“Stocks aren’t cheap and popular at the same time.”
- Unknown
High frequency trading (HFT) by institutional investors has dramatically increased turnover and lowered the holding period for securities in all global markets.
According to Grant’s Interest Rate Observer:
At the end of World War II, the average American investor held the average American equity for four long years. By 2000, those four years had dwindled to eight months. By 2008, eight months had shrunk to just two months (emphasis added).
Holding periods for stocks are no longer measured by days or even hours but by microseconds – millionths of a second. Very soon it might be measured in nanoseconds – billionths of a second.
A recent speech by an official of the Bank of England stated that in 2005, HFT accounted for less than 20 percent of stock volume in the U.S. equity markets. Today, it accounts for as much as 75 percent of stock market volume!
For short-term traders, HFT has increased price volatility, making it very difficult to trade the stock market. But for long-term investors, HFT has created great opportunities.
Any time stock prices disconnect from the intrinsic value of the underlying business, the advantage goes to the investor who is able to value the business and has patience.
You have the advantage
Unlike institutional investors, you don't have to answer to a committee or confine your stock selections to a particular industry or market cap.
Institutional investors and mutual fund money managers live and die by how well they perform against their benchmark index. Money managers check their performance weekly — and over the past few years, daily — on where they stand in relation to their benchmarks.
If they trail the benchmark for a few quarters, or God forbid a year or longer, the fund or manager will begin to see money leave their management.
Most of the money managed by institutions is being watched very closely by their clients. Pension plans, endowments and foundations have groups of quants measure performance down to a very granular level. Billions of dollars can be redeemed in an instant if they see a style shift, sub-par performance, or something in their data that flashes a warning sign.
As an individual investor, your greatest advantage is that there is no more than one pair of eyeballs slicing and dicing your stock selections and performance. Compare that to a team of analysts looking over the professional money manager’s shoulder, and you’ll know why they’d rather play it safe than sorry.
Instead of sticking to a very narrow group of sectors or market caps, you have the freedom to find stocks anywhere. If your performance is trailing a benchmark for one or two quarters, why should you care? You’re not investing your money based on how well you beat a benchmark over a short period of time.
Your other advantage is time. Since the big institutions need to show good relative performance on a weekly and monthly basis, very seldom do they invest in stocks that will make them look stupid over the short run.
If a stock has been in the news and is being dumped on Wall Street, it really doesn’t matter at how much of a discount the stock might be trading compared to the company’s intrinsic value.
The last thing a money manager wants to do is buy stocks that are unloved and unwanted. And those are the companies that we love to buy because they provide the greatest returns.
Quality at a discount
Given the enormous volatility as a result of HFT and money managers constantly being under the gun to perform, you might now have some insight as to why quality businesses trade at bargain prices every now and then.
Currently in IWP, we have several companies that have market caps greater than $15 billion, present solid balance sheets, have been in business for decades, and are leaders in their industry… yet are trading at historically low valuations.
Billion-Dollar Companies Trading at Bargain Prices
SE/TA Ratio: shareholder equity/total assets
As of 10/31/11 close What they all have in common is that they are unloved and unwanted and have fallen out of favor with investors. Ben Graham said that over the short term, stock prices move based on the popularity of the stock, but over the long term, it’s the intrinsic value of the company that wins out.
- Unknown
High frequency trading (HFT) by institutional investors has dramatically increased turnover and lowered the holding period for securities in all global markets.
According to Grant’s Interest Rate Observer:
At the end of World War II, the average American investor held the average American equity for four long years. By 2000, those four years had dwindled to eight months. By 2008, eight months had shrunk to just two months (emphasis added).
Holding periods for stocks are no longer measured by days or even hours but by microseconds – millionths of a second. Very soon it might be measured in nanoseconds – billionths of a second.
A recent speech by an official of the Bank of England stated that in 2005, HFT accounted for less than 20 percent of stock volume in the U.S. equity markets. Today, it accounts for as much as 75 percent of stock market volume!
For short-term traders, HFT has increased price volatility, making it very difficult to trade the stock market. But for long-term investors, HFT has created great opportunities.
Any time stock prices disconnect from the intrinsic value of the underlying business, the advantage goes to the investor who is able to value the business and has patience.
You have the advantage
Unlike institutional investors, you don't have to answer to a committee or confine your stock selections to a particular industry or market cap.
Institutional investors and mutual fund money managers live and die by how well they perform against their benchmark index. Money managers check their performance weekly — and over the past few years, daily — on where they stand in relation to their benchmarks.
If they trail the benchmark for a few quarters, or God forbid a year or longer, the fund or manager will begin to see money leave their management.
Most of the money managed by institutions is being watched very closely by their clients. Pension plans, endowments and foundations have groups of quants measure performance down to a very granular level. Billions of dollars can be redeemed in an instant if they see a style shift, sub-par performance, or something in their data that flashes a warning sign.
As an individual investor, your greatest advantage is that there is no more than one pair of eyeballs slicing and dicing your stock selections and performance. Compare that to a team of analysts looking over the professional money manager’s shoulder, and you’ll know why they’d rather play it safe than sorry.
Instead of sticking to a very narrow group of sectors or market caps, you have the freedom to find stocks anywhere. If your performance is trailing a benchmark for one or two quarters, why should you care? You’re not investing your money based on how well you beat a benchmark over a short period of time.
Your other advantage is time. Since the big institutions need to show good relative performance on a weekly and monthly basis, very seldom do they invest in stocks that will make them look stupid over the short run.
If a stock has been in the news and is being dumped on Wall Street, it really doesn’t matter at how much of a discount the stock might be trading compared to the company’s intrinsic value.
The last thing a money manager wants to do is buy stocks that are unloved and unwanted. And those are the companies that we love to buy because they provide the greatest returns.
Quality at a discount
Given the enormous volatility as a result of HFT and money managers constantly being under the gun to perform, you might now have some insight as to why quality businesses trade at bargain prices every now and then.
Currently in IWP, we have several companies that have market caps greater than $15 billion, present solid balance sheets, have been in business for decades, and are leaders in their industry… yet are trading at historically low valuations.
Billion-Dollar Companies Trading at Bargain Prices
SE/TA Ratio: shareholder equity/total assets
As of 10/31/11 close What they all have in common is that they are unloved and unwanted and have fallen out of favor with investors. Ben Graham said that over the short term, stock prices move based on the popularity of the stock, but over the long term, it’s the intrinsic value of the company that wins out.
