Out of the flow
This is one of those times when individual investors really have no idea what's going on. That's an exaggeration but it is, relatively speaking, correct.
In less volatile and stressed times an individual investor can do research and look at balance sheets, income statements, cash flows, headlines, charts etc. and make decisions based on, to some extent, the same information that the pros use. In those "normal" type times the individual investor also has one significant advantage over the big guys, and that's liquidity. Large investors always need to be aware of how much they move an investment going in and out. Generally speaking, unless they are extremely wealthy or in a miniscule small cap, an individual investor can buy or sell without worrying about getting the screen price. Buy, nobody knows, and sell, it's not going to be on Bloomberg.
That's not to say that the best institutional investors and traders don't always have the advantage of a network of information that is beyond what the individual has. They do.Their experience as investors and this network should give them an advantage versus the individual but there are no guarantees, and at times an individual can be more agile. In times like these, however, that network makes a huge difference.
So here's a real life example. Today I can look at a stock and see that it is getting walloped. Looking at all of the financial information and making a judgement about its industry, management etc. I can choose to buy that stock. In the totally stressed market that exists now I would big making a bet, taking a significant risk, as I would be assuming that the overall market is not going to collapse further and leave me with a good stock in a market that is getting revalued in the wrong direction. The pros who choose to buy now are making that same bet. There's a huge difference now however. The components of the shareholder base are critically important and I don't have a way to evaluate that. The pros and their network have valuable information that I don't have.
Let me explain further. There could be two stocks that have been clocked, seem to be good companies, and look like they're worth taking a flyer on. The two stocks look the same but what if one has a shareholder base with a number of investors who are leveraging their positions. What if those investors get into a position, with their overall portfolio, in which they must sell to stay viable regardless of a rational analysis of the company. And it doesn't need to be a leveraged situation. It could simply be a plain old mutual fund that is seeing significant redemptions and must do some across the board selling. The neural network of the best in the professional trading community will know in both of these situations. They will sell or short. That selling will drive a company's stock down further in the near term. One may say well so what---in an efficient market my investment will ultimately be valued appropriately. Well so what is that if I buy the stock with the weak hands and it goes down 20% more I would obviously have preferred to buy it at that level. The other stock does not have that problem. In most cases I don't have the information needed to make an intelligent or relatively safer choice between the two stocks.
CNBC'ers can talk about the opportunity that this market will eventually present but most individual investors in the market basically need to watch and let the momentum turn before pulling the trigger. We lose a few points of potential gain and that's just the way it is.
In less volatile and stressed times an individual investor can do research and look at balance sheets, income statements, cash flows, headlines, charts etc. and make decisions based on, to some extent, the same information that the pros use. In those "normal" type times the individual investor also has one significant advantage over the big guys, and that's liquidity. Large investors always need to be aware of how much they move an investment going in and out. Generally speaking, unless they are extremely wealthy or in a miniscule small cap, an individual investor can buy or sell without worrying about getting the screen price. Buy, nobody knows, and sell, it's not going to be on Bloomberg.
That's not to say that the best institutional investors and traders don't always have the advantage of a network of information that is beyond what the individual has. They do.Their experience as investors and this network should give them an advantage versus the individual but there are no guarantees, and at times an individual can be more agile. In times like these, however, that network makes a huge difference.
So here's a real life example. Today I can look at a stock and see that it is getting walloped. Looking at all of the financial information and making a judgement about its industry, management etc. I can choose to buy that stock. In the totally stressed market that exists now I would big making a bet, taking a significant risk, as I would be assuming that the overall market is not going to collapse further and leave me with a good stock in a market that is getting revalued in the wrong direction. The pros who choose to buy now are making that same bet. There's a huge difference now however. The components of the shareholder base are critically important and I don't have a way to evaluate that. The pros and their network have valuable information that I don't have.
Let me explain further. There could be two stocks that have been clocked, seem to be good companies, and look like they're worth taking a flyer on. The two stocks look the same but what if one has a shareholder base with a number of investors who are leveraging their positions. What if those investors get into a position, with their overall portfolio, in which they must sell to stay viable regardless of a rational analysis of the company. And it doesn't need to be a leveraged situation. It could simply be a plain old mutual fund that is seeing significant redemptions and must do some across the board selling. The neural network of the best in the professional trading community will know in both of these situations. They will sell or short. That selling will drive a company's stock down further in the near term. One may say well so what---in an efficient market my investment will ultimately be valued appropriately. Well so what is that if I buy the stock with the weak hands and it goes down 20% more I would obviously have preferred to buy it at that level. The other stock does not have that problem. In most cases I don't have the information needed to make an intelligent or relatively safer choice between the two stocks.
CNBC'ers can talk about the opportunity that this market will eventually present but most individual investors in the market basically need to watch and let the momentum turn before pulling the trigger. We lose a few points of potential gain and that's just the way it is.
posted by John Borden at 6:16 PM
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