottom and pick tops, so trading isn’t easy either but it’s just a different discipline. They know that a stock moves up not because the fundamentals are good, but because money managers with lots of money to invest, push prices of stock up when they buy, and push prices down when they sell.
What am I trying to say? That traders should get much more credit for their craft. In an era when someone would call you a fool for trusting financial statements implicitly, it’s odd that that same person would mock someone who trades on price not on financials. I admire value investors too and growth investors. These are different disciplines and people can be profitable using all kinds of strategies. I hope that’s clear to all (even to traders who mock deep value managers!)
At the time of this writing, I or my clients own the following investments mentioned in this column: Gold, silver
Note: this article is meant to be some helpful thoughts to share and not investment advice specific to you. Please consult your own advisor regarding investment and financial decisions. See our disclosures page