As investors, and we are all investors these days, it is important to understand the quirks of the stock price data that we use to aid us in our decision-making efforts. On Wall Street, investing can be a minefield for those who don’t take the time to appreciate why stock prices are at the levels that appear on quarterly statements.
At least four times a year, stock prices are more a function of institutional marketing practices than a reflection of economic forces that we would like to think of as its main drivers. Not even close … Towards the end of each calendar quarter, we hear from the financial media practically reporting that institutional exhibition activities “are in full swing. But that’s as far and deep as ever. What are they talking about and what are you talking about? What does it mean to you as an investor?
There are at least three forms of window dressing, none of which should make you particularly happy, and all of which should make you question the integrity of the organizations that authorize, implement, or condone its use. The best-known variety is to remove significantly losing stocks from portfolios and replace them with stocks in companies whose stocks have been the most popular in recent months. This practice not only makes managers appear smarter in reporting to top clients, it also makes mutual fund performance data appear much more attractive to would-be “money changers.” On the sales side of the ledger, the prices of the underperforming stocks fall further. Obviously, all fund managers will participate in the ritual if they choose to survive. This form of showcase, by most definitions, does not invest or speculate. But no one seems to care about ethics, legality, or whether this “Buy High, Sell Low” image is painted with their mutual fund palette.
A more subtle form of Window Dressing takes place throughout the calendar quarter, but is “done” before the quarterly portfolio reports hit the glossaries. In this less prevalent (but also more fraudulent) variety, managers invest in stocks that are clearly out of sync with the fund’s published investment policy during a time when their particular specialty has fallen out of favor with the gurus. For example, adding commodity ETFs or popular emerging country issues to a large-cap fund, etc. Earnings are made before the end of the quarter, so the fund’s holding report remains inflexible, but with better quarterly results. A third form of showcase is called “survival,” but it only affects mutual fund investors, while the others undermine the information used (and the market performance of) individual security investors. You may want to research it.
I cannot understand why the media reports so superficially on these “business as usual” practices. Perhaps ninety percent of the price movement in the stock markets is the result of institutional trading, and institutional fund managers seem more interested in politics and marketing than investing. They are trying to impress their top clients with their brilliance by reporting ownership of all hot tickets and none of the top losers. At the same time, they are manipulating the performance statistics contained in their promotional materials. They made “Buy High, Sell Low” the investment strategy accepted by the mutual fund industry. Meanwhile, individual equity investors are receiving inaccurate signals and incurring collateral losses by moving in the wrong direction.
From an analytical point of view, this quarterly reality of market value (artificially created demand for some stocks and unwarranted weakness in others) throws almost every security or market sector statistics totally out of control with the underlying fundamentals of the company. . But it gets even more blurry, and not in the adorable sense. For the sake of doing it, think about the “demand for demand” impact of a growing list of ETFs. I don’t think I’m the only one to think that the true meaning of stock prices has less and less to do with the corporate economy than it does with the ETF’s morning betting line … new millennium. [Remember the “Golden Circle” of the seventies? Aren’t GLD or IAU the same?]