Friday, 3 June 2016

Players vs commentators. Is any of it worth it?

Boring isn't it. I've stopped playing in the markets for a while and am instead making my shilling by doing things that people pay me for rather than being part of the zero sum game of pass the money parcel that is financial trading.

If you can find a nice yield then great, lock it down and pick up the coupon. If you can't find yield then stick your cash in a safe, but if you really are desperate you can take a punt on a price going up or down. But think this - There are always very good reasons for prices to go up from here and equally good reasons for the price to go down from here. If this wasn't the case then the price would not be where it currently is - at an equilibrium. So think this through one stage further and end up with the thought that it is all just a fifty/fifty  bet. So what is the point?

Well you are all now mumbling that it isn't a fifty/fifty bet because your insight is better than all the other idiots out there and, anyway, you only have to be brighter than most of the idiots, not all, to win. Well not so fast Sherlock, because unfortunately the market price reflects the idiots' inputs as well as yours. So you are back to 50/50.

No, really, you always make money? God you are good. Why do you need to tell me about it then? Because you want me to give you my money so that you can charge me some of my money for hopefully making me some more money? Ah I see! No, sorry chum.

You may be right, perhaps I can't possibly scout the market for the best buys and the best IPOs but I'll tell you something. IPO's are only ever ever ever worth buying if the seller is distressed. Do you really know more about his business than he does? Why is he selling stock and not issuing debt? He is willing to give away most of his upside in his company ownership to you right now because he loves you? Nah. It's worse than that. He wants to use you to wear the risk and give him cash so he can then go to his bank, show them your cash as proof of assets and borrow even more against it. This is then used to pay huge salaries to the board until the money runs out and the dream dies. Of course some IPOs are winners, just as there are always lottery ticket winners to encourage others to invest in what is effectively a bond yielding minus 50%. Yes folks, nations have been issuing negative yield bonds for years under the guise of lotteries. But anyway, IPO's you can keep them too.

The market is bent. Of course it's bent. If it wasn't bent then the same people wouldn't keep winning. But who does keep winning? Those who charge you for the pleasure of playing - The fund managers. The brokers. The financial journalists. The city real estate owners. The sales guys. The city bars and restaurants. Basically the shovel sellers to the gold prospectors.

Just an aside here, talking of the economics of restaurants and bars. You know who makes the money there? Not the establishment but once again the property owner. He will be able to charge in rent an amount right up to slightly less than the profit the place makes, because that is the marginal worth of the site.

So sell the dream shout the wins and never talk about the losses, unless they are someone else's. If you are good, no let me correct that, if you can persuade other people you are good, they may just one day pay you to have a go with their money or even better, pay you for your thoughts. And that is the risk free trade up until your reputation goes and they stop listening. Selling your thoughts.

Now here I stumble into a key point. There is a huge difference between how a trader, or financial risk taker is measured and a commentator who doesn't take financial risk.

The trader or fund manager is measured by financial return on their investments. If they get a trade wrong they can take their loss and move on to the next trade. A trader does not have to be more right than wrong, in fact he can be more wrong than right, as long as the small number of rights earn more than the large number of the wrongs. They can appear as complete numbskulls by trade idea but still make fortunes. They don't care what people think of their independent ideas as they are finally measured by profit.

The financial commentator is measured by something very different. The financial commentator is paid to be listened to or read. Paid either directly, or more commonly these days, by a company who has an advert next to their words. In this case the commentators greatest risk is appearing to be wrong and losing the trust of their readership. Therefore, why ever take the risk of putting out a view if being wrong can so quickly kill your reputation and it's your reputation that is most important in your peer reviewed position? Your editor decides if you keep your job, determined by the number of raised or lowered thumbs from your audience. Gladiatorial indeed, where the most sensible means of survival is to amuse the audience commentating on the other gladiators rather than having to join in and take a jab with a sword.

