Thursday, August 14, 2008

Four Things I Hate on Wall Street

There are many things I hate on Wall Street. Here is a list of four of them. Why do you care about this list? Well you don't necessarily, but it is my blog and if I want to post a list of things that I hate on Wall Street, then I will. If you don't want to read it, then don't.

Fed Watching - I spend a considerably amount of time hating talking heads on CNBC and Bloomberg espousing on the intentions of the Federal Reserve and its esteemed Chairman. Will they ease? Will they cut? Are they pausing?

The truth is, who cares what the Fed does? If you can find a stock worth $10 a share selling for $8 a share, then the Fed chairman could stick his head up his ass and it won't matter one bit. If you are a day trader, then I suppose you should care, but since I am not, I don't. A case can also be made that the financial media perpetuates and reinforces deviant behavior in investing by devoting too much air time to these events.

Smart Money - There is an enduring myth on Wall Street about "smart money." The term is a little condescending as it implies that everyone else is not "smart money" but therefore is "dumb money." The myth is that somehow, once an investor gets enough publicity and name recognition, and then has a decent track record, then somehow that investor has some sort of mystical power to select stocks that will outperform. Just think of a herd of investors, and the "smart money" is a cow in that herd that stands out from the rest and once he or she moos, everyone follows them.

So I don't actually hate investors that are "smart money," since most of them I have never met, and probably never will. What I hate is the concept, and the concomitant and Pavlovian response of other investors who blindly follow these people around without doing their own research or work. (Wow, did I really just use the word concomitant in a sentence?)

Catalyst Investors - I hear many investors talk on TV about a stock and how much they like it, etc. But then they say something like this - "I really like the stock, but I just don't see a catalyst for the stock going forward." What does this really mean?

A catalyst is defined in science as "a substance that speeds up a chemical reaction without itself undergoing any permanent chemical change." For our purposes it is a "thing that causes an important change to take place." Well don't you get it, you jackass, if you were a Value Investor, you wouldn't need a catalyst. Your "catalyst" in fact, is the rest of the market finally realizing that the stock is undervalued relative to its assets or earnings power.

The Market - There are many investors who use the market as a crutch or to defend their beliefs and/or stock picks. They will say "Well, that's what the market thinks, or that's what the market is saying." The problem with this, of course, is that the market is dominated by short term irrational investors who herd en masse into stocks and chase performance. This also creates and perpetuates investment bubbles. The fact that the market supports what you happen to be saying at that moment is not an investment thesis.

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