Everyone likes to be right and the easiest way to be right is to surround oneself with people and opinions that are predisposed to be similar to ours. When investing, it pays to be contrary. That sets you up to be wrong some of the time. The thing is, if you are right 60% of the time, and manage risk properly, there is a good chance you’ll make money. The most basic principle of investing is buy low and sell high. When doing this you’ll seldom hit the actual bottoms or tops; you are buying when the market is going down and selling when it is going up. That in itself is contrary to most retail investors’ practice of buying high and selling low.
Mutual Fund Flows and Sentiment as Contrarian Indicators
The majority of retail (casual) investors use mutual funds and ETFs (Exchange Traded Funds) to invest in the markets. Fund flows (deposits vs. withdrawals) are generally regarded as contrary indicators. This is a component of a broader series of indicators classified as investor sentiment that provide some insight into future directions of the market. The basic principle is: when many investors are bullish the market is more likely to go down and conversely a higher level of bearishness or negative sentiment indicates the market is likely to make a move higher. TrimTabs Investment Research reports on these fund flows and in a recent report stated:
We observed that equity prices tend to fall after equity exchange-traded funds (ETFs) rake in large sums of money. Conversely, the market tends to rise after equity ETFs post heavy outflows.
The report then issues this conclusion:
We have two explanations for the strongly negative correlation between equity ETF flows and future market returns. First, ETFs are traded mostly by retail investors and day traders. These are the least informed and most emotional market participants—the ones most likely to lose money over time. Second, we suspect hedge funds use ETFs when liquidity dries up. Hedge funds were forced to close individual stock positions during the credit crisis, so they bought equity ETFs instead. Equity ETFs posted large outflows in 2009, when liquidity improved.
These concepts are not really as complicated as they seem to be. It’s Economics 101. When demand outstrips supply, prices go up and when supply is larger than demand, prices go down. When funds are flowing into stocks, markets rise but at some point most people are invested and there isn’t enough uninvested capital left to drive prices higher.
Whatever the internal dynamics, the retail investors are generally the last to join in a rally and their main vehicle of investment are mutual funds and ETFs so large inflows into those instruments suggests that the market is near the top. That’s why many retail investors get the timing wrong and end up losing money. Nobody likes being wrong or losing money, it makes us feel pretty lousy about ourselves! This is borne out in the current rally where the retail investor is reticent to return to the markets after being burned so badly in the housing/banking crisis of 2008 – maybe one time too many in the last decade. As Adam Shell recently wrote in USA Today:
Yet, increasingly, investors on Main Street are not playing the stock market game with confidence like they used to, mainly because the game of making money has gotten tougher and more volatile since the financial crisis. Retail investors are buying fewer stocks. They are paring back on stocks and stock funds they already own. Instead, they’re moving into safer investments, like cash and bonds. “Investors are on strike,” says Axel Merk, president and chief investment officer at Merk Mutual Funds.
Fox News Doesn’t Make You Dumb. It Just Keeps You that Way
I don’t think the decision by retail investors to stay away from the markets is a good one. Markets have historically been a better investment than many other asset classes with the S&P 500 returning roughly a 7% annual rate of return. Stocks should, at the very least, be a strong component of a diversified portfolio. Instead of shying away from being wrong, investors – people in general – should expose themselves to a broader group of opinions, to alter unsuccessful behavior and improve decision making.
The findings of a new study, Misinformation and the 2010 Election, from the University of Maryland’s World Public Opinion show that 9 in 10 voters in the 2010 election believe they encountered information that was misleading or false, with 56% saying this occurred frequently. The study also concludes that those who watched Fox News almost daily were significantly more likely than those who never watched it to believe misinformation.
The bad news for FOX News viewers is that merely watching the channel appears to be toxic. Most voters believed a few whoppers during the 2010 election cycle. But daily watchers of FOX News believed more misinformation than everyone else.
The underlying problem uncovered by this study is that today’s news organization are not unbiased deliverers of the day’s events, these outlets are partisan interpreters of the day’s events packaged to appeal to their viewership or constituency. I don’t claim one network or source is a more egregious offender than another. Everyone is entitled to their opinions, but each carries a bias that should be understood before assuming what we are digesting is “news” and not opinion.
This Article is Biased
This article exposes some of my own biases. We all have them and those views can be positive as they give us the strength to make decision with confidence. Most of the stocks I own are lesser-known, yet-to-be-recognized small technology stocks. I short stocks that people recommend as buys, such as Coinstar (CSTR), and I shy away from momentum stocks with historically unjustifiable valuations. I believe you should never buy a stock for which you can’t make a historically significant case of undervaluation. In our markets his is contrary behavior, but it works, and it helps me sleep at night.
