In a previous article, I wrote the following about the joy of avoiding the competition to generate short term returns, and the opportunity it provides for long term investors:
“The guy sitting at home managing his $100,000 IRA should be ecstatic. Without any clients to report to, you can sit back and laugh off the volatility, and continue loading up on beaten-down and unloved names without having to explain your rationale to unhappy clients. If you don’t capitalize upon this opportunity, or even worse, turn it into a headwind, you are passing up on one of the single largest advantages that you have as an individual investor.”
Some people continue to think that they can win over time fighting with the traders – and if it was a fair game, maybe they could; this is my next addition in a series of articles highlighting just how tilted this playing field can be.
David H. Solomon, the Assistant Professor of Finance and Business Economics at University of Southern California, and Eugene Soltes, the Assistant Professor of Business Administration at Harvard Business School, recently co-authored a study entitled “What Are We Meeting For? The Consequences of Private Meetings with Investors.”
The key finding from the study, which I’ll delve deeper into in a moment, is best captured by these few sentences in the abstract: “Using a dataset of all one-on-one meetings between senior management and investors for an NYSE-traded firm, we investigate the impact of private meetings on fund investment decisions. We find that hedge funds, large block holders, geographically close investors, and higher turnover funds meet more frequently with management. Investors who meet with management have trades that are unusually correlated with each other and such trades better predict future stock returns.”
To be clear, this data was taken from a single mid-cap NYSE-traded firm, including an “exhaustive compilation of all meetings between senior management and investors over a six-year period, covering over 900 meetings with 340 different institutional investors.”
Before we get into the purpose of the study, just think about those numbers – in a period with roughly 1500 working days (after adjusting for weekends and holidays), management met with three outside investors a week, on average (much of this comes via concentrated doses at analyst events or other investor conferences); this is indicative of something quite common – according to the sixth edition of the BNY Mellon Analysis of IR Practices, the average CEO and CFO have 46 and 72 such meetings per year, respectively. That time adds up, and would undoubtedly be better spent running the business. Anyway, back to the study, quoting from the FT (here):
“They found evidence that fund managers were able to predict the future movement of the shares of the companies they met, and altered their stake to profit from this. For instance, when a stock rose 10% in a quarter, investors that had met with the management in the previous quarter had typically increased the size of their stake by 33% before the share price rally. Likewise, these informed fund managers aggressively slashed their holdings before significant share price falls. They typically generated an excess return of 3.7% in the month following a meeting with management.”
Where this becomes trouble for you and me is quite clear, as noted by Mr. Soltes:
“The individual that has access to these meetings has access to information that you and I don’t have, whether it’s material, immaterial, inside information or not.”
The question becomes, how can one avoid directly competing with someone that likely holds a material informational advantage? Certainly this seems like the only rationale response to such a conclusion; in my mind, it’s obvious that individual investors are disadvantaged in many ways when it comes to predicting short term results and movements in equity valuations. On the other side of the coin, I believe that serving two gods is easier said than done – and that many people who chase short-term returns (more than one-fifth of the funds in this study had turnover ratios in excess of 100%) have trouble thinking about relevant long-term issues like underlying business economics and the widening of a company’s moat (which may be a drag on near-term profits).
As always, there’s a silver lining - an opportunity to be exploited for those willing to accept reality as it is rather than continue on a fool’s errand; as poet Robert Frost once noted, choosing the road less traveled can make all the difference.
- CEO Buys, CFO Buys: Stocks that are bought by their CEO/CFOs.
- Insider Cluster Buys: Stocks that multiple company officers and directors have bought.
- Double Buys:: Companies that both Gurus and Insiders are buying
- Triple Buys: Companies that both Gurus and Insiders are buying, and Company is buying back.
About the author:
As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, my preferred approach is "Patience followed by pretty aggressive conduct." I run a concentrated portfolio, with a handful of equities accounting for the majority of my portfolio (currently two). In the eyes of a businessman, I believe this is adequate diversification.