By Des Carmody
Source: StockCourse
In the Australian Shareholders Association’s publication “Equity” for December 2011 and January 2012, an article by Marcus Padley was published. I felt that his wise words needed a wider currency amongst Stockcourse traders who perhaps are not members of the ASA. So with apologies to Mr Padley I have tried to encapsulate his article and fit it to the requirements of Stockcourse traders. Any faults that you may come across are mine and not Mr Padley’s.
INVESTORS: For the purposes of this paper I will lump together fundamental investors, long term investors, value investors and income investors under the common head of Investors. Let us start with the first assumption then, namely, that people who regard themselves as investors would claim to be, on the whole, “buy and hold” investors who hold the belief that you cannot time the market and therefore it is “Time in the market” that counts.
TRADERS: The second assumption must be that people who regard themselves as traders would claim to be people who think they can – to a certain extent – time the market and therefore hold the belief that “timing the market” is everything.
COMMON APPROACHES
Next, let us consider the common approaches adopted by these two classes of shareholders.
INVESTORS:
It is the common approach (by no means universal, but certainly sufficiently enough to be classed as common) for “investors” to make their trading decisions based on information given to them when contacted by their broker and given the latest thoughts on what the broker’s analysts have come up with. For very good reasons the analysts employed by brokers can only carry out their job by conducting fundamental analysis of stocks which are on their watch list. Read the fine print on the contract that you have with your broking firm and you will find that there are more disclaimers than grains of sand on a beach. All care, no responsibility.
It is thus the fundamental analysts whose advice is being bandied about and these fundamental analysts are good at certain things, including:
Identifying companies that make money (and that’s the root of it all in the long term).
Identifying rubbish companies.
Identifying good management.
Identifying sector trends.
Portfolio theory.
… and most of this analysis is done with one aim in mind – to decide which stocks to buy.
Often “buy advice” is dictated by the date of a company’s results when the analysts have just published their post result research. That morning the analysts, in the morning meetings, report to hundreds of advisers that their research has disclosed that the company is in great shape. The hundreds of advisers then get on their phones to their clients and tell them what the analysts have concluded.
The “timing” is thus dictated by the results date. The clients then compete against each other to buy the stock. The price, using the basic supply and demand theorem, rises exponentially.
Too much advice focuses on what to buy and whenever that conclusion is made that’s when to buy.
There are a couple of things wrong with this stratagem. First, by the time the advisers have contacted the first of their clients the news is stale. The heavy hitters will have already purchased the amount of stock they need to keep their “portfolios” in balance. This, of course, forces up the price. Second, when the price has been forced up the analyst’s advice has to be altered and in all likelihood that advice would now be to “hold” the stock. Even if it doesn’t change their advice the client would be paying a much higher price and thus reducing the percentage profit available.
Investors, in the main, have difficulty with:
Timing the market. They declare that it can’t be done.
Selling. They don’t know how.
Being disciplined. They will watch stocks being destroyed without doing anything about it.
Being vigilant.
Having a trading plan.
Being emotional.
Being lemmings.
Being wrong.
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