Do brains matter?

I was about to start a round of golf at the weekend and for the second week on the trot the chatter on the practice putting green was about stocks. “Tesla’s down 30%, last chance to get onboard mate”. “I’m on Zip”. “Can’t go past Afterpay”. “Gamestop was up 52% on Thursday”.

I wonder, do they know anything about these stocks other than they are on a bandwagon? And will they know when to jump off? And I also ask - do brains matter? Do you need brains to make money in the stock market, or just a "feel" for the mood, down the pub, on social media, on the golf practice putting green?

What I do know, and apologies to all those people that went through three years of purgatory doing a CFA qualification, is that you don't need to be able to value stocks anymore. No-one cares or needs to care anymore.

Making money out of the stock-market used to be about finding undervalued stocks. Making money out of the stock market now is less maths and more "art". With the availability of data there is simply no edge in being able to value a stock anymore. All that high-brow, secret herbs and spices bull---t some fund managers profess to is so 1980s. Value fund managers cannot claim the intellectually higher ground anymore, people are able to value a stock on a mobile phone these days - if you don’t believe me you’ve never looked at one of our STOCK BOXES (see screenshot below) - it's done for you.

Tesla - 86% overvalued (at least it has a value - more than you can say for a traditional DCF valuation of APT).

Point being, that "The Warren Buffett Way" is now an exhausted commodity. It used to be an elite stock picking technique and you had to read, understand and implement The Intelligent Investor to get the "value" out of it. That created a barrier to entry for individual investors that lasted for decades, but time has dulled the value of value and there is no need, in a world of readily available valuations (all of which are flawed by input guesswork and assumptions anyway), for an individual to do their own discounted cash flow valuations using a weighted average cost of capital suitable to that particular industry.

In a quiet bull market, at best, a “valuation” or any fundamental evaluation, based on historic and forecast progressions in earnings, dividends, or balance sheet, provides little more than a sensible filter that helps to limit risk and guard against blatant investor stupidity. But, as an “edge”?

Value analysis as a stock market advantage is a dull imitation of what it once was, when data was not readily available, when valuation techniques were not well understood, when technology didn’t drop all that information and all those tools into every investors' online broking account for free. When everybody knows what the valuation is, there is no edge.

So if knowing the value of a company isn’t an edge and doesn’t move a share price, what does move a share price?

A share price reflects a combination of value and sentiment. What makes money is the ability to pick the extremes in both and identify when the herd is getting it wrong, and be able to time when the herd wakes up to it. It’s a very different game these days and, I would argue, better. The herd is bigger, the extremes are more extreme and the adjustments are quicker. The opportunities have multiplied and the ability to exploit the herd (watch the herd don't join the herd) are more often, more extreme and repair themselves more quickly.

You have to decide

Because of that, irritatingly for most of you, you are probably finding it hard to “invest” for the long term and shut your eyes to the short term. You are being forced to trade, forced by the volatility in your net wealth, forced by knowing how much you were worth two weeks ago compared to today and realising that you should have sold, that it's not that easy, it's not one-way, that you can lose money just as rapidly and that that there is just as much risk as opportunity. In which case you have to now choose, to engage with the stock market on a level other than luck, or cut and run whilst you still have a profit and thank your lucky stars for those fabulous few recovery months in late 2020 and early 2021.

As a newsletter and a fund manager, we are caught somewhere in the middle. We can’t do what the big industry funds do and stay in business (they are primarily responsible for the administration rather than the investment of your investments), we have to live somewhere in the middle ground between taking advantage of the opportunities that present themselves (call it medium-term trading) and being long-term.

Each to their own, we know where we are and what we are doing on what timeframe, but for all of you out there now losing your gains for the first time, wondering whether you should have sold, not knowing whether you are investors or traders, and especially for those of you who have become stock market know-it-alls in the last couple of months of easy money, you have to decide what you want to do from here.

Are you going to keep playing the game or cut and run?

My humble advice to you is that if you are new to the stock market and have been successful, know your limitations. You are making money in one of the regular but rare stock market booms. You are in a sentiment bubble. It is not usually this easy. It is not usually this volatile. People do not usually talk about the stock market at 19. People do not usually talk about the stock market on the practice putting green. This is a sentiment bubble. Not a stock market bubble, a bubble in attitudes about some (not all) prices. It's different to a stock market bubble. It is confined to some very popular stocks - are these the only stocks you hold?

It has been a wonderful run - a great introduction to the stock market - but what are you going to do? Engage (forever) or exit (for now).

We choose to engage. Of course. Our job is to engage. We have a team that wakes up every day with no other purpose than to engage. We love it. So we know our choice.

Most of our members are long-term investors. They love it too, they will carry on as always, engaging at their level of engagement on their chosen timeframe.

I am talking to you guys on the putting green. To my daughter's 19-year-old friends who have fabulously risked and won, who have turned their JobKeeper money into a small fortune.

Look at how much money you’ve lost in the last two weeks playing in the volatile “sexy” (now unsexy) end of the market (BNPL) and ask yourself, do I have any edge at all other than participation at the right time?

If you can answer that honestly, you can work out your next move.

We know ours. Timing when to buy into the loss of sentiment in technology stocks. The herd is huge, it'll return as soon as it left, and it is far easier to reinflate an old balloon than blow up a new one.

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