Saturday, January 28, 2017

1/28/2017 What's the difference between stock picking and flipping a coin?

A week of more sweeping change than I can remember.  Eight years of Obama eradicated in eight days of Trump.

Regardless of who you supported, one, both, or neither – the pace of change and the unrest that accompanies it are matters that we often read the market does not like (bad?) – and in other writings we read that the market climbs a wall of worry (good?) – and in other writings we read that the market grows with enthusiasm (good?).  And, finally, we read that the market collapses after euphoria sweeps in the last buyer (bad?).

So which is it? Chaos (down), worry (up), enthusiasm (up), euphoria (down)?

Right.  These are a bunch of useless pieces of speculation that fit whatever random mood the writer is in.

Studies have shown that depressed people have a more accurate understanding of the way the world is, but I like to think that optimists have a better appreciation of what the world can become.

I don’t time, and these useless speculations are precisely why I don’t time.  The only money I’ve lost in the market has been in futile attempts to keep from losing money.

We are in the age of Trump.  Economic forces are larger than one man, and move far more slowly than the news.  Jump to the news and you’ll just sell to a patient fundamental investor and buy from a sneaky high frequency trading algorithm that rode the excitement and left you with the stock that’s ready to fall back to earth.

So where is Mr. Market on my models?  The Sector Model is now in Utilities.  The Full Model is, well, also pessimistic:


Utilities, utilities, utilities – from coast to coast!  Mr. Market is hiding from the cold weather and waiting for a sunnier day.  He has his shoes propped up on a newspaper that his neighbor highlighted for him in a political argument, and he’s hiding in his rented apartment watching cable tv and occasionally talking to his ex wife about the child support he owes from the construction job he hasn’t been able to get to through the bad weather.

Queue up Archie Bunker and look for a beer.  I don’t see a lot of enthusiasm for economic growth here.

I’m still watching Mohawk Industries MHK in the Furniture industry.  P/E is about average.  They’ve been making a number of acquisitions and their relative price strength is falling.  No one is excited about it.

And that brings me back to the point I started with: when you buy a stock, who are you buying it from; and when you sell a stock, who are you selling it to?  Someone just like yourself?  If you are trading with someone just like you, what’s the difference between trading and flipping a coin?

No – we trade with people who have different time horizons.  In a typical 4-6 year business cycle a sector will have its trough, its initial rise, a late rise, a top, an early fall, and then panic.  Long term investors should focus on stocks no one wants at the moment.  Focus on those last three words: “at the moment.”  Long term investors buy from short term traders at maximum pessimism, and sell back to short term traders at maximum optimism.

Which are you?  Well, the first indicator is how often you trade.

The less often you trade, the longer you’ll hold the stock.  Simple math.

The most brilliant stock pickers are the ones who buy a stock that everyone “knows” will go nowhere anytime soon – and they hold it until “anytime soon” is long past in the rear-view mirror.

Slower is better, in trading, in romance, and perhaps also in politics.  Time will tell.

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