Monday, July 27, 2009

The Real Vampire Squid On The Face Of Humanity

Matt Taibbi’s article on Goldman Sachs has now achieved legendary status for the term he coined in this sentence:

“The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

The entertaining article was a little short on facts, but who cares, after all, in an age where blogging dominates, no one cares about accuracy anymore. What really matters is shock value, and no one should be surprised that this article appeared in a mainstream media publication, as they are desperate to find a way out of its slow death.

I digress, though, as I am not writing this post to argue against the points that the author made. What I am writing about is to tell everyone that the real “vampire squid wrapped around the face of humanity” is not Goldman Sachs but in reality is the “momentum” investor.

When I worked on a trading desk at Morgan Stanley, we had a more colorful name for them. We called them “fast money scum,” and we meant it.

The ethos of the momentum investor is simple in concept. Buy what’s going up. If it keeps going up, buy more. When momentum breaks, get out. Everyone knows who these investors are. When a stock you own is down 20% after it misses earnings by a millionth of a cent – that’s them.

The momentum investor has enabled all three bubbles in the last ten years – Technology/Internet, Real Estate/Homebuilding and Commodities. They do this by pushing stocks up far above what they should be trading for on a fundamental basis.

It wouldn’t be so bad if these investors were honest about what they do, but they are not. They usually manufacture or hide behind some fundamental story about whatever sector is bubbling up, usually in league with sell side enablers, who are enamored of the trading commissions they generate.

Even worse, the financial media - CNBC and Bloomberg TV - orient programming toward this group, by amplifying short term trends, rather than discouraging it.

This infects the entire market as institutional investors, most of whom are trained as fundamental investors, are forced to jump on the bandwagon, lest they be left behind in the relative performance game.

Momentum investors have cost ordinary investors trillions in wealth over the last decade, as many small investors buy into these fundamental stories and then don’t realize when momentum breaks and the plug is pulled.

Any new regulatory initiatives out of the Obama Administration should be oriented toward controlling or destroying these investors.

10 comments:

Anonymous said...

"Fast money Scum and we meant it"

ewwww, ahhhhh!

the fact that you traded on a desk meant that you are part of the massive old school, distribution system invented for and geared toward wealth class, this creation for a privileged few, that very few people have had access to until recent deregulation started kicking in...and now that the easy money play in spreads has been liberated, and Ibanks actually have to do real "work", they call foul and want uncle sam taxpayer to make it easier for them to make 200-500K salaries ++ and bonuses.

I dont feel one bit for your POV, because in its an insular, and entitled approach,
Free markets should be truly free- for any participant,

momentum traders provide liquidity. plan and simple.

Just like your big money clients did/do...MF Pensions and the like...who have massive turnover each year

You want the world to just listen to what your research people say, and follow the pack?

What we need is for all the bank trading to go under and do EVERYTHING electronically...with NO centralized goading...Full price and order transparency, BAN the DARK POOLs...and lets see where the markets really price every day.

Eric J. Fox said...

Good rant...but it doesn't even seem like you read what I wrote.

Anonymous said...

The Bull Market in Financial Fraud in the US

http://jessescrossroadscafe.blogspot.com/2009/07/bull-market-in-financial-fraud.html

Anonymous said...

Nice article.
I disagree with your "Momentum investors have cost ordinary investors trillions in wealth over the last decade, as many small investors buy into these fundamental stories and then don’t realize when momentum breaks and the plug is pulled.".
NOBODY forced the small guy to leverage up and buy homes in 2005 or commodity stocks in 2008 or dot com stocks in 1999 etc. It is investing 101 that if one is able to get a return in an asset class > CD return then the risk is also greater than a CD.

I see momentum buying (or selling) coming primarily from emotion (greed/fear) supported by short term mis-pricing of assets and a good story that even an Average Joe could understand and buy in to.

We have seen bubbles in several asset classes over the last 300-400 years and not just because of pump and dump action by Goldman, as the conspiracy theorists want everyone to believe. I see bubbles (or extremes) as law of nature - NOTHING is perfectly balanced all the time.

Greg

Anonymous said...

taibbi is stealing from cthulhu lore

http://closetgoth.files.wordpress.com/2009/02/cthulhu_by_darkf666.jpg

yeah - fast money scum- and you were just a vig stealing bookie scumbag on a sell-side desk trying to jam clients and rip their faces off.

Daniel M. Ryan said...

I remember reading summaries of market experiments where the subjects got to play around with stocks that had fixed fundamentals. It was only a matter of time before the greater fool theory caught on and the participants created a bubble. Once the bubble burst, though, the stocks then traded in a range that reflected those fundamentals. [Unfortunately, I don't have a reference handy.]

When the effect is isolated, there is evidence to show that momentum investors do learn after suffering a drubbing. I suggest that there's more to your story than simply momentum investing getting out of hand. Granted that there's a difference between experimental labs and real life, but those real-life factors have to be considered as influences too.

Eric J. Fox said...

"the fact that you traded on a desk meant that you are part of the massive old school"

I don't work on a desk anymore, or on the sell side.

"You want the world to just listen to what your research people say, and follow the pack?"

No, I don't. They are not my research people. I left MS in 1996.

Eric J. Fox said...

"NOBODY forced the small guy to leverage up and buy homes in 2005 or commodity stocks in 2008 or dot com stocks in 1999 etc"

Agreed, people have free will. No one put a gun to their head.

Eric J. Fox said...

"you were just a vig stealing bookie scumbag on a sell-side desk trying to jam clients and rip their faces off."

Just for the record, I did bonds, not stock on the desk, and it was not a prop desk, so we didn't mark anything up.

Fisher said...

I'm from Fisher Investments and we have a new book out on recognizing the signs of financial fraud: How to Smell a Rat: The Five Signs of Financial Fraud