I have been thinking about this piece I posted yesterday. The central tenet is that to admit a mistake is to undermine one’s sense of self. Thus doing so is extremely difficult for professional money managers. My thoughts have drifted to the current round of pending and proposed legal action by shareholders against various companies, most notably MYR, TLS and AMP. Leaving aside the obvious illegality of the behaviour of AMP my lay observation is that these class actions are based on the false notion that the management of the company is both obligated and responsible for the share price going up. It is assumed (falsely) that if a company is profitable its share price will go up and if it is unprofitable its share price will go down. This does seem logical but unfortunately when you are dealing with markets logic doesn’t always enter into the equation. Whilst a companies management can control the decision and direction of the company it cannot control the markets perception of those actions. The current poster child for this disconnnect is the Ponzi scheme Tesla which is currently burning an estimated $7430 every minute Yet, it has no trouble maintaining a somewhat stratospheric share price. In the quick and dirty chart below I have overlaid Tesla’s losses with their monthly share price.
As you can see not making a cent hasn’t hurt their share price, nor has it hindered anyone’s desire to participate in the company. It is obvious that markets are emotional machines not only in their reaction or overreaction to events but they also give each investor the chance to display their own emotional maturity or lack thereof. The desire to seek retribution from a third party for your own missteps is somewhat symptomatic of society at present. The market is a wonderful instrument in that it gives you (generally) fair warning of impending doom. The three charts below are of our current suspects, on each chart I have plotted the 52 week highs and volume. The plotting of 52 week highs gives a nice blunt indicator of a stocks health – the more blue arrows the better. Volume is there simply to illustrate that there is infinite opportunity to leave a position that has gone bad.
As can be seen all three have had very ordinary performance for the past two years. If we were to cast a critical eye over each of these we would note the following –
MYR – has been in a sweeping downtrend ever since listing. It is clear that bricks and mortar retail is not what it used to be. Unfortunately, for MYR its backers and the peanuts who bought it upon listing did not get this memo.
AMP – has been a dud ever since the GFC and has simply trended sideways in a broad band. The recent Royal Commission revelations has merely seen it trend back to the bottom of this channel. The current decline started in August 2015 which gave investors roughly 1010 days to leave the sinking ship. Although, you wouldn’t want to rush things.
TLS – had a brief moment in the sun post the GFC as it became one of the main recovery stocks as money moved back into the market and then it was all over – something Mum and Dad investors seemed to fail to notice.
If there is a villain here it is not the companies themselves, granted the management of each three is probably ordinary but it is no more ordinary than most Australian companies large or small. The real problem lies as it so often does with the advisory industry which despite all evidence to the contrary continued and continues to recommend stocks that are in clear downtrends. The graphic below is taken from Yahoo Finance and is freely available. It shows the analysts recommendations for each stock and their equally unrealistic target for two of our three companies.
The preponderance of ratings are towards either make matters worse by buying more or simply do nothing – sell ratings are rare. This raises the question as to why sell recommendations might be so rare. The answer is quite simple and is based in two related reasons. The first is rather simple and it is related to the article I mentioned earlier – analysts lack the courage to suggest something as a sell recommendation because of the damage being wrong would do to their self esteem. It is much easier to generate reasons as to why something you recommended to buy went down than it is to justify something you recommended to sell going up. The second is career self interest – broking does not pay for the immense infrastructure run by investment houses. Corporate fees pay for the in house chef as such you dont want to bit the hand that feeds you. .
However, it should not be assumed that the incompetence of managers and the idiocy of analysts absolves individual shareholders or blame. If there is blamed to be apportioned then they must take the lions share because in the end they are responsible for their own actions. What is interesting to me is that people will spend months researching what sort of fridge they might buy but then spend 10 minutes thinking about what their investment strategy might be. And I flatter most by using the expression strategy. Simply buying something and hanging onto it is a fools errand and unfortunately stupidity often has a price. The market always extracts a price for being lazy and if what are referred to as Mum and Dad investors cannot make the time to actually think about what they are doing then the price is generally going to be high.
Your incompetence is your own as such you should own it.