If we are making bad decisions, like buying market tops and selling bottoms like the recent bottom in 2008, it is positive to examine our biases and correct them where possible. The best way to correct faulty assumptions is to take in a variety of disparate view points and make informed decisions. We can’t do this confining our media consumption to sources that only reinforce our previously held views. Religion and patriotism should allow for independent thought and interpretation. We should all try to broaden our information sources in 2011 and perhaps we can overcome the ‘misinformation’ gap and make some more profitable investment decisions.
I hope technology positively affects your life in 2011 and all your stock investments are winners.
Steven Bulwa is an investment analyst with a focus on new developments in technology and the companies poised to benefit. He has contributed to TheStreet.com, Realmoney.com, Business Insider, Huffington Post and SeekingAlpha.com, among others. Visit www.bulwatechreport.com, or follow @BulwaTech, to learn about technology companies with true growth prospects for 2011 and beyond.
Follow us on Twitter.
Sign up for Mediaite’s daily newsletter.
Values, Value and Valuation — The money is all relative
Oh how timing sometimes works out to be funny. I was driving home tonight and started thinking about the value of products, the valuation of companies and how the values that a company portrays can change the rest. No sooner had I sat down to write this piece than the news of Goldman Sachs investing $500 million into Facebook broke and refreshed the entire thing in my mind. So let’s look at these three things, and try to see if one manages to sway the rest.
Values
Do you, like me, find yourself more inclined to use or purchase something that comes from a company that you can believe in? The ethos of a company can — for me at least — completely break me away from the product. That very fact, because I feel that I’m likely not alone in my actions (or lack thereof) can have a serious impact on the bottom line of a company.
Look at Facebook, for instance. When the Social Graph was announced and the new privacy changes went into effect, many people threw up their hands in disgust. But many others continued with life as usual, even if a bit annoyed. Why? Because Facebook has this outward appearance of a company that’s simply trying to do cool things, and it needs information in order to do them. The company’s values seem, for the most part, to be in line with the things that we Internet users want. As such, there was a lot more wagging and a lot less barking from the angry dogs crowd.
You’re starting a company? There’s likely something to be said for developing an ethos ahead of time, making it known and then sticking to it. Would Google be where it is today if not for the “don’t be evil” tag line? Even if you don’t fully believe that the company runs that way, you still remember it. Point made.
Value
When value exceeds cost, even by a single cent, the purchase will be made – Grant Cardone
That quote is one that has stuck with me for some time now. A few years ago I was making my living selling cars and it is sometimes exceedingly difficult to overcome the objection of price. In the technology world, we’re constantly being offered products for “free”. The only cost? A bit of information, a slice of our privacy or somethings similar. But then, after using those “free” products, we start to build our own value for them.
Don’t believe me? Just look at some of the things that you likely use every day. Gmail? You’d pay for that. Twitter? You don’t want to admit it, but it’s likely become a valuable asset to your daily Internet life. The same can be said for so many things and yet we get them for “free”. But there’s a down side to this issue as well — it becomes very difficult for a maker to charge for a product when there are free alternatives. Don’t believe that? When was the last time that a box office movie didn’t get a torrent version?
And yet, even as companies try to build value in their products, still others think that the economy allows for them to set their own values and tell us what something is worth. TV networks are probably the most well-known perpetrators of this heresy. Apple TV launched, ABC and Fox decided to jump on board and see what would happen. Some of the rest? They decided that $.99 was devaluing the product and yet as the provider of the product, there is no one entity that is more unqualified to name the value.
Consider it a lesson in business, I suppose. The potential buyer will determine the value of your product. Always.
Valuation
Now here’s a sticky one. Valuation is one of those strange things because it means so many different things to different people. To the potential investors, it’s a measure of how much money can be made. To the business owner it’s a gauge of how well the business has done. To the end user? It’s…honestly not much.
As a case in point, around TNW we love Twitter. We want to see it succeed and we are sure that it will. The valuation continues to climb prior to any IPO and yet, as users of the service, it really doesn’t matter much to us. Sure, it would matter if the site closed its doors, but beyond that there simply isn’t anything about the valuation number that matters.
And so, as an entrepreneur you have to ask yourself where the balance lies. Do your company values allow you to build value in your product? If so, then the chances are that your valuation will end up right where it needs to be. There’s a fair amount of truth in the thought that, if you handle the small stuff, the big stuff will fall into place.
So with that, I offer you a thought going into the new year — start with your values. The rest will fall into place.
online reputation management dental
<b>News</b> Corp's Head Of Online Gaming Ditches for Facebook | The New <b>...</b>
The head of online gaming at News Corp is moving to Facebook after just half a year, reports Kara Swisher at All Things D.Sean Ryan, once acting CEO of LiveJournal, was recruited to build an online gaming division at News Corp.
Jelly Belly Inventor Creates Anatomically Correct Gummy Heart
The man who invented Jelly Belly jelly beans hopes to strike candy gold again with a 2.5-pound anatomically correct gummy heart that oozes candy blood.
It's Official: TV <b>News</b> Is For Old People
The Internet is now the top news source for 18-to-29 year olds.
No comments:
Post a Comment