A Canadian on Wall Street

It’s somewhat interesting reading to occasionally look at the Google Finance message boards on a per-stock basis. The signal-to-noise ratio is often relatively high, especially when compared to Yahoo’s morass of financial discussion. You get an insight into the mind of the average investor — often somewhat well-informed and spouting various lingo that they may have picked up much the way any of picks it up, from exposure and a hobbyist’s interest. As far as I’ve seen, there are few true professionals on these boards, which makes some sense. A top stock-picker is often leery of giving away too much of the recipe to their secret sauce, for obvious reasons.

Take for instance this thread on Lululemon’s message board. I love the exactitude, the forthright assuredness of people who declare the stock “cheap” without any real indication of how they arrived at that conclusion — by what metric is it cheap? Often, it seems the only metric they use it historical; what’s cheap is something that is priced lower than at some time in the past. Or later, “Im sure we will test support in the low 30s againn so you may get your chance.” How is this person so sure? The lack of skepticism in that statement makes me wonder if they should ban stock message boards. Or perhaps study them under the aegis of behavioural finance. Flocking behaviours, etc. It seems that people are happy to absorb a few algorithms and “rules of thumb” and arrange them just so, hoping that by doing so — like the Pacific Islanders and their cargo cults — they will achieve their desired results. The thinking almost seems like: If they look or sound like they know about investing, then they must know about investing. Or “fake it until you make it?” Although it might be a long time before some of these people make it.

I’m reminded of the need for skepticism and strong justifications for buying at a certain price from re-reading Benjamin Graham and David Dodd’s old textbook “Security Analysis”. It focuses a great deal on bonds and preferred shares, while leaving common stock investment till about the midway point, and some of the conditions that it describes (a world of high dividend common stocks, with single digit P/E ratios) don’t really exist anymore, but some of the same mistakes that people make now crop up in the text. The move from investment to speculation, the insistence on a “new era” where steady earnings don’t matter, the hope for future gains. It’s tough reading this book and figuring out how to apply it to the current climate. As value investors know, it’s been slim pickings for years, as investing and stocks have gotten so much play that the amount of interest and volume means that few stocks remain cheap for long. It’s hard doing the dirty work of finding unloved, unknown and excellent gems — is it still as possible as it used to be in 1940? Graham talks about staying out of the market for long periods of time, like a three year stretch after the Great Depression. This is a difficult thing to do, when the natural instinct is always to act. Graham is almost asking us, those who believe in his philosophy, at least, to be like philosophical Taoists, detaching ourselves from everything, removing any sign of affinity. That’s even tougher in today’s marketed and PR-ed world. I speak from experience, as I originally went predominantly into cash mid-summer last year, anticipating the current situation, but ended up watching as the market continued to creep up and visions of lost opportunities danced in my head — I ended up getting back in whole hog and consequently taking a hard hit in the current market. Of course, going into cash was the right move in hindsight, but having the mental fortitude and conviction (as well as truly analytical, skeptical and unbiased reasons for a particular move) is the harder part.

There’s still room for hunches and instinct, though. But if you’re going to follow those, they better be strong and you better be able to stick to them in the face of contrary information (but also be willing to accept the contrary information if there’s a good reason). It’s a tough game, isn’t it?