But your audience has to respect you and if your audience is one of financial risk takers then, as all good sales folk try to do, empathise with your audience and pretend to understand their woes even if you do not. Cry when they cry, cheer when they cheer and be one of the players. Pretend to be one of the gang, even if you are not. They'll love you for it as you wear the jacket and talk the talk. (N.B. CNBC stripy jacket wearing commentators with thick necks).

Spot the difference -

Wasp                                                                                      Hover fly 

But it all comes to nought when the players notice these imposters don't walk the walk. I mention this because one of my pet peeves is media whoops and hollers as prices move. It's like a financial actor's breathing exercise -
All together now,  "Yeah guys! New Highs! Wooh. Xyzeee really tanking. Not been here since the last time, and... slowly now .. deep delve mumble on Widget corp. Pause.... Gravitaaaaaaas.... Over to Scott... And relax"

But ask any of them for a trading view on the market, just one idea, a teeny morsel to show that they are willing to be one of the boys and you are met by a wall of silence. I know as I tried it on Twitter here  and though three top sports had a go, the silence was deafening. Even after prodding. And that, dear reader is the proof. If you can't put in a call on the market then you really should not be pretending you are anything but a shovel seller. Grow a pair and the big boys then may show you some respect, but until you do, you can take off the gang jacket and get back to selling advertising space.

Now if you are smart, you would now be pointing to my first paragraphs and asking as to why any of the market commentators should put out a view when it's only a 50/50 call. To which I reply...

.... Good point. It's 'waste of time' squared.

Footnote - I am really glad I have so many friends in financial journalism who will of course be laughing along with this post, as I am of course not referring to THEM. There are some fantastic financial journalists who provide cracking insight and analysis for which we are all grateful but this superior breed do not pretend to be market players with skin in the game and don't get over excited when prices move. 


Anonymous said...

Your comment about IPO's being only worthwhile for distressed co.'s is flat out wrong. Co.'s IPO most of the time because the owners want to be relieved of the stress of an undiversified risk and be able to actually spend part of their life achievement on, you know, stuff.

Angel investors etc. want to cash out because they need the money for new investments (and also relief themselves of the undiversified nature of owning a highly successful company).

And yes, a lot of co.'s IPO at the right time right before the slump, but there are also some that IPO well in time for you as a fundamental investor to get on a boat that can really take you places. Google

Polemic said...

Yes anon. The fact remains that the owners/angels want their money elsewhere rather than in the dream they are selling to you.

I'd rather buy an IPO in a UK bank being sold by the State through political pressures (lloyds) than a non cash generating, IT unicorn pipe dream being sold by a cash burning team of smiley delusionists.

Hotairmail said...

It's a very common error to consider trading to be a zero sum game. It is plainly not true. When the market rises, more is won than is lost. The spinning off of cash and overall, rising capital values, reflects money supply and profitable work, population, technology/productivity.

The global economy has grown hugely over the decades. In the near term I cannot see a reversion of all the relevant numbers in nominal terms. You may well be correct on timescales of 70 or 80 years or more, but it would require a Black Death or something, or even looking further out, the heat death of the universe.

Clearly, the only time you may be correct is with regard to credit derivatives literally created by two sides accepting a bet.

The idea that on average any bet must be 50:50 is a truism that is also not the case unless we consider credit derivatives. I personally believe individual players can consistently do better. In fact I've long come to the conclusion Pol, that the way you have made money over the years has not been down to your ideas and your analysis, but money management. I have shirked from stating so in the past in case you took it the wrong way, but as you alluded to that yourself (gains and losses, winners and losers), I'm pretty sure in your heart of hearts you know that to be the case.

Basically, you are particularly good at identifying decision points but not necessarily outcomes (better than half no doubt). It is the way you seem to have traded those decision points that has made you money down the years. If you think that is true, it may help inform the way you trade and your attitude to it.

Polemic said...

Hotair. That was a big one. Disagree on not being zero sum but too long to argue here.

How I trade is how I trade and I don t need to navel gaze on it. Old dog new tricks n all.